Deemed Insolvency – failure to maintain proper books and records

Written by Kim Wallman, Principal

April 17, 2019

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When a company goes into liquidation and I become the Liquidator, I inherit what I inherit. A veritable smorgasbord or problems, claims, disputes and troubles.

I also inherit the insolvent company’s books and records, and it is incumbent upon me to assess whether the records adhere to section 286 of the Corporations Act 2001 (CA), that is that they:-

  • Correctly record and explain the transactions, financial position and performance of the company; and
  • Would enable true and fair financial statements to be prepared and audited.

I objectively base my assessment on the records that I receive and the standard / state that they are in.

Accordingly, I examine the following (or lack of the following, as the case may be):

  1. Maintenance of a management accounting system (i.e. MYOB, Xero, QuickBooks or even sometimes Excel or manual records)
  2. Engagement with a bookkeeper to manage the financial record keeping system
  3. ATO BAS / SGC lodgement history
  4. Externally prepared financial statements and tax returns, particularly whether they are up to date
  5. Periodic bank reconciliations
  6. Cash flow management tools

Apart from the section 286 obligation described above, a lack of proper books and records can leave directors exposed to an insolvent trading personal liability under section 588E(4) of the CA.

For a Liquidator, proving an insolvent trading claim is complex, time consuming and costly. And even if a claim can be proved, directors can mount one of four defences to the claim. This partly explains why so few theoretical insolvent trading claims are acted upon by Liquidators generally.

However under section 588E(4), if it can be proved that a company did not maintain proper financial records at the time that certain transactions are entered into, a Court is likely to find a personal liability to its directors.

The message here for directors is, if they want to avoid the ‘silver bullet’ for a Liquidator’s insolvent trading analysis, they should adhere to the requirements of section 286 and ensure that they maintain proper books and records.

This means more than just sales records, supplier invoices, payslips and bank statements in separate shoe boxes. The section 286 requirements may not be met in these circumstances.

To echo the points above, the records must correctly record and explain the transactions, financial position and performance of the company and enable true and fair financial statements to be prepared.

About the author

Kim Wallman is the principal of HLB Mann Judd Insolvency WA.  He established the firm in 1995 and has over 35 years of experience in the insolvency and restructuring industry.  Kim maintains his strong reputation through building trust, providing fair and expert advice and always maintaining an empathetic, compassionate mindset.

If you have any queries about insolvency matters, please feel free to contact Kim on 08 9215 7900, 0411 619 256 or via email to kwallman@hlbinsol.com.au

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