Corporate Governance on Trial: The Importance of Record-Keeping for Directors

The recent High Court decision in PK Investments Ltd v Sabaratnam & Anor (Re Finno Medical Ltd – Insolvency Act 1986) [2024] EWHC 2188 (Ch) has delivered a stark reminder of the critical importance of robust corporate record-keeping. Chief ICC Judge Briggs’ ruling serves as both a cautionary tale and a reinforcement of the legal obligations directors face under the Companies Act 2006.

This case, involving the liquidation of Finno Medical Ltd, encapsulates the pitfalls directors may face when corporate records are poorly maintained, raising issues of governance, compliance, and personal accountability.

A Breach of Duties

Finno Medical Ltd, a pharmaceutical company specializing in importing and reselling medicines, entered compulsory liquidation in December 2018, burdened with a deficit exceeding £2.6 million. PK Investments Ltd, a Maltese creditor and assignee of Finno’s claims, pursued summary judgment against Sebajeevan Sabaratnam, a former director, citing breaches of his statutory duties. These breaches included allegations of undocumented, high-risk transactions with third-party companies in Hong Kong, which resulted in substantial losses without any identifiable benefit to Finno.

The payments, totaling over £900,000, were made to entities including Hafiza Traders and Zait Com HK Limited. Despite Mr. Sabaratnam’s assertions that these transactions were legitimate, the court found no evidence to substantiate this claim. The companies in question were either unresponsive or nonexistent, and no commercial agreements, due diligence, or records of financial benefit were produced to justify the transactions.

The Role of Records

Under Section 386 of the Companies Act 2006, directors are obligated to ensure their companies maintain adequate accounting records. These records must:

• Accurately disclose the company’s financial position.
• Show and explain all transactions.
• Enable compliance with legal requirements for financial reporting.

Judge Briggs noted that directors cannot fulfill their duties to creditors, shareholders, or regulators without this basic foundation. The absence of proper documentation in Finno Medical’s case exemplifies the legal and practical risks when this obligation is neglected.

The court emphasized that the obligation to maintain proper records cannot be delegated to others, as established in Secretary of State for Trade and Industry v Hall [2006]. Directors have both collective and individual responsibility to ensure records are sufficient, accurate, and accessible.

Legal Precedent

The decision reflects broader legal principles established in cases such as Wetton v Ahmed [2011] EWCA Civ 610 and Re Firedart Ltd [1994] 2 BCLC 340. Courts have consistently held that the failure to produce adequate records allows for adverse inferences against directors, particularly in insolvency proceedings.

In this case, the absence of records made it impossible for Mr. Sabaratnam to substantiate his claims that the transactions in question were in the company’s best interests. Instead, he relied on inconsistent statements and unverified assertions, including the claim that the company laptop—allegedly containing critical data—was lost in Paris.

Consequences of Non-Compliance

The court ultimately ruled in favor of PK Investments, finding that Mr. Sabaratnam had breached his duty of care under Section 174 of the Companies Act 2006. Judge Briggs concluded that the payments in question were made without due diligence, written agreements, or a clear commercial rationale, leading to a loss for the company and its creditors.

This judgment also underscores the dual purposes of record-keeping: enabling directors to make informed decisions and equipping liquidators with the information necessary to recover company assets in insolvency. As noted in Secretary of State for Trade and Industry v Arif [1995], directors who fail to maintain records cannot claim ignorance of their company’s financial position or escape liability for mismanagement.

Lessons for Directors

The PK Investments case is a compelling reminder that maintaining comprehensive and accessible records is not merely a statutory requirement but also a practical safeguard. Without such records, directors are left vulnerable to allegations of misconduct, particularly in insolvency scenarios.

The court’s ruling reinforces the message that corporate governance requires transparency, diligence, and accountability. Directors who neglect these principles risk severe personal and professional consequences, as this case so vividly illustrates.

As businesses navigate increasingly complex regulatory environments, the importance of proper record-keeping can hardly be overstated. For directors, the best protection often lies in adhering not only to the letter of the law but also to its spirit.