In August 2023, ASIC released its annual Corporate Plan which highlights that one of ASIC’s key projects is taking action, including enforcement action, against companies (and AFS licensees) who do not comply with their obligation to lodge financial reports.
Obligation to prepare financial reports
Under the Corporations Act, certain bodies corporate, including public companies and certain proprietary companies, must prepare a financial report and directors report for each financial year. Financial reports for most private companies that have reporting obligations are due within 4 months after the end of the financial year.
A director contravenes the Corporations Act if they fail to take all reasonable steps to comply with, or secure compliance with, the company’s obligation to prepare and file financial reports. A company secretary may also be liable for non-lodgement of financial reports.
Recent ASIC prosecutions & compliance programmes
ASIC has been more active in taking enforcement action for non-lodgement of financial reports recently.
ASIC took action against 15 companies during the period 1 July 2022 and 31 December 2022 for non-lodgement of financial reports. Most of those instances involved failure to lodge financial reports for at least 2 financial years. While the fines were not substantial ($115,000 in aggregate), ASIC “named and shamed” each individual company that it had taken action against. It does not appear that corresponding action was taken by ASIC against company officers. Reputational damage can therefore arise for non-lodgement of financial reports, in addition to the potential for fines and penalties.
ASIC is also increasing its systems to identify non-compliance. Approximately a third of ASIC’s current compliance programmes are aimed at or related to financial reports, including a programme to identify companies that might be large proprietary companies (and requiring them to lodge financial reports). ASIC is now more likely than ever to identify non-lodgement of financial reports.
Deed of cross guarantee – are you covered?
ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 (DOCG Instrument) provides relief for certain wholly owned subsidiaries to (among other things) prepare and file financial reports. The relief is only available if certain prescriptive conditions are satisfied.
One of the conditions that is commonly overlooked is the requirement that the directors of every company that obtains the benefit of the DOCG Instrument passes an annual resolution:
- considering the advantages and disadvantages associated with the company remaining a party to the deed of cross guarantee and taking advantage of the relief afforded by the DOCG Instrument; and
- that the company should continue to remain a party to the deed of cross guarantee; or
- that the company should seek to revoke the deed of cross guarantee in respect of the company.
The annual resolution is required to be passed “at or about the end of the relevant financial year”.
The relief is helpful to help reduce the compliance burden and costs associated with financial reporting obligations, it is not a “set and forget” arrangement. Groups with a deed of cross guarantee in place should include the required annual resolutions as part of its corporate governance calendar and continue to monitor compliance with the conditions in the instrument to ensure that the relief continues to apply.
Deeds of cross guarantee – what happens if it goes wrong?
ASIC generally expects strict compliance with the conditions of the DOCG Instrument. While ASIC is reluctant to grant individual relief or to issue a “no action letter” for failure to comply with the conditions of the DOCG Instrument (and a corresponding failure to lodge financial reports) it is possible to obtain relief from a Court. The Court has the power to make orders under section 1322(4) of the Corporations Act to take a number of actions, including relieving a person of from civil liability, and extending the time period to take certain actions (such as filing an “opt in notice”).
The Court has been called upon to exercise this power in respect of failures to comply with the DOCG Instrument on various occasions, including earlier this year: In the matter of Canon Australia Pty Ltd. In addition to the requirements of section 1322(6) (which, among other things, require the person to have acted honestly, and that no substantial injustice has been or is likely to be caused to any person), a Court will also take into account whether a person has taken prompt action to remedy (including by way of applying to the Court for relief) the error once identified.
It is therefore important that if non-compliance with the DOCG Instrument has been identified, it is promptly investigated and addressed.