Directors’ Duties: Keep Accurate Records to Prove Lawful Transactions

An important ruling is a vital reminder of the fiduciary duties owed by directors, and the risks in the event of a breach. Keeping honest and full accounts is one of those duties. At the award-winning firm ParrisWhittaker, our expert corporate lawyers advise companies and directors on their legal duties and on insolvency issues.

Under the Bahamas Companies Act s81, company directors (and company officers) owe statutory and fiduciary duties to act honestly and in good faith with a view to the best interests of the company. They are also required by statute to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

Keeping accounts

The directors are specifically required by statute to keep true accounts of a company’s financial dealings, including their assets and liabilities. Where a company is being wound up, the company accounts must be available to the receivers and will be prima facie evidence of the trust of matters recorded within them.

Further, the fiduciary duties of directors include the duty to act in the interests of creditors when the company becomes (or is at real risk of becoming) insolvent. In a ruling from the UK’s High Court¹, a director had not satisfied the court he had complied with his legal duties. The ruling has important persuasive authority on the courts in The Bahamas and should be noted.

What happened in this case?

The claimant (C) company, OmniMax, is a North American manufacturer producing aluminium products for the building trade. D was sole director and shareholder of two companies that went into liquidation. The defendants were D, his wife and one of D’s companies.

The liquidator assigned any claims against the defendants to company C. The claims brought by C included a claim against D for deceit and false representation and breach of fiduciary duty. C secured a freezing order against all the defendants as well as summary judgment against D.

D’s was found to have engaged in serious misconduct and breaches of company law. For example, he had used company assets to fund a private property in breach of his fiduciary duties.

He had also made payments totalling £1.677m of company money to himself and another company (just over a year before going into liquidation) in breach of duties under the UK’s Company Law Act (including a duty to act within powers, a duty to promote the success of the companies and to avoid conflicts of interest).

Lack of records

D did not dispute he had received the payments, even claiming he was entitled to them – but he had no valid explanation or purpose for how the businesses were being run. It was also claimed that there was documentation in existence – but that it was missing.

However, the judge made clear that once a director has received company money, it is for the director to show that the payment was proper; and where debit entries have correctly been made to a director’s loan account, it is for the director to justify credit entries on the account. The director is or was one of those officers responsible for the management of the company’s business and will have had a responsibility for ensuring proper accounting records were kept. His defence failed.

Had D been able to produce accounts to demonstrate money had been properly transferred – the outcome could have been very different.

Key takeaway

The ruling underscores the importance of the statutory duties owed by directors, including keeping full and accurate financial records. Without a transparent record showing transactions and their purposes, individual directors are at risk of personal liability for losses.

For urgent advice on directors’ duties and insolvency, contact the award-winning commercial litigation lawyers at ParrisWhittaker at +1.242.352.6112 or info@parriswhittaker.com.

1 Omnimax International LLC v Cullen [2024] EWHC 2367 (Ch)