The financial reporting obligations in Part XI of the Companies Act 1997 are enforced almost entirely against directors personally.
Sections 185 to 187 — the offences
| Section | Failure | Who | Penalty |
|---|---|---|---|
| 185(1)(a) | Financial statements of a reporting company not completed and signed within the time in s 179 | Every director | s 414(3) |
| 185(1)(b) | Group financial statements not completed and signed in time | Every director | s 414(3) |
| 185(2) | Statements of a reporting company or group fail to comply with an applicable financial reporting standard | Every director | s 414(3) |
| 186(a) | Statements of an exempt company not completed and signed in time | Every director | s 414(2) |
| 186(b) | Statements of an exempt company do not comply with section 180 | Every director | s 414(2) |
| 187 | A company required by s 190 to have statements audited fails to do so | Every director | s 414(3) |
| 188(5) | The board fails to keep proper accounting records | Every director | s 414(2) |
| 189(4) | No notice to the Registrar of where accounting records are kept | The company (s 413(2)) and every director (s 414(2)) | — |
| 209(3) | Annual report not prepared within five months | Every director | s 414(2) |
| 215(10) | Audited statements and audit report not lodged with the annual return | Every director | s 414(3) |
Failures by a reporting company attract the higher penalty in section 414(3); failures by an exempt company attract section 414(2). A failure to have an audit carried out where one was required attracts the higher penalty. Section 419 sets out the defences generally available.
Section 183 — the filing deadline
The directors of a company required by section 190 to be audited shall ensure that, within 14 days after the annual meeting, copies of the financial statements and any group financial statements, together with a copy of the auditor’s report, are submitted to the Registrar for registration in accordance with section 215(3).
Two separate filings therefore arise for an audited company: the section 183 lodgement within 14 days after the annual meeting, and the certified copies that must accompany the annual return in the company’s allocated month under section 215(3).
Section 348A — the liability that bites hardest
Liability if proper accounting records not kept. Where section 188 has not been complied with, directors face personal liability in the terms that section provides.
Section 348 imposes liability for a failure to prevent insolvent trading — which requires proof about the company’s financial state and the directors’ conduct. Section 348A requires only that proper accounting records were not kept.
In practice a liquidator who finds inadequate books pleads both: section 348A because it is straightforward, and section 348 because the absence of records usually means nobody was monitoring solvency either.
The knock-on consequences
- The solvency test becomes unsupportable. Section 4(2)(a)(i) requires directors to have regard to the most recent financial statements that comply with section 179. Without them, a solvency certificate has no foundation — and under section 54(2)(b) a director is personally liable where reasonable grounds did not exist for the opinion.
- It is automatically unfairly prejudicial. Under section 152(5), signing a certificate required by this Act without reasonable grounds existing for an opinion set out in it is conduct that is unfairly prejudicial.
- The auditor must say so. Under sections 200(e) and 201(e) the report must state whether proper accounting records have been kept — and under section 200(2) a qualified report on a reporting company goes to the Registrar within seven days, and on to the Accounting Standards Board.
- Striking off. Under section 366, failure to file an annual return is a ground for removal from the register — and the audited statements must accompany it.
- Disqualification. Under sections 426 and 428, persistent failures can support an order or a Registrar’s prohibition on managing companies.
- Investigation. A shareholder or creditor may seek a section 220 order authorising a qualified person to inspect the records and, if the Court orders, to audit the accounts — with the company bearing the reasonable costs.
Fixing a lapse
| Step | Provision |
|---|---|
| Ask the Registrar for an extension — available for financial statements, group statements and the annual report, for any special reason, even beyond the calendar year | ss 179(2), 181(3), 209(4) |
| Reconstruct the accounting records so the financial position can be determined with reasonable accuracy at any time | s 188(1)(b) |
| Complete and sign the statements — two directors, or the sole director | s 179(1)(b) |
| Appoint an auditor if one is required; use s 195 for a first auditor | ss 190, 195 |
| Prepare and send the annual report, at least one month before the annual meeting | ss 209, 210 |
| File — within 14 days after the annual meeting, and with the annual return | ss 183, 215(3) |
| Ask the Registrar to extend the meeting deadlines if the calendar has slipped | s 101(3) |
The most dangerous combination is a company with no current accounts that continues to pay dividends or director remuneration. Every such payment engages section 50 or section 139, each of which requires a signed certificate with grounds — and each of which imposes personal liability where the grounds did not exist. Fix the accounts first.
Sources
- Companies Act 1997 — ss 4, 50, 54, 101, 139, 152, 179–190, 195, 200, 201, 209, 210, 215, 220, 348, 348A, 366, 413, 414, 419, 426, 428
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.