For a majority of companies, the company’s finances are the most important part of the corporate governance function. A company’s finances encompass all matters relating to the regulatory, legal, compliance and solvency aspects of a company’s function.
The finance director has overall control for this function, delegating roles dealing with a broad range of roles including the internal management accounts, taxation and banking. That person will be responsible for reporting on the company’s financial performance to other directors at board meetings.
For a small company, this function may be carried out by a director in addition to various other roles or, quite commonly, the director may delegate this role to the company’s accountants. Whilst this is a sensible idea at first glance, at all times directors need to be aware that it is they (and not their professional advisors) who will ultimately be responsible for any decisions made when performing such roles.
Cash-flow
Ultimately, to operate, a company must always be able to pay its debts as and when they fall due. A company with assets but no cash cannot trade and, legally, is insolvent.
If the company is profitable but suffers from cash flow problems, then directors have a fiduciary duty to remedy this or, if it cannot be remedied, to restructure the company or cease trading.
Common examples of cash flow issues include:
- long debtor days – where clients take a long lead time to pay debts, whilst the company has to service its creditors over a shorter timescale;
- reliance on the “big job” – where the company is dedicated to only one, or a small number, of projects and is dependent on a large payment expected to be received at some time in the future.
- legacy debts – where a past event continues to dominate the company’s business and acts as a drag on the business, sucking in all cash received to maintain this obligation.
Whilst the above is not an exhaustive list of causes of cash flow issues, they are amongst the most common. However, there are solutions to all of the above problems and a well-advised director of a company with a sound business should consider alternatives available to him/her. Visit our excellent company rescue pages for assistance.
Management accounts
At all times a company’s directors should have access to management accounting information such as to enable them to have an understanding of the company’s financial position.
The management accounts, sometimes in paper ledgers but more commonly held within an accounting software system, comprise separate lists of transactions relating to, or subordinate to, different components of either the company’s balance sheet or its profit and loss account (which will ultimately form part of the company’s financial accounts).
Examples of the main company ledgers include
- the company’s purchases;
- sales;
- cash at bank; and
- debtors and creditors.
At all times one ledger entry should be balanced by another – for example a purchase will have a mirror entry either in the cash ledger (reducing the company’s funds) or the creditors ledger (if such a purchase is not paid for immediately). Hence the term “balancing the books”.
If these accounts are not maintained to a reasonable extent, the directors will never have access to sufficient information enabling them to understand the company’s financial position. For example, a director dealing solely with sales may never know that the price a product or service is being sold for may not be clearing the administrative costs of running the business (rather than just the costs of delivering the product or service).
Abuse by finance director
Whether they have this title or not it is ultimately a position of trust if a director has control of the finances.
This duty extends to safeguarding the company (and its directors) from the risks and consequences of insolvency, ensuring the company adheres to its compliance duties (the most of important of which relates to the legal requirements to file and pay properly prepared tax returns and – perhaps most importantly – regularly reporting on the company’s financial performance to other directors and coordinating such compliance with the company’s financial advisors.
Quite often, particularly where a company is run by an even number of directors or there is deadlock then it is not uncommon to see a director abuse such a position.
Such abuse which could potentially lead to the company’s failure but often leads to a breach of any relationship of trust and confidence that may exist between directors Such abuse can include:
- removing a director at Companies House without shareholder authority;
- refusing a co-director’s request for access to the company’s accounting records;
- fabricating company resolutions;
- unreasonably refusing share transfers;
- concealing funds withdrawn to that director’s own benefit;
- adding family members to the company’s payroll;
- altering shareholdings as recorded at Companies House and in the company’s share Register, without consideration and/or board approval;
- refusing to pay dividends (particularly where the company is a quasi-partnership.
The above is not an exhaustive list but are merely a small collection of examples we have encountered where a finance director (or any director in control of the company’s finances) abuses their position.
At Francis Wilks & Jones we have comprehensive experience of disputes or claims arising from such circumstances and how to control company directors and owner/managers when the business or the board relationship is in danger of breaking down. Please call any member of our team for your consultation now. Alternatively email us with your enquiry and we will call you back at a time convenient for you.
