Company directors have financial record keeping duties under the Corporations Act and substantial penalties can apply for a failure to maintain adequate financial records.
What are the duties?
All companies are required to keep and maintain accurate financial records which:
- correctly record and explain the company’s transactions and financial position
- would enable true and fair financial statements to be prepared
What are financial records?
In essence, financial records:
- are broadly defined in the Corporations Act and include invoices, receipts, bills of exchange (eg. cheques), promissory notes, documents for prime entry (eg. cash books and journals) and working papers
- must be retained by the company for at least 7 years after completion of the transactions to which they relate
How are financial records to be kept?
The financial records may:
- be stored in electronic form provided they can be converted into hard copy within a reasonable period of time
- be kept in any language, however, an English language translation must be provided within a reasonable period of time if requested by a person entitled to inspect the records
- be kept overseas provided sufficient written information is retained within Australia which would enable true and fair financial statements to be prepared
What rights does a director have to inspect financial records?
In summary:
- a director of a company has a right to inspect the financial records of the company
- this right is based on the director’s duty to manage the affairs of the company with due care, skill and diligence
- a company must make its financial records available at all reasonable times for inspection by a director
- if a company refuses to make its financial records available for inspection, a director may apply to the court for an order requiring the company to make its records available to the director or a person authorised by the director to inspect the records on the director’s behalf
- under the Corporations Act, a former director may also inspect the books and financial records of a company up to 7 years after they ceased to be a director of the company provided the inspection is related to current, pending or anticipated legal proceedings
- a director should negotiate access rights (usually under a Deed of Access, Insurance and Indemnity) with the company to provide a broader right of access than available under the Corporations Act
What are the penalties?
A company director who fails to take all reasonable steps to comply with their financial record keeping obligations will have breached a civil penalty provision of the Corporations Act and the court, upon application by ASIC, may:
- fine the director up to $200,000
- disqualify the director from acting as a company director
- require the director to pay damages or restitution to the company if the company has suffered loss or damage due to the director’s breach of duty
What are other ramifications?
In addition:
- the director may also have committed a strict liability criminal offence and be subject to criminal prosecution
- the director may find overseas travel difficult if a criminal offence has been committed
- the director may suffer damage to their reputation
- the director’s employment or contractor arrangement with the company may be in jeopardy
- it may trigger buy-out provisions under a Shareholders Deed
- if a company is found to have contravened a civil penalty provision, the company may be liable to pay a fine of up to $1,000,000
More Information
Please contact our commercial law team at Matthews Folbigg Lawyers on 9635 7966 if you require legal advice with respect to your rights and obligations as a company director or if you would like to discuss the options available to endeavour to protect your interests.
