Be Warned: Failure To Keep Proper Company Records Exposes You

Company directors are legally responsible for maintaining accurate company accounts and records, and if they don’t – they could risk an adverse inference being drawn from their failures.

The specialist corporate lawyers at ParrisWhittaker advise and support companies and their directors on all matters relating to their legal obligations.

A recent case¹ from the UK demonstrates – in somewhat extreme circumstances – how a director’s failure to keep accounts, records and proper paper trails collectively painted a picture revealing misfeasance and fraud. The ruling has persuasive effect on the courts in the Bahamas and the wider Caribbean region.

Under declaring VAT

By way of introduction, UK companies are required to pay ‘value added tax’ (VAT) if their turnover exceeds £90,000. The records they must keep therefore include any relating to the payment of VAT and all other relevant taxes and bank accounts, etc.

In this case, the sole director of a scrap metal recycling business instructed his accountants to file VAT returns with HM Revenue & Customs (HMRC – the government body that collects taxes).  But he only supplied them with bank accounts for one of three company bank accounts.

His VAT liability was therefore significantly understated – and he underpaid at least £800,000.

It became apparent that this was intended.

HMRC was suspicious and investigated the company, subsequently issuing him with amended VAT assessments which he was unable to settle. He had also withdrawn significant sums of money from his bank accounts of more than £2.5 million.

Just four years after the company was incorporated in 2014, liquidators were appointed and they launched proceedings against the director for fraudulent trading and misfeasance. They also claimed that he ‘deliberately and persistently’ underdeclared VAT and had also destroyed company books and records. (The director did admit destroying documents.)

Liability for fraud

Where company directors know or ought to know that there is no reasonable prospect of the company avoiding insolvency, they are required to take all reasonable steps to minimise loss to its creditors.

Under insolvency and company laws in England, the court can impose liability on anyone who – during the winding up of a company – was knowingly a party to the carrying on of company business with intent to defraud creditors of the company or for any fraudulent purpose. Similar provisions apply in the Bahamas.

The High Court concluded on the very clear facts that this director:

• deliberately caused the company to operate with the intention of defrauding HMRC
• deliberately mis-declared VAT throughout the existence of the company
• kept its trading accounts secret and hid bank accounts
• destroyed company records and documents
• used his bank accounts in an “unrestrained and undocumented way”

He was found liable for fraudulent trading and misfeasance. His “deliberate non-maintenance of records was an aspect of his fraud”. He was ordered to repay around £2.57 million.

What does this mean?

A failure within any company to keep proper records and paper trails demonstrating clearly the company’s financial position at any given time is an important legal responsibility.  The absence of records and documentation – and more so the deliberate destruction of documents – can infer wrongdoing, which any director of integrity will want to avoid.

If you have any concerns relating to your company records or, indeed, your financial viability, contact the experience corporate lawyers at ParrisWhittaker at []

¹Thiel-Czerwinke & Anor v Crabb (Courtside Recycling Ltd, Re)  [2024] EWHC 337 (Ch