New ASIC instrument: relief or uncertainty?

On 1 April 2017, two important and widely used Australian Securities and Investments Commission (ASIC) financial reporting class orders were repealed:

1. [CO 98/98] Small proprietary companies which are controlled by a foreign company but which are not part of a large group (CO 98/98)¹ and
2. [CO 02/1432] Registered foreign companies – financial reporting requirements (CO 02/1432).²

The class orders have both been simultaneously replaced by a new combined legislative instrument, the ASIC Corporations (Foreign-Controlled Company Reports) Instrument 2017/204 (Instrument 2017/204).³

However, some uncertainty has arisen regarding the drafting and interpretation of the transitional provisions of Instrument 2017/204.

The relief provided by both CO 98/98 and CO 02/1432 has been retained in Instrument 2017/204, except that ASIC may now give notice to a small proprietary company controlled by a foreign company or a registered foreign company that it cannot rely on that relief for a particular financial year.

Small foreign-controlled proprietary companies

Section 292(2)(b) of the Corporations Act 2001 (Cth) (Act) requires a small proprietary company that was controlled by a foreign company for all or part of a financial year to comply with the financial reporting obligations under Pt 2M.3 of the Act (to prepare and lodge accounts with ASIC and to have the accounts audited), unless it was consolidated for that period in financial statements lodged with ASIC by a registered foreign company, a company, a disclosing entity or a registered scheme.

Instrument 2017/204 provides relief for small proprietary companies controlled by a foreign company from the requirements of Pt 2M.3 of the Act.

To qualify for relief, the directors of a small foreign-controlled proprietary company must resolve to rely on the relief available under Instrument 2017/204 no earlier than three months before the commencement of each financial year to which relief under the instrument is relied on.

For the first financial year relief under the instrument is to be relied on, and the first financial year following a financial year in which relief was not relied on (if any), a notice of the resolution must be lodged with ASIC using a Form 384 during the period starting three months before the start of the relevant financial year and ending four months after the end of the relevant financial year.⁴

Provided such small proprietary companies are not part of a ‘large group’, as defined in Instrument 2017/204, they are not required to lodge financial reports with ASIC (if all the conditions of Instrument 2017/204 are met).

Registered foreign companies

Section 601CK of the Act requires a registered foreign company to lodge with ASIC a copy of its balance sheet, cash flow statement and profit and loss statement for its last financial year at least once in every calendar year. These financial statements are those required by the law in the company’s place of origin.  However, if such financial statements are not required in the company’s place of origin or if the disclosures contained within are not sufficient, ASIC can require the company to prepare and lodge financial statements prepared as if the company were a public company formed under the Act.

Instrument 2017/204 also provides relief for registered foreign companies from the requirements to prepare and lodge accounts with ASIC subject to restrictions, limitations and prohibitions corresponding to, and no less strict than, those applicable to an Australian proprietary company under section 113 of the Act. The company must also meet the definition of a small proprietary company as if subsection 45A(2) of the Act applied.

For companies that have relied on relief under a former class order, a new instrument often contains transitional provisions which align the former class order with the new instrument, so that in theory the relief applied under the former class order carries over to the new instrument.

Instrument 2017/204 appears on face value to contain such transitional provisions, but on closer inspection we feel there is interpretational ambiguity.

The ambiguity arises because:

• subsection 7(1) of the Instrument 2017/204 states that the requirement to comply with Part 2M.3 of the Act does not apply in relation to a company for a relevant financial year where the company relied on the relief in CO 98/98 for the financial year immediately preceding the relevant financial year; and
• subsection 7(2) of the Instrument 2017/204 goes on to state that a company to which subsection 7(1) applies is taken to have relied on the relief for the financial year immediately following the relevant financial year.

To give an example, if a company relied on CO 98/98 for FY16 then the practical effect of subsection 7(2) of the Instrument 2017/204 is that:

• the company cannot rely on subparagraph 5(2)(c)(i) for FY17; and
• instead, the company is taken to have relied on the relief in subsection 5(1) for the purposes of subparagraph 5(2)(c)(i) for FY18.

As far as we are aware, ASIC has not yet provided any comment or guidance on this potential ambiguity, and companies should exercise caution relying solely on Instrument 2017/204 on the basis that they have been relying on CO 98/98 in previous years.

Interestingly, on 31 March 2017 Senator Whish-Wilson gave a notice of a motion to disallow Instrument 2017/204 (in whole or in part). The notice to disallow is currently still unresolved and the Senator  will move on 11 May 2017 that the instrument be disallowed and repealed, so for now, ‘watch this space’!⁵

If you have any questions about the issues discussed in this article, please contact your usual Norton Rose Fulbright Australia adviser or authors Ben Smits, Partner, and Mitchell Kelly, Associate.