Keeping your accounts in order Law Reporter

Directors are liable for failure to keep appropriate accounts.

When a person becomes a company director, many duties are imposed on that person by the Corporations Law (the Law). In Law Reporter we have often discussed the duties to act honestly, with appropriate care, to avoid conflict and related duties. Insolvent trading has also been a popular topic of discussion. From time to time, we see cases reported which remind the reader of how important another basic and fundamental feature of a director's position is – to keep proper accounting records. Failure to do so may result in significant consequences as is illustrated by a recent decision of the Western Australian Supreme Court, Love v Australian Securities Commission ((2000) 36 ACSR 363) (the case was initially brought by the Australian Securities Commission now replaced by ASIC, referred to as the Commission). The facts are taken from Butterworths Law Report. Love was a director of Kazakk Pty Ltd (the company). He had been convicted under a now repealed provision of the Law for failing to take all reasonable steps to secure Kazakk's compliance with its obligation to keep proper accounting records (see now section 289(1) of the Law).

Love appealed that conviction. He claimed that the magistrate had made a mistake in finding the charge proved. He also claimed that the magistrate had failed to provide adequate reasons for his decision. He also sought leave to provide fresh evidence to the court. This was in the form of weekly summaries of financial information which had been prepared and sent by Love to employees of Kazakk. Unfortunately for Love, the appeal was dismissed. Owen J ruled there was no real possibility that even had fresh evidence been presented, the magistrate would not necessarily have found that Kazakk had complied with section 289(1). There had been too many other deficiencies, apparently, in Kazakk's records and record keeping procedures for that to occur. Owen J reviewed the relevant evidence. He noted that the relevant summaries, would arguably not have "altered the magistrate's conclusion that the company's record keeping was insufficient because they did not form part of the company's records, in the sense that they were never intended to be kept permanently.... I do not think that records that are not intended to be kept can be used as evidence of a company's record keeping for the purposes of compliance with section 289(1). They may be used in some circumstances, however, as evidence that a director of a company was taking reasonable steps to ensure that the company satisfied the requirements of section 289(1). In the circumstances of this case, however, the evidence of the summaries could not be relied upon in that way. The summaries were not means by which [Love] would 'double-check' compliance, nor were they evidence of a system by which he secured compliance." (at para 44)

Owen J then dealt with the question of challenging a magistrate's finding on the basis of weighing up the evidence in assessing the way in which the magistrate had conducted the case. He felt that the magistrate had the benefit of all of the evidence of persons at the initial hearing. He relied on the decision in Van Reesema v Flavel ((1992) 10 ACLC 291) which also considered section 289. In that case the Full South Australian Supreme Court had indicated that there were two obligations imposed on a company in this regard. There is first the obligation to keep such accounting records as correctly record and explain the transactions of the company as well as its financial position; and second, the company must keep those records in such a manner as will enable the preparation of appropriate accounts. The court went on to note that accounting records included various books of prime entry such as a cashbook and a journal as well as ledgers. The judge recognised that what might be sufficient for one company may not be so in relation to another. However, relying on the Van Reesema case, he felt that failure to keep an adequate general journal was relevant to his decision on whether the company had satisfied the requirements. Bearing in mind the expert evidence given by three persons in the trial, he said the magistrate had not erred in ruling that adequate records had not been kept.

The appellant also alleged that the magistrate had not provided adequate, clear reasons for his conclusions. However, while it was the decision of the magistrate to give reasons for a decision which adequately revealed the intellectual process by which he made a particular determination, in the view of Owen J the magistrate had fulfilled the relevant duty. The trial had lasted nine days spread over a period of 16 months, there were 10 witnesses, 900 pages of transcript and 75 exhibits. Owen J said the magistrate was not required to analyse every piece of relevant evidence nor specifically to refer to each piece of disputed evidence in his decision. Owen J also concluded that there was no need for the magistrate: "expressly to define, with specific reference to the company, what would have constituted 'adequate' records and record keeping procedures so as to achieve compliance with section 189(1). The critical issue was whether the records which were actually kept were 'inadequate'. Put more accurately, the fundamental question was whether the Crown had discharged the onus of establishing that the records did not comply with section 289(1). In my view the reasons for decision adequately explain why the magistrate was so satisfied." (at para 69)

In all of the circumstances the appeal was dismissed. Of course, each case is very much dependent on its own facts. The decision is a salutary reminder of the importance of ensuring that the relevant provisions of the Law in relation to technical matters are treated with sufficient attention to both general and specific detail to avoid the possibility that challenges may be brought against directors.

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