What are the implications for keeping poor accounting records?

The sole director of a company which ran a nightclub in Edinburgh has been banned from being involved in the management of a company for six years due to his poor record keeping.

What accounting records must a company keep?

Every company is required to keep “adequate” accounting records. To be classed as “adequate” the records must:

• show and explain the company’s transactions;
• give a reasonably accurate view of the company’s financial position; and
• enable the directors to prepare accounts which comply with the relevant legal requirements.

The records must contain day to day entries showing all amounts received or spent by the company, as well as details of the company’s assets and liabilities. If the company deals in goods, the records must also contain stock inventories as at each financial year end and statements of all goods bought and sold.

The records must be kept for three years (or six years for a public company).

What happens if the records aren’t “adequate”?

Failing to keep adequate accounting records is a criminal offence by every director in default, punishable by an unlimited fine and up to two years in prison.

These breaches often come to light when the company fails and is referred to the Insolvency Service for investigation following a compulsory liquidation. As part of those proceedings the directors can also face a disqualification order – as happened in the latest case.

A nightclub without records

Brian Chalmers set up Scene Live Limited to run a nightclub in Edinburgh. But only three years later, the court ordered the company’s closure when it failed to pay tax.

The Insolvency Service investigated the company and discovered that its sole director had failed to:

• maintain adequate accounting records
• file accounts at Companies House
• hand over records to the Insolvency Service

The director was also unable to provide any explanation for £180,000 which the company had paid to a third party.

The director gave a disqualification undertaking (the administrative equivalent of a disqualification order but without involving court proceedings) and is now banned for six years from being a director of any company or being involved in the promotion, formation or management of any company.

The last word

Commenting on the case, Rob Clarke of the Insolvency Service said: “Companies are under a legal duty to account for their income and expenditure and fulfilling that duty is a key component of the role of a director. There is no place in the corporate arena for those who neglect their responsibilities in this area, a fact which is reflected in Brian Chalmers’ lengthy ban.”