Lifecycle of a Business - Money, Money, Money: Directors’ Duties and Financial Accounts

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune.

But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

Moving on to Directors: Lights, Camera, Action!

Money, Money, Money: Directors’ Duties and Financial Accounts

We’ve recently written about the general duties of directors which are set out in the Companies Act 2006 and in that article, briefly mentioned that other, more specific duties and obligations may also apply, including, for example, in relation to a company’s financial accounts. Broadly, the directors of a company have to be satisfied that the annual accounts provide a true and fair picture of the company’s financial position before they are approved and filed at Companies House. But how can they do this and why is compliance important?

What is the duty?

A Company’s financial accounts must be approved by the company’s directors and filed at Companies House each financial year. However, by law, the accounts must not be approved unless they give a true and fair view of the financial position of the company, including its assets and liabilities. If a director is not convinced that the information contained in the accounts provides a true and fair view, the accounts should be investigated and any necessary adjustments made.

The words “true” and “fair” can be considered at face value when considering the company’s accounts. In other words, do the accounts show a picture of the company which is, in the context of the directors’ knowledge of the business and the necessary application of accounting rules, an accurate reflection of what has happened during the relevant financial period and the situation at the end of the year? If a director thinks something material is missing or that something has been described in a misleading way, they should add a disclosure or make a correction. “Fair” is also important as it implies balance.

The accounts can be approved by a majority of the directors and once approved, one director needs to sign the balance sheet, directors’ report and any strategic report being submitted to Companies House. For this reason, the approval decision should be made at a formal board meeting and documented in the minutes. Any discussions and any dissenting views that have been expressed by any director should also be recorded in those minutes. Recording such matters is particularly important; if approved annual accounts do not comply with the statutory requirements, every director who knew that they did not comply or failed to take reasonable steps to ensure compliance, or to prevent the accounts from being approved, commits an offence.

Objective professional judgement must be applied during the preparation of the accounts and when considering whether the accounts give a true and fair view. Although directors can delegate the preparation of the accounts, they cannot abrogate their responsibilities and simply defer to others in relation to the accounts’ content and approval. They must be open to challenging other members of the board on the decisions being made. A lack of awareness will not provide a director with any defence in a breach of duty claim.

Incorrect accounts?

Directors have a legal duty not to file false information at Companies House. Knowingly or recklessly delivering information or making a statement to the Registrar of Companies that is misleading, false or deceptive is a criminal offence and can lead to fines and/or imprisonment.

To commit such an offence, a director has to have:

1. knowingly or recklessly submitted false information; or
2. failed to take reasonable steps to secure compliance with the requirements or prevented the accounts or report from being approved.

This means that if the accounting records are not reasonably accurate, every director (as well as any other officer, including the Company Secretary, Head of Finance and shadow directors, who have taken part in the production of the accounts for filing) may be criminally liable. It also means that any director who was careless about the legal requirements may be personally guilty of an offence. A director could also be liable to compensate the company for any losses it suffers as a result of an inaccurate report.

Repeated failure to comply with filing duties or conduct which makes the director in question unfit to be concerned in the management of a company could result in the individual’s disqualification from acting as a director of a company for up to 15 years.

An honest mistake?

We are, after all, only human and mistakes do happen. On this basis, inadvertently filing inaccurate information is unlikely to cause a breach and any inaccuracies which are discovered may be corrected using Companies House’s second filing service.

True or on time?

Where directors find themselves caught between the duty to file the accounts on time and not knowingly or recklessly filing documents which are misleading, false or deceptive, it is worth noting that filing accounts which are materially incorrect is much more serious than filing them late.

That said, Companies House does issue fines for late filings and there is no guidance as to how directors should deal with this situation. It should therefore be assumed that Companies House is not going to look too kindly on a company which finds itself in this position and so it is important for directors to get up-to-speed with the company’s activities and financial position in plenty of time before having to approve and arrange the filing of the accounts.

Failure to submit accounts can result in Companies House striking off the defaulting company from the company register. There is a detailed and fairly lengthy process for this and also plenty of adverse consequences for all involved in the company, including assets becoming the property of the Crown, disqualification of directors and directors being liable for company debts, not to mention the reputational issues at stake.

Practical steps

• Ensure that robust processes of verification are in place prior to the release of any information.
• Practise good record-keeping by documenting decisions and the decision-making process. Ensure that the approval of the accounts (as well as any discussion and challenge) is set out in formal board minutes – it is difficult for a director to prove that their duties have been exercised if there is no permanent record of the decisions made.
• If a director has not, or cannot, satisfy themselves that the accounts reflect a true and fair position of the company’s financial position, they should not approve the company’s financial statements.
• Being completely up-to-speed on your duties and obligations as a director is of prime importance and the role of a director should never be taken lightly. You should seek professional advice if required. This could be legal, financial or other advice relating to a particular problem or situation. Directors are not expected to know everything, but they are expected to do what is needed to ensure that they are discharging their duties appropriately.

Disclaimer

This note reflects the law as at 27 October 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.