We have previously written about the desirability of related parties obtaining security for funds advanced to or used by their company.
But when the company ends up in liquidation, it is certain that the liquidator will take a close look at not only the security but also will want to be satisfied about the underlying transactions. And that’s where problems might arise.
The books of many companies are initially prepared by a bookkeeper and then completed by an external, qualified accountant. The liquidator will not simply be satisfied by an amount shown on the external accountant’s balance sheet. He or she, will also seek to verify that balance and the transactions making up that balance by reference to the bookkeeper’s internal records.
It is therefore critical to ensure that all such advances are properly recorded and supported in the internal accounts of the company.