The Risks of Failing To Keep Proper Company Records
Companies and directors are reminded of their statutory obligation to keep full and accurate company records and accounts. A recent case is an abject lesson for all directors and businesses of the risks of failing to keep up with keeping proper records and paper trails.
Under declaring VAT
When he asked his accountants to file VAT returns, the director of a scrap metal recycling business supplied bank accounts for just one of three company bank accounts. This meant – as was evidently the director’s objective – that his VAT liability was significantly understated to the tune of more than £800,000.
HM Revenue & Customs investigated and issued him with amended VAT assessments, which the director could not settle. Liquidators were subsequently appointed and they began proceedings against the director for fraudulent trading and misfeasance and ‘deliberately and persistently’ under declaring VAT, and other claims including destroying company books and records.
Liability
Under section 213 of the Insolvency Act 1986, if it appears during the course of winding up a company that company business has been carried on with intent to defraud creditors of the company or for any fraudulent purpose, the court can impose liability on anyone who was knowingly a party to it. It is no bar to the operation of s213 if the company intended to defraud only one creditor
The High Court found on the facts that the director:
· had sole control of the business
· deliberately caused the company to operate with the intention of defrauding HMRC
· deliberately mis-declared VAT throughout the company’s existence
· kept its trading accounts secret, including hiding bank accounts
· destroyed company records and documents
· used his bank accounts in an “unrestrained and undocumented way” (to the tune of £millions)
The director offered the court a ‘smattering’ of different accounts and tried to convince it that his huge cash withdrawals were used to buy stock – explanations which the court did not accept.
Unsurprisingly, he was found liable for fraudulent trading and misfeasance and ordered to repay a total of some £2.570 million. The judge commented that the director’s “deliberate non-maintenance of records was an aspect of his fraud”.
Key takeaways
In many respects, this is an extreme and obvious case but illustrates the problems that can arise, and the potential for allegations against directors if there is an absence of records and documentation.
All directors are legally required to keep full and accurate company accounts and to preserve them in compliance with company law and directors’ wider fiduciary duty.
On a more general note, trading while insolvent is inherently risky. Directors could, for example, be personally liable if they continue trading knowing (or ought to have known) there was no reasonable prospect of avoiding liquidation.
If you are concerned, always take specialist advice from corporate and tax lawyers before taking further steps.
1Thiel-Czerwinke & Anor v Crabb (Courtside Recycling Ltd, Re) [2024] EWHC 337 (Ch
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