What quality of books and records are expected to be delivered to a liquidator?

Estimated reading time: 6 minutes Company liquidation

The dynamics of liquidations can quickly turn toxic. Directors initially see the liquidator as a savior from tax debts and creditor actions and then when the investigations begin the directors see the liquidator as their enemy.

What quality of books and records are expected to be delivered to a liquidator?

In article:

Directors are legally required to hand over the books of their liquidated company as soon as a liquidator is appointed. There is also an ongoing obligation of the director to assist the liquidator in performing their duties, which can mean helping the liquidator to understand what is in the books and explaining past transactions.

This can create a sense of internal conflict for directors. Directors are aware that their conduct is likely to be investigated as part of the liquidation. They are therefore concerned about their own liability, such as the possibility of being found liable for allowing insolvent trading and/or voidable transactions relating to their actions.  

Nevertheless, the best way of managing this conflict is complete transparency with the books from the point of liquidator appointment. This is the path of action least likely to antagonise the liquidator, and may avoid examinations and complaints to the Australian Securities & Investments Commission (ASIC) afterwards. Disclosure of the books and records of the company doesn’t mean that directors can’t argue with the liquidator about the interpretation of those transactions, such as whether the transactions were uncommercial or inappropriate. 

Here we take a deep dive into the director’s obligation to hand over the books and examine how directors should manage this obligation. 

Obligation to hand over books

The obligation to hand over the books of the company is set out in section 530A of the Corporations Act 2001 (Cth). This section provides that, as soon as placed into liquidation, company officers must, as soon as practicable, deliver to the appointed liquidator all the books in their possession relating to the company. 

Corresponding to this obligation of the officers (in this case the directors) is a right of the liquidators to demand access to the books and records of the company (see section 530B of the Corporations Act 2001(Cth)). 

So, what exactly does ‘books’ include? The Corporations Act 2001 (Cth) defines ‘books’ broadly; a register, any record or information, financial reports or records, or documents. Section 9 of that Act also defines ‘financial records’ extremely widely. This means it will include the company computer server, and immediate access to any cloud software in use (such as accounting and budgeting software). There is really no room for a company director to argue that a liquidator is not entitled to receive copies or original documents that relate to the company’s affairs.

Liquidators will require this access from day one. This is partly because it is essential to begin the liquidator’s investigations and reporting, and partly because the liquidator needs to protect records from any potential tampering. 

Note, as a director, you should ensure that you have a copy of records before the liquidation begins, in case you need access to them to properly respond to any claim by a liquidator (and potentially defend yourself).

What if a director considers delaying the transfer of books to the liquidator? Forget about it. The director would better serve their own interests by bundling all documents together and delivering on day one of appointment. This puts the onus on the liquidator to take the next step and sets up the winding-up procedure with a professional dynamic. The effort would also be better served carefully considering the financial structure of the business before the winding up procedure is initiated. 

Read more about the best steps for a director preparing for winding up at The Ultimate Guide to Liquidation Part 2: Preparing for Liquidation.

What if the books are a ‘dog’s breakfast’?

Poor financial management and record-keeping is one of the most common warning signs of insolvency. Therefore, it is no surprise that at the point of liquidator appointment, the books are often in a mess. There are a range of risks when the books are in a state of disarray: 

Where a business is in financial difficulty (ideally before the business is clearly insolvent) it is worthwhile getting a bookkeeper to reconcile accounts and therefore characterise all the transactions on the bank statements. 

At the very least, the directors should put the time into getting all ‘source documents’ together. That is, gathering the original financial records that are used to inform the ‘books of prime account’. This means cash receipts/vouchers, invoices, debit notes, credit notes, cheques and so forth. Directors should put some effort into tracking down every last document (even if it is an invoice languishing in somebody’s archived email folder). 

On a more general note, robust financial record-keeping should be on the minds of all company directors right from the point of incorporation. For these purposes, companies should consider subscribing to a reliable accounting software service such as MYOB, Quickbooks, Xero, Wave or FreshBooks. 

The alternative scenario, of leaving transactions unreconciled and opaque is that the director risks not only insolvent trading allegations but also claw-back actions for any transactions that are deemed (by the liquidator) to be unreasonable/uncommercial. 

Can I hide or alter the books before handing them over?

Putting to one side the illegality and dishonesty involved in this act, there is little practical point in doing so. Through Austrac, the liquidator will have ready access to all information about company bank transactions. So any attempt to hide transactions is likely to be uncovered and result in worse consequences for the director. 

In some cases, directors may be inclined not to hide the transactions, but to influence how they are characterised. For example, a director may attempt to classify earlier drawings from a company as a legitimate business expense (eg. payment of a salary), rather than a loan. However, the liquidator will make their own assessment based on an objective assessment of the evidence. Any money taken out of the company bank account might be allocated to a loan account or classified as an unreasonable director-related transaction based on the liquidator’s assessment. 

Note also: 

  • If dishonesty is found to be a factor, criminal charges can be forthcoming with a penalty of up to five years imprisonment. 
  • There is a duty to provide assistance to liquidators when asked, and liquidators have a strong power of search and seizure under section 530C of the Corporations Act 2001 (Cth) (so any attempted hiding or alteration can be easily discovered). Read more about this power at How Can Liquidators Obtain a Warrant to Seize Company Property?.

A more prudent path for a concerned director might be to properly record all transactions before appointment, and then negotiate with the liquidator afterwards to resolve any potentially ‘questionable’ transactions. This is more likely to result in a favourable settlement for the director than an attempt at obfuscation. Ultimately however, answering this question depends on the individual’s circumstances and professional advice should always be sought. 

One concrete piece of advice that any lawyer is likely to make to directors is don’t make any admissions about dishonesty. A person who is concerned they may have committed a criminal act would be prudent to exercise their right to silence. Dishonesty graduates the director’s potential liability from civil to criminal liability (‘out of the frying pan and into the fire’). At the same time though, there is no ‘right to silence’ when it comes to directors’ obligations, so directors cannot simply ‘clam up’ if the issue is civil not criminal in nature. 


Breach of trust - corporate trustee breaches duties

Breach of Trust: Definition and Recent Case Law

Estimated reading time: 16 minutes

In a trust, a trustee has strict obligations to beneficiaries. These are either set out in the trust deed, or apply via operation of law. Where a trustee does not act in accordance with those obligations there is a ‘breach of trust’. Here we take a deep dive into the concept of a breach of trust, and examine some recent case law.