Director’s Personal Liability – How to Protect You

Here’s what you need to know about your record-keeping duties and the key documents that can protect you and your business.

Why Maintaining Records Matters

• Personal Liability Risk: Directors can become personally liable for company debts if records aren’t maintained. Without proper documentation, you may be held accountable for the company’s unpaid debts, a situation no director wants.
• Legal Compliance: Under the Corporations Act, companies are legally required to maintain financial records that accurately reflect their financial health and transactions.
• Industry Trends: With insolvencies on the rise in various sectors—such as construction and hospitality—keeping accurate records can help protect your interests if your company faces financial trouble.

Key Legal Requirements for Books and Records

1. Corporations Act Section 286:
   • Requires companies to keep financial records that show financial position, performance, and transactions.
   • Records must be retained for at least seven years.
2. Corporations Act Section 588E:
   • If sufficient records aren’t available, the company is presumed to be insolvent, increasing directors’ risk of personal liability.
3. ASIC Guidance:
   • ASIC provides comprehensive guidelines on which books and records to maintain. Directors should familiarise themselves with this guidance, as ASIC is responsible for prosecuting breaches of duty.
     https://asic.gov.au/for-business/running-a-company/company-officeholder-duties/
   • This page covers essential duties and requirements for directors, including specifics on financial record-keeping, obligations under the Corporations Act, and guidelines to help you maintain compliance.

Types of Records to Keep

To comply with legal obligations and best practices, directors should ensure they keep the following:

• Financial Statements: Profit and loss statements, balance sheets, depreciation schedules, and tax returns.
• General Ledger: A record of all transactions, ideally reconciled against bank statements.
• Cash Records: Bank statements, loan documents, cash receipts, and loan account statements.
• Sales and Debtor Records: Invoices, statements, unpaid invoices, and debtor documentation.
• Employee Records: Wage records, superannuation contributions, and relevant registers.
• Asset Registers and Legal Documents: Records of assets, valuations, legal agreements, and evidence of depreciation.

Best Practices for Managing Books and Records

• Use Digital Tools: Electronic accounting software like Xero or MYOB can simplify record-keeping. Attach source documents directly to transactions to ensure records are audit-ready.
• Scan and Archive: Minimise paper records by scanning and attaching documents to digital transactions, making audits more efficient and less stressful.
• Monthly Financial Updates: Consider preparing monthly financial statements to monitor the company’s financial health and provide a defense if your duties are ever questioned.

The Consequences of Poor Record-Keeping

Neglecting your record-keeping responsibilities can lead to serious consequences. In recent cases handled by O’Brien Palmer, directors faced significant personal liabilities due to lack of documentation, with one director liable for hundreds of thousands of dollars in unpaid taxes. Failing to keep records can turn company debt into personal debt, a costly and avoidable risk.

How We Can Help

As registered liquidators, O’Brien Palmer assists companies in resolving financial difficulties. Whether appointed by directors or through court orders, we help manage liquidations and debt recovery. Don’t wait until financial challenges arise—taking proactive steps now to maintain proper records can make a world of difference.

Reach out today to discuss your situation and schedule a no-obligation appointment.

Liam Bailey, Managing Partner
O’Brien Palmer