The Importance of Keeping Books and Records

Transcript of Video

Hi, I’m Steven Kugel of the Insolvency Experts.

Often when times are becoming tough in business, the director of a company will be flat out trying to juggle all aspects of the business just to keep the doors open and in these cases, one of the first things to go is the preparation of books of account as to the financial position of the company.

Issues that every director needs to be aware of

Firstly and obviously, without regular reports as to the financial position of the company, a director cannot determine where the company is in terms of its assets and its ability to meet its liabilities. One cannot possibly know whether a company is capable of repaying that next dollar of credit it seeks unless it complies with the law and the ASIC guidance in terms of regularly assessing the financial position of the company.

Of course, if a reasonable person in the position of the director could not form the view that debts could be paid as and when they fall due for payment — that is the definition of Insolvent Trading and that may lead to the loss of personal assets.

Now, another great reason for maintaining books and records is this.

Where a company goes into liquidation, a liquidator is required to collect and then undertake a review of company the records to determine the reasons for its failure. This includes an assessment of when precisely the company became insolvent.

In these circumstances, the onus of proving insolvency is upon the liquidator.

Now in the case where no books and records have been maintained, the law says the company is presumed to be insolvent so long as financial records were not maintained. This means that a Liquidator could take action against a director for Insolvent Trading on the basis that no records had been kept and then the onus of proving the company was solvent would fall to the director – who would have to prove solvency — without financial records in order to avoid a damages award and the loss of personal assets.

For these reasons, you must encourage your clients to stay close to their accountant through good and bad times.