Thinking | 22 June 2021
Does your company rely on ASIC reporting relief? Key things you need to know
By David Dickens and Rachel Giudicatti
The ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 provides a helpful mechanism that relieves wholly-owned companies from their financial reporting obligations, which can be costly and onerous.
This Instrument is frequently relied upon by corporate groups. However, in order for your company to properly obtain (and maintain) reporting relief, all conditions of the Instrument must be met.
With the end of financial year around the corner for many companies, it is timely to consider the requirements of the Instrument and take action to rectify any noncompliance.
Navigating the Instrument
The primary requirement under the Instrument is for the company to enter into a deed of cross guarantee with their parent entity (or alternatively, be joined to an existing deed of cross guarantee by way of an assumption deed).
The original, signed deed of cross guarantee (or assumption deed) in the required form – ASIC Pro Forma 24 and 27 – must be lodged with ASIC before the end of the first reliance year.
This requirement is often well understood. However, the deed alone is not sufficient to obtain (and maintain) reporting relief under the Instrument. A number of other conditions must be met by the company to be eligible for the relief each year, including the following:
- the company must lodge an ASIC Form 389 (opt-in notice) within four months of the end of the first reliance year (addressed in further detail below);
- original signed solicitor certification must be lodged with ASIC with the original deed;
- the company must meet all general eligibility requirements in relation to the nature of the company and holding entity;
- before the end of the first reliance year, the directors must pass a resolution and sign a solvency statement;
- each subsequent year, the directors must pass a resolution recording that the company should continue to remain a party to the deed of cross guarantee;
- at the end of each financial year, each member of the closed group (other than the holding company) must be a company or a body incorporated in Australia, the United Kingdom, New Zealand, Singapore or Hong Kong;
- the company must have been wholly owned by the holding entity at all times during the relevant period (or the company became party to another deed of cross guarantee with another holding entity in certain circumstances); and
- the consolidated financial statements of the holding entity must be prepared in the required form and include specified information and statements.
The above list provides a brief snapshot of some of the key conditions of the Instrument. For further guidance on navigating the stringent requirements of the Instrument, see part one of our previous series on ASIC reporting relief for wholly-owned companies.
Recent trend to bear in mind
In recent times, 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 the Form 389 on time in order to rely on the reporting relief.
If the 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 will therefore have a continuing obligation to comply with the financial reporting requirements under Part 2M.3 of the Corporations Act 2001 (Cth).
This is a strict deadline, which cannot be extended by ASIC because it does not have the power or discretion to do so under the Instrument.
While the Form 389 is the most common issue identified by ASIC, recent court cases have involved companies failing to comply with other procedural requirements of the Instrument. Therefore, even if your company has lodged the Form 389 on time, it is important to bear in mind the other conditions of the Instrument to avoid any adverse action by ASIC and noncompliance with the Act.
The paragraphs below provide general guidance on rectifying noncompliance arising from the failure to lodge the Form 389 by the prescribed deadline. For further information on this issue, see part two of our ASIC reporting relief series.
Can the company just do nothing?
The issue is unlikely to go away if the company does nothing, especially if it is already on ASIC’s radar. If the error has been identified by ASIC, the company can expect further correspondence from ASIC or a formal notice under section 1274(11) of the Act requiring the company to lodge reports.
Even if the error has not been identified by ASIC, staying silent is not advisable. ASIC undertakes routine assessments of lodged documents and is alive to this issue, as demonstrated by the recent court cases. ASIC may identify through its own enquiries that the Form 389 has not been lodged and that the company has not otherwise lodged financial reports for the relevant years.
In either scenario, given the company is (and will continue to be) in breach of its financial reporting obligations under the Act, it is prudent to take steps to rectify the noncompliance.
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. A company secretary may be personally exposed to a penalty under section 188(1) of the Act in relation to the failure to lodge reports.
So what is the solution?
To rectify the noncompliance, the company should either:
- prepare, audit and lodge financial reports for the relevant years (together with the prescribed ASIC Form 388). The company will need to pay any late lodgement fees that may apply; or
- apply to the court under section 1322(4) of the Act for an extension of time to lodge the Form 389 and relief from civil liability arising from the failure to lodge reports.
The preferred course of action will largely depend on commercial considerations including costs, time commitments, effort and convenience (including whether there has been any change in the company’s personnel, accountants or auditors). In our experience, it is generally less expensive, more convenient and quicker for a company to bring a court application to rectify the noncompliance.
Regardless of the course of action taken, it is sensible to write to ASIC as the first step. In doing so, the company should explain the approach that will be adopted (ie option 1 or option 2 above) and request confirmation that ASIC will not take any compliance action against the company in the meantime (including commencing court proceedings).
How we can help
We are experienced in matters concerning the operation and conditions of the Instrument including representing a number of companies in Federal Court applications to relieve companies of their reporting obligations where the requirements of the Instrument had not been complied with.
We can assist in providing advice on the Instrument and court application process (including prospects, timing and costs), corresponding with ASIC and acting in court proceedings if required.
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