Part Two: ASIC reporting relief for wholly-owned companies – don’t miss out!

By Oliver Jankowsky, David Dickens and Rachel Giudicatti

This article follows on from an earlier article on the ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 (Instrument).

‘Part One’ summarised the conditions that must be met under the Instrument in order for certain wholly-owned subsidiaries to obtain relief from the financial reporting and lodging requirements of Part 2M.3 of the Corporations Act 2001 (Cth) (Act).

A subsidiary company must satisfy all requirements of the Instrument in order to take advantage of the reporting relief, including ‘opting in’ to the relief by lodging the ASIC Form 389 (opt-in notice) (Form 389) by the prescribed deadline.

In recent months, there has been a trend of ASIC targeting and pursuing noncompliance with the Instrument and a number of court applications have been made by companies as a result. One of the most common errors identified by ASIC is the failure by a subsidiary company to lodge Form 389 on time in order to rely on the reporting relief.

These cases provide a timely reminder of the financial reporting requirements of the Act and when a company will be eligible for relief under the Instrument.

So, what should you do if your company has taken advantage of the relief but not complied with all conditions of the Instrument?  This article provides guidance on rectifying any noncompliance with the Instrument (in particular, in relation to the Form 389 requirement).

What if the company has not lodged Form 389?

Each subsidiary company that is party to the deed of cross guarantee must lodge the Form 389 on time in order for the company to take advantage of the relief under the Instrument (or, put differently, in order for the company to ‘opt in’ to the relief).

Form 389 is only required to be lodged once within four months after the end of the first reliance year.  The relief will then continue to apply in subsequent years until the company lodges a Form 399 ‘opt-out notice’ with ASIC or until financial reports are lodged by the company.

If a company does not lodge the Form 389 with ASIC within four months of the end of the first financial year in which the company relies on the relief, the company will not have the benefit of the relief and consequently, will have a continuing obligation to comply with the financial reporting requirements under Part 2M.3 of the Act.

The failure to lodge Form 389 is a common error identified by ASIC and has been the subject of a number of recent proceedings commenced by companies in the Federal Court of Australia.[1]  We set out below some general guidance in relation to rectifying any non-compliance arising from the failure to lodge Form 389.

First, if the subsidiary company has not yet lodged the Form 389 for the first reliance year, and it is within four months of the end of the first financial year, the company should promptly lodge the Form 389 with ASIC before the expiry of the four-month period.  Providing all other conditions of the Instrument are met, the company will have the benefit of reporting relief for the financial year.

However, issues usually arise because companies have inadvertently failed to lodge Form 389 by the prescribed deadline.  In our experience and based on the case law, ASIC will not extend the time period for lodging the Form 389 in these circumstances because it does not have the power or discretion to do so under the Instrument.  Further, ASIC is unlikely to grant a formal ‘no action’ letter where there are compliance failures by a company and its advisors under the Act.

Accordingly, the company’s options are as set out below.

Prepare, audit and lodge financial reports for relevant financial years

The company’s officers can prepare the company’s financial reports for the relevant financial year (or years) and have the reports audited (if required under section 301(1) of the Act).

The financial reports (which typically comprise the company’s financial statements, signed director’s declaration, signed director’s report and signed auditor’s report) should be lodged with ASIC, together with the prescribed ASIC Form 388, pursuant to section 319(1) of the Act.  Standard late lodgement fees will likely apply in these circumstances.

Preparing, auditing and lodging financial reports can be a time consuming process. Accordingly, it may be prudent to write to ASIC in the first instance notifying ASIC of the company’s error in failing to lodge the Form 389, and the steps that are being taken by the company to prepare and lodge the required documents. Further, it may be preferable to obtain confirmation from ASIC that it will not take any compliance action against the company in the meantime.

As noted above, ASIC undertakes routine assessments of lodged documents and may identify through its own enquiries that the company has not lodged Form 389 as required under the Instrument. In those circumstances, ASIC would be likely to issue a notice under section 1274(11) of the Act requiring the company to lodge the financial reports (together with the prescribed Form 388). It is important for a company to act accordingly in response to such a notice, as failure to comply with the notice may result in ASIC commencing court proceedings against the company.

