A recent judgment in the High Court has confirmed that directors who do not maintain accurate company financial records do so at their own risk.
WOW Internet Limited entered liquidation in July 2014 with Ms Sharma appointed as liquidator. Having made no returns to creditors, Ms Sharma took steps to dissolve the company.
Subsequently, in an unrelated case, Ms Sharma was found guilty of misfeasance and breach of duty, following which Stephen Hunt of Griffins Insolvency Practitioners took steps to restore the company and seek his appointment as liquidator.
An investigation by Mr Hunt highlighted a number of payments out of Wow's account which required further investigation. These payments totalled £52,431.30 which could not be explained by reference to WOW's books and records (which had been provided by Ms Sharma to Mr Hunt), including cash withdrawals amounting to £29,626 which were made after the deemed date of WOW's insolvency.
Mr Hunt sought further explanation and documentary evidence from the director, Mr Qasim Majid, who claimed that all documentation (including SAGE records) had previously been provided to Ms Sharma.
Mr Hunt claimed that Mr Majid had been unable to justify the payments out of WOW's account and had not maintained sufficient company records to explain the payment of these sums (contrary to section 339(3) of the Companies Act 2006).
In the course of his witness testimony, Mr Majid tried to justify the expenditure noting that certain payments were for the benefit of WOW's employees, some payments were to suppliers of WOW and other sums were due to him personally. However, Mr Majid was unable to support his position by reference to any of WOW's records or even any contemporaneous documentation.
It was held by Deputy ICCJ Frith that Mr Majid should repay the full amount of £52,413, accepting Mr Hunt's submission that the court should be entitled to draw adverse inferences from a director's failure to properly maintain a company's books and records.
The judgment noted that the evidential burden was on a director to prove that any sums paid out of WOW's account were for legitimate company purposes. It was held that if directors "conduct the business informally and take a lackadaisical approach to supply of contemporaneous documentary evidence, they do so at their own risk."
This is an important reminder to all directors who fail to maintain a company's books and records that they may face an uphill battle to defend a later claim that the monies were used for an improper purpose.
...if the directors of a company conduct the business informally and take a lackadaisical approach to supply of contemporaneous documentary evidence, they do so at their own risk