Sections 421 and 422 of the Companies Act 1997 deal with two forms of dishonesty by insiders: taking the company’s property, and falsifying its records.
Section 421 — fraudulent use or destruction of property
(a) fraudulently takes or applies property of the company for his own use or benefit, or for a use or purpose other than the use or purpose of the company; or
(b) fraudulently conceals or destroys property of the company,
commits an offence, penalty under section 413(4) — a fine not exceeding K200,000 or up to five years’ imprisonment, or both.
Shareholders are included. Section 421 applies to a director, employee, or shareholder. In a small company the person taking the assets is often a shareholder rather than an officer, and the section reaches them.
“Or for a use or purpose other than the use or purpose of the company” is wider than taking for oneself. Diverting company assets to a related business, to a family member, or to another company in the group can fall within paragraph (a) even though the accused gains nothing personally.
Concealment counts. Paragraph (b) sits alongside section 321(1)(b), which prohibits concealing or removing company property with intent to prevent or delay a liquidator taking control — and section 322, which requires present and former directors and employees to identify and give up company property to a liquidator.
The same conduct is a breach of the section 112 duty to act in good faith and in what the director believes to be the best interests of the company, and of the section 123 restriction on using company information.
In a liquidation, section 350 allows the Court to inquire into the conduct of a person who has misapplied or retained company property and order repayment or compensation — and it has effect even though the conduct may constitute an offence. A section 344 recovery may also be available for a related-party transaction at an undervalue, over a five-year look-back.
Section 422(1) — falsification of records
(a) destroys, parts with, mutilates, alters, or falsifies — or is a party to the destruction, mutilation, alteration or falsification of — any register, accounting records, or document belonging or relating to the company; or
(b) makes, or is a party to the making of, a false entry in any such register, accounting records or document,
commits an offence, penalty under section 413(4).
The records protected are the ones the Act requires the company to keep — the company records under section 164, the share register, the register of charges, the interests register, and the accounting records under section 188 — but the words “or document belonging or relating to the company” are wider still.
Section 422(2) — electronic and mechanical systems
(a) records or stores in the device, or makes available to a person from the device, matter that he knows to be false or misleading in a material particular; or
(b) with intent to falsify or render misleading any such register, records or document, destroys, removes, or falsifies matter recorded or stored in the device, or fails or omits to record or store any matter in the device,
commits an offence, penalty under section 413(4).
Subsection (1) applies to a director, employee, or shareholder. Subsection (2) applies to every person — so an external bookkeeper, an IT contractor, or an accountant outside the company is within it.
Paragraph (b) expressly covers a failure or omission to record. Deliberately leaving transactions out of the accounting system, with intent to falsify or mislead, is the offence — not only altering what is there.
And note the different mental elements: paragraph (a) requires knowledge that the matter is false or misleading in a material particular; paragraph (b) requires an intent to falsify or render misleading.
Falsified or missing accounting records are also the trigger for section 348A: where a company in liquidation cannot pay all its debts and has failed to comply with section 188, the Court may declare directors and former directors personally responsible, without limitation of liability, for all or any part of the company’s debts.
Section 348A(4) confirms the Court may make that declaration even though the person is liable to be convicted of an offence — so section 422 and section 348A operate together, not as alternatives.
Section 424 — improper use of “Limited”
Any person who, not being incorporated with limited liability, whether alone or with others, carries on business under a name or title of which “Limited”, or an abbreviation or imitation of that word, is the last word, commits an offence, penalty under section 413(2) — a fine not exceeding K10,000.
The word signals to anyone dealing with the business that the owners’ liability is limited to their shares. Using it without incorporation misleads on the one point that matters most to a creditor. The corresponding positive requirements are in section 22, which controls what a company may be called, and section 30, which requires the name to appear on the company’s documents.
Practical points
- Keep company money separate. Paying personal expenses from the company account and treating it as a loan account entry is where most section 421 exposure begins.
- Document related-party dealings and disclose interests under section 118; a properly disclosed and approved transaction is not fraudulent use of property.
- Never edit historic records. Correct by a dated adjusting entry, not by alteration — section 422(2)(b) reaches deletions from electronic systems.
- Preserve records once insolvency is in prospect — section 321(1)(c) makes destroying, concealing or removing records an offence without proof of any intent once a liquidation or an application is on foot.
- Do not use “Limited” in a trading name unless the entity is in fact incorporated with limited liability.
Sources
- Companies Act 1997 — ss 22, 30, 36, 112, 118, 123, 164, 188, 321, 322, 344, 348A, 350, 413, 421, 422, 424
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.