Most Australian small proprietary (private) companies don’t have to file annual financial accounts with Australia’s corporate regulator. However, if those companies are foreign owned, they do have to file audited annual accounts unless they take very particular steps to obtain a filing exemption.
Foreign Owned Proprietary Companies
There are many foreign companies that control Australian proprietary (private) companies but the majority of those foreign parent companies are not registered in Australia as foreign companies and do not file consolidated financial accounts in Australia.
Chapter 2M of the Australian Corporations Act sets out a raft of provisions regarding financial reports and directors’ reports that Australian companies must prepare and file with ASIC each year.
The financial and directors’ reporting obligations are quite onerous and must be audited if filed. For a small proprietary company, the cost and time associated with the preparation of the reports can be disproportionate to the company’s size and public benefit in having those reports filed. For that reason, most small proprietary companies are exempt from the obligation to prepare and file Chapter 2M financial and directors’ reports. However, that reporting exemption is not available if:
- the company’s shareholders or ASIC require the company to prepare the reports; or
- the company is controlled by a foreign company for all or part of a financial year and the Australian company is not consolidated for that period in the financial statements lodged with ASIC by a registered foreign company.
Accordingly, an Australian small proprietary company that is foreign owned does have to file annual audited reports with ASIC unless it obtains the benefit of relief detailed in ASIC Corporations (Foreign-Controlled Company Reports) Instrument 2017/204 (the Order).
Except as noted below, a foreign owned small proprietary company that fails to prepare and file annual financial and directors’ reports commits a strict liability offence under the Australian Corporations Act. Thus, a failure to file can’t be “repaired” by subsequent corporate action. Directors of the company, including foreign directors, who fail to take all reasonable steps to comply with or secure compliance with the reporting requirements will contravene the Act. That could lead to hefty fines and potentially, orders banning them from being directors or managers of Australian companies. If dishonesty is involved, the directors could be guilty of a criminal offence.
ASIC relief – the Order
In recognition of the disproportionately high cost that foreign owned small proprietary companies would face in complying with the financial and directors’ reporting and filing obligations under Chapter 2M and the marginal public benefit, ASIC has issued the Order. Provided that a small proprietary company owned by a foreign company is not part of a “large group” and complies with the terms of the Order, it will not be required to prepare and file financial and directors’ reports. If the Australian company is part of a group of Australian companies that together would not satisfy the definition of a small proprietary company, then it will be part of a large group and relief under the Order will not be available to it.
In summary, the Order requires that for a foreign owned small proprietary company to start gaining relief from preparing, auditing and filing reports, the company’s directors must resolve not more than 3 months before the commencement of the financial year for which relief is first sought that the company will rely on the Order for relief. Further, the company must notify ASIC of that resolution using an ASIC Form 384 no later than 4 months after the end of the relevant financial year.
If the directors do not pass the required resolution and/or the company does not give the requisite notice to ASIC, relief from the reporting requirements will not be available to the company. The failure, even by inadvertence of the directors to pass the resolution or the company to file the notice with ASIC, cannot be cured retrospectively and as a result, the failure by the company to prepare and file the necessary reports will constitute a breach of the Corporations Act.
We have acted for 2 Australian small proprietary companies that were foreign owned but that fell foul of the regulatory requirements. While financial accounts had been prepared and audited each year, the companies had not filed the requisite financial and directors’ reports with ASIC and had not complied with the terms of the Order (or the earlier Class Order 98/98). As a result, they were in breach of the Corporations Act. Those breaches continued, through inadvertence, for a number of years. Upon becoming aware of their breaches, they instructed us. We made submissions to ASIC on their behalf and were successful in having ASIC issue a “no action” letter. The no action letter is not a complete release but was of very considerable comfort to the companies and their directors. Obviously, avoiding the offences in the first place is the preferable course of action.
Directors must pass the requisite resolution ahead of every financial year for which relief will be sought. The Form 384 need only be filed by the company with ASIC in respect of the first financial year for which relief is sought. However, if there is a subsequent financial year for which the company will not seek relief, it must notify ASIC accordingly, using a Form 394. If in respect of a later financial year, the company will again seek relief under the Order, it must again comply with the Order provisions, including notification to ASIC.
We recommend that foreign companies that are not registered in Australia but that own Australian small proprietary companies check with those companies to ensure that they are either complying with their financial and directors’ reporting obligations or have properly complied with the Order to obtain relief from those reporting obligations. If any non-compliance is identified, the Australian company should seek legal advice about how it should address the resultant breaches of the Corporations Act.