Section 188 of the Companies Act 1997 states the accounting records obligation by reference to what the records must achieve.
Section 188(1) — what the records must do
(a) correctly record and explain the transactions of the company; and
(b) will at any time enable the financial position of the company to be determined with reasonable accuracy; and
(c) will enable the directors to ensure that the financial statements comply with section 179 and any group financial statements comply with section 182; and
(d) will enable the financial statements to be readily and properly audited.
“At any time” — not at the year end, not when the accountant next attends. The records must be capable of showing the company’s financial position with reasonable accuracy at any moment.
That is what makes continuous solvency monitoring possible, and it is why section 4(2)(a)(ii) requires directors to have regard not only to the last financial statements but to all other circumstances they know or ought to know. A board that cannot say today whether the company can pay its debts as they fall due is in breach of section 188(1)(b) before it is in breach of anything else.
Section 188(2) — the specific requirements
(a) entries of money received and spent each day and the matters to which it relates; and
(b) a record of the assets and liabilities of the company; and
(c) where the business involves dealing in goods —
(i) a record of goods bought and sold, except goods sold for cash in good faith in the ordinary course of a retail business, identifying the goods, the buyers and sellers, and the relevant invoices; and
(ii) a record of stock held at the end of the financial year, with records of any stocktakings during the year; and
(d) where the business involves providing services, a record of services provided and relevant invoices.
Paragraph (a) requires entries each day of money received and spent and what it related to. A bank statement alone does not satisfy it; the purpose of each movement must be recorded.
Paragraph (c)(i) requires the identity of buyers and sellers for goods transactions — with a carve-out only for cash retail sales in good faith in the ordinary course. That is what allows a liquidator, an auditor or the Registrar to trace where assets went, and it is central to establishing a voidable transaction or a recovery from a related entity.
Sections 188(3) and (4) — form and retention
(3) The accounting records shall be kept (a) in written form; or (b) in a form or manner in which they are easily accessible and convertible into written form.
(4) The company shall keep accounting records for the current accounting period and for the last 10 completed accounting periods.
Note the difference. Section 164(1)(j) requires the accounting records for the current period and the last seven completed periods to be kept as company records at the registered office. Section 188(4) requires the company to keep them for the current period and the last ten.
The safe practice is to retain accounting records for ten years, and to hold the most recent seven years’ worth where section 164 requires. Section 165 separately requires the board to ensure adequate measures exist to prevent and detect falsification of records.
Failure by the board to comply with section 188 is an offence by every director, with the penalty in section 414(2).
Section 189 — where the records may be kept
(1) A company may keep the accounting records at its registered office or at some other place.
(2) Where they are not kept at the registered office, the company shall submit a notice to the Registrar of the place where they are kept, and of any change in that place, within one month of the change.
Where the records are not kept in the country, the company shall ensure that accounts and returns for its operations that —
(a) disclose with reasonable accuracy the financial position of the company at intervals not exceeding six months; and
(b) will enable the preparation of the financial statements, any group financial statements and any other document required by this Act,
are sent to, and kept at, a place in the country.
Section 189 permits the accounting function to sit overseas — a shared service centre, a regional office, a parent’s finance team. What it insists on is that six-monthly accounts and returns disclosing the financial position with reasonable accuracy are held here.
That is the minimum needed for the directors to discharge section 188(1)(b), for the Registrar to exercise the inspection powers in sections 400 to 403, and for a liquidator or receiver to take control of a company’s affairs.
Failure to comply with section 189(2) is an offence by the company (penalty under section 413(2)) and every director (section 414(2)).
The consequences of inadequate records
| Provision | Consequence |
|---|---|
| s 348A | Personal liability of directors where proper accounting records were not kept |
| s 188(5) | Offence by every director |
| s 200(e), 201(e) | The auditor must state whether, in their opinion, proper accounting records have been kept — a qualification is public |
| ss 185–187 | Offences where statements are late, non-compliant, or unaudited |
| s 422 | Falsification of records is an offence |
| s 426 | Persistent failures can support disqualification from managing companies |
| s 4, s 54(2) | Without records, directors cannot show reasonable grounds for a solvency opinion — and become personally liable for distributions |
It is worth emphasising: section 348A imposes liability if proper accounting records are not kept, independently of whether the company traded while insolvent. A director who cannot produce records complying with section 188 faces personal exposure in a liquidation without the liquidator having to prove anything about the company’s trading decisions.
Sources
- Companies Act 1997 — ss 4, 54, 164, 165, 179, 182, 185–189, 200, 201, 348, 348A, 400–403, 413, 414, 422, 426
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.