ASIC relief defers obligations to lodge financial reports and hold annual general meetings for companies in external administration by 6 months. Companies in liquidation (other than AFS licensees) do not have to comply with financial reporting or AGM obligations at all.
ASIC has published a Consultation Paper that proposes deferring financial reporting and AGM obligations for companies in external administration for up to 24 months. The proposal would remove the need for companies to make individual applications for relief. However, it would also require administrators to make administration returns and management accounts available to shareholders.
As things stand, companies in external administration for more than 6 months routinely apply to ASIC for individual relief. It is also rare for the external administration of a substantial company or listed company to be concluded in less than 6 months. Court applications for extensions of the voluntary administration period in complex administrations are routine.
According to ASIC, it almost never refuses applications by externally administered companies for the deferral to be extended from 6 months to 24 months. From a sample of applications described in the Consultation Paper, ASIC refused only 3% of financial reporting deferral applications and 1% of AGM deferral applications.
24 month deferral by default - at a price
ASIC now proposes to allow the 24 month deferral by default, avoiding the need for companies to apply on a case-by-case basis after 6 months. That would reduce legal costs and ASIC fees for companies in protracted external administrations.
The new relief would begin when a voluntary administrator or provisional liquidator, or a managing controller over substantially the whole of the property of the company (a receiver and manager), is appointed. The relief would cease after 24 months or when the external administration ends. If a voluntary administration is followed by a deed of company arrangement, the relief will continue so long as the deed administrator exercises all of the management functions and powers of the company.
One of the most controversial aspects of the proposed new relief is not the extension of time, but the substantial compliance and accounting burdens which are proposed as the price for relief.
Only public companies and large proprietary companies are required to lodge financial reports, so most companies do not need to rely on ASIC's relief. Relief is more limited for AFS licensees and ASIC's proposed changes will not apply to them.
What does ASIC's proposal mean for insolvency practitioners?
ASIC's proposal is relevant to insolvency practitioners who take appointments as receivers or voluntary or deed administrators of a public or large proprietary company. If the proposal outlined in the Consultation Paper is implemented, the appointee should be aware that, in order to rely on the financial reporting and AGM relief, the company must, among other things:
- prepare yearly and half-yearly management accounts and make them available to shareholders, free of charge (paradoxically, they will not need to be prepared for or provided to creditors under ASIC's proposal);
- make any Form 5602 (annual administration return) and Form 5603 (end of administration return) available to anybody (not just shareholders or creditors), free of charge; and
- prepare and lodge all outstanding financial reports before the external administration comes to an end or when the company is returned to the directors’ control.
Will administrators have to provide management accounts to shareholders?
The most surprising idea in the Consultation Paper is the requirement that external administrators, as a condition of reporting relief, regularly prepare management accounts and to provide them to shareholders free of charge.
Accounts will often be commercially sensitive in the context of any potential restructuring or sale, in which case releasing them would not be in the interests of the company and its creditors. Courts routinely make suppression orders over financial information of companies in administration, in recognition of the likelihood that its disclosure will limit the realisable value of the company's business or stock. Even if accounts can be disclosed, they will do little to help shareholders, and preparing them will inevitably impose a cost burden on the administration, for no benefit to creditors.
Preparing accurate accounts will also be difficult if, as is commonly the case, the company has not kept proper financial records. While reporting entities are more likely to have maintained good financial records than an externally administered SME company, in the last financial year for which ASIC statistics are available, administrators nominated "poor financial control including lack of records" as a cause of business failure in 37% of reports (across all companies). External administrators may feel that preparing management accounts in those circumstances would expose them to unacceptable professional or legal risk.
How useful are financial reports or AGMs for externally administered companies?
The Consultation Paper suggests that financial reports for an externally administered company are useful but burdensome, and tries to balance utility against costs in proposing a 24 month deferral.
Submissions made to ASIC are likely to comment on the circumstances in which financial reports and AGMs may be useful notwithstanding external administration. On one view, they are inappropriate for most externally administered companies because:
- preparing financial reports for a company in administration raises accounting issues that make reporting more difficult than normal (such as provisioning for employee entitlements or impairment of assets on account of the restructuring). The restructuring may be too dynamic to be able to tell whether parts of the business or its assets are discontinued operations or assets held for sale;
- it may be impossible to report on a going concern basis;
- shares in the insolvent company are implicitly worthless, and generally cannot be transferred. Shareholders, who would normally be the most important users of financial reports, therefore have little use for them, other than to see how poorly their investment has fared;
- similarly, AGMs focus on participants (shareholders and directors) whose roles in the company are likely to have been overtaken by other stakeholders (creditors and external administrators); and
- the law requires directors to be involved in AGMs and in the preparation of any financial reports, but also suspends directors' powers and functions during an external administration.
While we endorse ASIC's proposed extension of relief to 24 months, in our view, management accounts, like financial reports, are unlikely to be useful for shareholders of insolvent companies.
Making a submission on the new proposed extended financial reporting and AGM relief
Comments on the Consultation Paper are due by 11 March 2021; ASIC then expects any changes to take effect in the second half of 2021.
If you would like to understand the impact of these changes in more depth, or assistance on drafting a submission, please contact us.