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The importance of keeping proper accounting records

By Alden Ho - 13 Apr 2018

It is common practice for directors to operate a company without paying adequate attention to keeping proper accounting records. But did you know directors of those companies could be held personally liable?

The obligation to keep accounting records is codified under section 194 of the Companies Act 1993. It states that a company's directors must at all times keep accounting records that:

  1. Correctly record the transactions of the company; and
  2. Will enable the company to ensure that the financial statements of the company comply with generally accepted accounting practice; and
  3. Will enable the financial statements to be readily and properly audited.

Importantly, failure to keep proper accounting records could mean that the directors are personally liable for the company's debts. In the recent case of Grant v Gifford, the Court held that as the director had failed to:

  1. Prepare the company's financial statements for several years in accordance with generally accepted accounting practice;
  2. Introduce measures or systems to track the company's position and performance, including the keeping of an asset register, invoices and inventory; and
  3. Provide adequate information to the accountant,

the liquidators were hindered in investigating the company's affairs.

Consequently, the director was liable for the entirety of the company's debts owed to its creditors. In addition, the Court also ordered that part of the liquidators' fees and disbursements be paid.

As shown above, the potential liability for failing to prepare accounting records can be significant but are avoidable.

If you wish to discuss any matters relating to the above, please contract either Alden Ho or Tony Johnson of this office.


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