Under section 194 of the Companies Act 1993, the board of a company is required to ensure that at all times, records of the company are kept that:
- Correctly record the transactions of the company; and
- Will enable the company to ensure that the financial statements (or group financial statements) of the company comply with generally accepted accounting practice (if the company is required to prepare such statements by law); and
- Will enable the financial statements to be readily and properly audited (if the statements are required to be audited).
The board must also establish and maintain a satisfactory system of control of its accounting records
These records must enable for the financial position of the company to be determined with reasonable accuracy at any time, without requiring explanation or reconstruction. These records must “speak for themselves”. Keeping basic accounting records such as cheque books, deposit books, bank statements, invoices and the like will not comply with the statutory requirements.[1] However, given the vast variety of the type of business a company may operate, there are no set requirements of records that must be kept – it will depend on the nature of the business as to what is required.
The Court has considered what the meaning of “keeping” records is. It was decided that “kept” does not simply mean retaining or storing records, as the usual interpretation of the word would imply. Rather, “keeping” records also imports an obligation for the board of the company to create records that the company is required to hold under section 194.
Furthermore, the obligation to keep records is continuous. The board is required to ensure that records are kept so that the financial position of the company can be determined with reasonable accuracy at any time. The records therefore must be kept up to date.
If a director/the board fails to keep the accounting records as required, a company can seek relief for losses experienced as a result of the breach of section 194. The mechanism for doing so is section 300 of the Act, provided that certain criteria are met:[2]
- The company is in liquidation
- The company is unable to pay all its debts
- That the company has failed to comply the obligations imposed on it as to the keeping of accounting records
- The failure to keep the accounting records has:|
- contributed to the company’s insolvency; or
- created substantial uncertainty over the company’s assets or liabilities; or
- substantially impeded the orderly winding up of the company or
- for any other reason warranting the remedy under section 300
The Court will also consider causation (the link between the breach and the loss), the culpability of the director/board, and the duration of the breach.
Some examples
- Destroying company records: if a liquidator is appointed and the records have been destroyed, it is very likely that this will result in substantial uncertainty as to the financial position of the company, and will substantially impair the orderly liquidation of a company.[3]
- Failing to record the work in progress on a project (e.g. invoices issued and received and time sheets of staff) will result in substantial uncertainty as to the assets and liabilities of the company.[4]
- Not recording whether share capital has been paid up can result in substantial uncertainty as to the financial position of the company.[5]
- It is a breach of section 194 to prepare financial statements but maintain no general ledgers to verify the financial statements.[6]
- Failing to record the day-to-day transactions of the company by using an accounting software package, or register or keeping supporting documents results in substantial uncertainty as to the financial position of the company.[7]
Steps to take to help avoid breaching section 194
- Using an accounting software package to record the day-to-day transactions of the company, and keeping this up to date
- Preparing financial statements and keeping supporting documentation to allow the financial statements to be verified
- Engaging an accountant to prepare the required documentation
[1] Maloc Construction Ltd (in liq) v Chadwick (1986) 3 NZCLC 99,794.
[2] Re Network Agencies International Ltd (in liq); Johnston v Edwards [1992] 3 NZLR 325; (1991) 5 NZCLC 67,535.
[3] Walker v Ariyathas [2012] NZHC 1648.
[4] Maloc Construction Ltd (in liq) v Chadwick (1986) 3 NZCLC 99,794.
[5] Maloc Construction Ltd (in liq) v Chadwick (1986) 3 NZCLC 99,794.
[6] Mizeen Painters Ltd (in liq) v Tapusoa [2015] NZHC 826.
[7] Grant v Guo [2015] NZHC 2480, Mizeen Painters Ltd (in liq) v Tapusoa [2015] NZHC 826.
