Section 414(1) of the Companies Act 2006 (the “Act”) requires that “A company’s annual accounts must be approved by the board of directors and signed on behalf of the board by a director of the company”. The Act also sets out liabilities for false or misleading statements for releases such as any preliminary statement made in advance of a report. But as the Act does not prescribe the method of approval of these matters why is it important that this is done in a board meeting?
Approval of annual accounts and board statements
One of the main statutory responsibilities for all company directors is to ensure that the company maintains full and accurate accounting records and to prepare the Annual Report and financial statements. They must be prepared in accordance with applicable law and regulations and directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position and profit or loss of the company for that period.
As a single director will be required to sign the accounts on behalf of the board as a whole, they must be aware of the views of entire the board. A company’s Articles of Association will usually set out the rules for decision making by directors. The general rule (from the Model Articles) is that any decision of the directors must be either a majority decision at a meeting or by all eligible directors indicating to each other by any means that they share a common view on a matter. The most effective way for a common view amongst directors to be achieved is in a board meeting where the directors can voice their opinions and provide constructive challenge. The minutes of the meeting will provide a formal record of the discussions and the decisions made. These can also log any dissenting views that a director or directors have expressed.
It is particularly important for the approval of the accounts to be documented because if the annual accounts which are approved do not comply with the requirements of the Act every director of the company who knew that they did not comply or failed to take reasonable steps to secure compliance with those requirements or, to prevent the accounts from being approved, commits an offence. In addition, if there are omissions in relation to the accounts or directors’ report, directors can be liable to compensate the company for any losses it suffers as a result of the report.
Similarly, under section 1270 of the Act, there are certain liabilities for compensation for any person discharging managerial responsibilities who knew that statements released were untrue or misleading or was reckless as to whether it was untrue or misleading or knew the omission to be dishonest concealment of a material fact.
A board should ensure that there is a robust process of verification in place prior to the release of information. This will ensure that appropriate managers and directors have reviewed the information and have confirmed it as correct, complete and reasonable prior to release.
Directors should also feel confident in discharging their duties, and not put themselves at risk of liabilities, fines and imprisonment. For all boards, the minutes are evidence that directors have discharged their directors’ duties under the Companies Act 2006. It is difficult for a director to prove that their duties have been exercised unless there is a permanent record of decisions made. Therefore, approval of annual accounts and board statements at a formal minuted board meeting can provide directors with the comfort that they can evidence they acted in good faith and all decisions made in relation to these matters were made for the right reasons, following robust discussion and challenge.