As those who have needed to deal with ASIC Deeds of Cross Guarantee and the associated ASIC Instrument 2016/785 can no doubt attest, the requirements that a corporate group needs to satisfy before its subsidiaries can benefit from the financial relief the instrument provides are anything but straight-forward. Thankfully, one issue that has often been a point of contention (at least for those who were aware of it) has been taken off the table.
What is the issue?
For a subsidiary to be eligible for the financial reporting relief provided by ASIC Instrument 2016/785, the subsidiary needs to enter into an ASIC Deed of Cross Guarantee with its holding company, and the subsidiary and the holding company need to satisfy certain other conditions.
One of those conditions is that the subsidiary must not be a ‘borrower in relation to debentures’ or a ‘guarantor of a borrower in relation to debentures’.
That condition, insofar as it relates to ‘guarantors of a borrower in relation to debentures’ was only introduced in 2017 when ASIC updated the relevant instrument. Before that, companies providing those guarantees were not excluded from relying on the relief solely because of the existence of the guarantee.
Without wanting to get too technical, there has always been uncertainty as to how the term ‘borrower in relation to debentures’ should be interpreted for the purposes of the instrument.
In our view, there is a good argument that, when read in the context of the Corporations Act, the phrase is only intended to apply to borrowers of debentures to which Chapter 2L of the Corporations Act applies. That is, debentures issued to retail investors that under the Corporations Act require a trustee and prospectus style disclosure.
However, the contrary view, which ASIC unhelpfully supported in statements it made late last year, is that the phrase needs to be interpreted more broadly. Under that view, any special purpose ‘finco’ within a group (i.e. an entity that makes external borrowings on behalf of the group and then on-lends the funds to other group members) would be caught and therefore the finco and any guarantors of the finco (which is typically most other material group members) could not avail themselves of the financial reporting relief provided by the ASIC instrument. Put another way, that view effectively makes the ASIC instrument useless for any corporate group that uses a ‘finco’.
How has the issue been resolved?
In response to active engagement from interested stakeholders on this issue (which we as a firm helped lead), ASIC has issued a very sensible no-action position that makes the ASIC Instrument useable for a broad range of corporate groups. In short:
- The no action position means that ASIC will not take enforcement action against fincos or their guarantors for not preparing and lodging annual reports, where all other conditions for reporting relief under ASIC Instrument 2016/785 have been satisfied.
- However, the no-action position does not apply where the finco has on issue debentures to which Chapter 2L of the Corporations Act applies (i.e. debentures that were issued to retail investors that require a trustee and prospectus style disclosure).
The no action position applies retrospectively (from 28 September 2016 when the current form of the ASIC instrument was issued) and prospectively (to 1 October 2026 being the sunset date for the current instrument, unless a replacement instrument correcting the issue is put in place earlier).
What does this mean for me?
If you have a finco and have previously been relying on the financial reporting relief provided by the ASIC Instrument: You can continue to do so provided you continue to satisfy the other conditions of the instrument.
If you have a finco and have not previously sought to rely on the financial reporting provided by the ASIC Instrument because of this issue: You can now consider whether you want to change approach.
If you do not have a finco: Nothing.
The legal small-print
ASIC’s general policy on ‘no-action’ positions and their status is set out in Regulatory Guide 108 No-action letters. In particular, it should be noted that:
- A no-action position is an expression of regulatory intention about how ASIC’s powers will be exercised.
- The purpose of a no-action position is to provide an indication as to the future regulatory action that ASIC might take.
- Entities do not need to apply to ASIC to avail themselves of the no-action position.
- The ASIC no-action position does not necessarily preclude third parties from taking legal action in relation to the relevant conduct.
- ASIC does not represent that the conduct covered by the no-action position will not be held to contravene the relevant legislation. Nor does ASIC undertake to intervene in an action brought by third parties in respect of such conduct.
