Thinking | 12 June 2020

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

By Oliver Jankowsky, David Dickens and Rachel Giudicatti

For many companies, the end of the financial year is around the corner, which triggers the financial reporting requirements under Part 2M.3 of the Corporations Act 2001 (Cth) (Act).

The ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 (Instrument) provides a helpful mechanism whereby certain wholly-owned companies are relieved from their financial reporting obligations. This Instrument is frequently relied upon by corporate groups.  However, in order for your company to properly obtain relief, all conditions of the Instrument must be met.

This article provides guidance on navigating the stringent requirements of the Instrument to ensure your company properly obtains reporting relief and avoids any noncompliance with the Act.

‘Part Two’ to this article addresses the course of action that should be adopted if your company has taken advantage of the relief but not complied with all conditions of the Instrument.

Overview of Instrument

The Instrument commenced on 29 September 2016 and applies to financial years ending on or after 1 January 2017.  The Instrument repealed the previous ASIC Class Order 98/1418.

Under the Instrument, certain wholly-owned companies are relieved from the financial reporting requirements under Part 2M.3 of the Act where they enter into a deed of cross guarantee with their parent entity and meet other conditions under the Instrument.

The effect of the deed of cross guarantee is that each company in the closed group guarantees the payment of any debt owed to creditors by the parent and each other subsidiary company.  This means that creditors can have regard to the consolidated financial position of the group as a whole, rather than the financial statements of each of the subsidiaries.

If a company obtains reporting relief under the Instrument (by entering into the deed of cross guarantee in the proper form and meeting all other conditions), it will not need to comply with the following requirements of the Act:

  • prepare a financial report and a directors’ report for each financial year (s 292(1));
  • have the financial report for a financial year audited in accordance with Division 3 of the Act and obtain an auditor’s report (s 301(1));
  • report to members for a financial year by providing the financial report for the year and the directors’ report for the year within the prescribed time frame (ss 314(1) and 315); and
  • lodge the report for a financial year with the Australian Securities and Investments Commission (ASIC) by the relevant deadline (s 319(1)).

As noted above, the reporting relief is only available to a company that meets all the conditions of the Instrument.  These conditions are set out in further detail below.

How to obtain reporting relief

In order for a company to be relieved of its reporting obligations under Part 2M.3 of the Act, it is not sufficient for a company to simply enter into a deed of cross guarantee with its parent company, and for the signed deed to be lodged with ASIC.  Rather, there are a number of additional requirements under the Instrument that must be met by the company in order for the company to obtain reporting relief.

It is important to note that a company does not technically ‘apply’ to ASIC for reporting relief, nor does ASIC ‘approve’ or ‘grant’ the relief by notifying the company.  Rather, the relief applies to the company as of right, providing that the company has satisfied all requirements under the Instrument.  ASIC will only undertake certain routine assessments of lodged documents to ensure they are properly executed and otherwise in order, but takes no responsibility for the accuracy of those documents.  Ultimately, it is a matter for the company to ensure it properly complies with the conditions and processes stipulated in the Instrument.

The following table summarises the key conditions that must be followed under the Instrument in order for a company to obtain reporting relief for a relevant financial year.  However, to ensure that a company properly obtains (and maintains) reporting relief, the first port of call should always be the Instrument itself.

No.Condition Reference
1.Original, fully executed deed of cross guarantee in required form (ASIC Pro Forma 24) must be lodged with ASIC before the end of the first reliance year

Note: Deed must be correctly executed and contain correct company details. All wholly owned entities within the closed group must be party to the deed.
ss 5, 6(1)(m)(i), Instrument
2.Deed of cross guarantee must be lodged together with original, signed solicitor certification (in the required form) and relevant fee must be paids 6(1)(m)(ii), Instrument
3.Company must meet all general eligibility requirements in relation to the nature of the company and holding entityss 6(1)(a)-(e), Instrument
4.Each subsidiary company that intends to rely on the relief must lodge an ASIC Form 389 (opt-in notice) within four months of the end of the first reliance year

Note: If a company later ceases to rely on the relief under the Instrument and does not lodge a financial report for a financial year, it must lodge an ASIC Form 399 (opt-out notice) within four months of the end of that financial year
s 6(1)(f), Instrument

ss 7(1)-(2), Instrument
5.The director(s) of each company must pass a resolution (in the required form) and must make and sign a solvency statement (in the required form) before the end of the first reliance yearss 6(1)(g)-(h), Instrument
6.At or around the end of the relevant financial year, the directors must have resolved that the company should continue to remain a party to the deed of cross guarantee (after considering the advantages and disadvantages)s 6(1)(i), Instrument
7.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)s 6(1)(j), Instrument
8.The company must hold office as trustee under the deed of cross guarantee at the relevant time (or, if the trustee is a group entity, there must be an alternative trustee)s 6(1)(k), Instrument
9.The deed must have been approved by ASIC under a previous order if lodged before 1 July 2004s 6(1)(l), Instrument
10.As at the end of a relevant 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

If a foreign company is party to the deed, the directors of the company and holding entity must be satisfied as to the enforceability of the deed
ss 6(1)(n)-(o), Instrument
11.As at the end of a relevant financial year, no party to the deed of cross guarantee is a body regulated by APRAs 6(1)(p), Instrument
12.The company and holding entity must have at no time terminated, repudiated (or attempted to terminate or repudiate) or agreed to any variation of the deed of cross guarantee (except in certain circumstances)s 6(1)(q), Instrument
13.Consolidated financial statements:

  • holding company must prepare and lodge consolidated financial statements for the group by the relevant time and in the required form

  • certain conditions apply in relation to the preparation of the consolidated financial statements depending on whether the holding company is a registered foreign company

  • consolidated financial statements must include adequate provision in relation to certain liabilities (if applicable)

  • notes to the consolidated financial statements must include certain information and details (including in relation to the deed of cross guarantee) and must be prepared in the specified form

  • director’s declaration and other documents must include certain statements regarding potential liabilities (if applicable)

ss 6(1)(r)-(w), Instrument
14.If the holding entity’s financial reports are required to be audited, the auditor must be satisfied that the reports have been prepared in the manner required under the Instruments 6(1)(x), Instrument

Conclusion

The Instrument provides relief to certain wholly-owned companies from the financial reporting requirements under Part 2M.3 of the Act, which can be costly and onerous.  However, a subsidiary company can only obtain reporting relief if it satisfies all conditions of the Instrument.  If a company fails to comply with any procedural requirements of the Instrument (but still takes advantage of the reporting relief), it will be in breach of its financial reporting obligations under the Act.

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.

Contact

Oliver Jankowsky

Oliver Jankowsky

Partner & Head of International Practice

Oliver is a corporate and commercial lawyer, with particular expertise in advising foreign clients on cross-border transactions.

David Dickens

David is a leading dispute resolution lawyer with expertise in creditor claims, distressed debt trading and liquidation.

Related practices

You might be also interested in...

Corporate & Commercial | 16 Jun 2020

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

The end of the financial year is around the corner and for many companies, this triggers the financial reporting requirements under the Corporations Act 2001 (Cth). The ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 provides a helpful mechanism to relieve certain wholly-owned companies from these obligations. However, in order to properly gain relief, companies must meet all the conditions of the Instrument.

Financial Services | 10 Jun 2020

Financial Services in Focus – Issue 40

Financial Services in Focus is a fortnightly round-up of legal and regulatory developments in the financial services sector in Australia. Read more here.