If the company has not received any notice or other correspondence from ASIC (but has not lodged the Form 389 as required), the company’s officers may be tempted to stay silent in relation to the company’s failure to lodge the Form 389 (and to continue to take advantage of the reporting relief). However, it is important to bear in mind that in such circumstances, the company is (and will continue to be) in contravention of its financial reporting obligations under Part 2M.3 of the Act.

The failure to lodge financial reports with ASIC under section 319(1) of the Act is an offence of strict liability and heavy penalties and sanctions can apply. Further, under section 188(1)(h) of the Act, the secretary of a company may be liable to a penalty if a company contravenes section 319(1) of the Act. Accordingly, company officers should tread carefully and obtain legal advice in relation to any noncompliance by the company.

Lodge Form 389 within time period for current financial year

Putting aside previous years, to obtain reporting relief for the current or most recent financial year, the company should lodge the Form 389 with ASIC within four months of the end of the financial year (as well as comply with all other conditions of the Instrument).

However, this will only enable the company to obtain relief for the current or most recent financial year (and future financial years, until such time as the company ceases to rely on the relief). By lodging Form 389, the company will not obtain retrospective relief with respect to previous financial years and accordingly, steps should be taken to rectify any noncompliance in relation to those past years.

Issue court application under section 1322(4) of the Act

Depending on the nature of the company and the number of years of noncompliance, the company may incur substantial costs in preparing, auditing and lodging financial reports for the relevant years. Further, significant time commitments may be required by the company’s officers, and inconvenience may be caused (particularly if there has been a change in company personnel, making it more difficult to now prepare, audit and lodge the financial reports).

Accordingly, from a commercial perspective, it may be sensible for the company to instead apply to the court for relief under section 1322(4) of the Act.

Such an application typically comprises an originating process and supporting affidavit material from the relevant officers of the company. In our experience and based on the case law, ASIC tends not to oppose these applications, subject to the company providing evidence that the mistake was honest and inadvertent, and addressing other requirements under the Act (as described below). It is prudent to promptly notify ASIC of the company’s intention to bring such an application and to request that ASIC delays any compliance action against the company in the circumstances.

In the court application, the company and its officers may seek orders under section 1322(4) of the Act, including the following:

• declarations by the court;
• an extension of time to lodge the Form 389 with ASIC (or to comply with other conditions of the Instrument that may not have been met by the company); and
• relief from any civil liability in respect of any failure to comply with the financial reporting requirements under Part 2M.3 of the Act (or any notice issued by ASIC, if applicable).

The purpose of the orders is for the company to obtain retrospective relief, ie, once the company has lodged the Form 389 within the extended time frame under the orders, the orders will take effect as if the company had lodged the Form 389 on time for the first reliance year, and the company will be granted retrospective relief for any subsequent financial years.

In order to obtain relief, the company will need to establish certain requirements under section 1322(6) of the Act, which are informed by the case law. These requirements include the following:

• the failure to lodge the Form 389 is essentially of a procedural nature;
• the relevant persons acted honestly;
• it is just and equitable that the orders be made; and
• no substantial prejudice or injustice has been or is likely to be caused to any person or entity (or the public interest in general) as a result of the orders being granted.

Conclusion

In recent times, there has been an increase in court proceedings involving companies failing to comply with the procedural requirements of the Instrument, including failing to ‘opt in’ to the relief by lodging the required Form 389 with ASIC by the prescribed deadline. As a result, these companies have been in breach of their financial reporting obligations under the Act and have been required to approach the court to seek orders rectifying the noncompliance.

These cases generally arise in circumstances where the companies’ officers have acted honestly and in good faith, and where no prejudice has been suffered. It remains to be seen whether any changes will be made to the legislation as a result of these cases (including, for example, amendments empowering ASIC to grant extensions of time).

Hall & Wilcox has experience in matters concerning the operation and conditions of the Instrument, including recently representing a company in a Federal Court application against ASIC.  Our lawyers can assist in providing advice in relation to the Instrument and the financial reporting requirements of the Act, corresponding with ASIC and acting in court proceedings if required.

[1] Re Murray River Organics Limited [2019] FCA 931; Re Navitas Bundoora Pty Ltd [2020] WASC 87; ComfortDelGro Corporation Australia Pty Ltd, in the matter of ComfortDelGro Corporation Australia Pty Ltd [2020] FCA 378; Car Buyers Australia Pty Limited v Australian Securities and Investments Commission [2020] FCA 599.