Meeting your financial reporting obligations ASIC

Friday, 01 June 2001


    Michael Gething outlines financial reporting obligations for companies under the Corporations Law, and looks at recent ASIC actions against two companies that failed to meet these obligations.

    As a company director, you would be familiar with the financial reporting obligations on a public company. In brief, under s292 of the Corporations Law (Law), all public companies must prepare and lodge a financial report and a directors' report annually. Sections 295-297 of the Law set out the requirements for the annual financial report; s298-300 cover the annual directors' report; and s302-303 the half-yearly financial reports and directors' reports. Other important statutory obligations are imposed by the remaining provisions of Part 2M.3 of the Law.

    These obligations fulfill two key objectives. They:

    • provide critical information to shareholders and creditors; and

    • help ensure that minimum financial management processes are in place in these companies.

    In a couple of recent instances, ASIC has shown that it is willing to pursue companies and directors who have neglected or failed to comply with their financial reporting obligations.

    These case studies illustrate two different avenues of action available to ASIC in this area.

    Rural Traders Company Limited In recent proceedings in the Supreme Court of Western Australia, ASIC obtained final orders against Rural Traders Company Limited (RTC), compelling it to file its outstanding annual financial report and directors' report. In this case, ASIC relied on the power contained in 1274(11) of the Law, which allows the court to make such an order on a company, upon application by ASIC, under certain conditions. What were the company's obligations under the Law? As a disclosing entity (see s111AC for a definition) under the Law, RTC was required to:

    • prepare a financial report and a directors' report for each financial year: s292;

    • lodge these reports with ASIC within three months after the end of the financial year: s319;

    • prepare a financial report and a directors' report for each half-year: s302; and

    • lodge these reports with ASIC within 75 days after the end of the half-year: s320.

    How did ASIC go about enforcing the Law? Under s1274(11), if a company fails to lodge its reports, ASIC may give the company a notice requiring it to comply within 14 days. If the company does not comply, ASIC can take immediate court action. In December 2000, ASIC issued a notice to RTC requiring it to comply with its obligations under s319 and s320 to lodge both its financial report and directors' report for the year ended 31 December 2000 and half year ended 30 June 2000. This notice satisfied the conditions under s1274(11) allowing the court to make an order.

    What was the outcome? The Supreme Court of WA subsequently made orders requiring RTC to comply with its obligations. RTC complied with the orders, thereby avoiding enforcement proceedings against it and its directors. Where orders are obtained and personally served on a company and its directors, ASIC may take enforcement proceedings against the company and its directors if these orders are not complied with. If RTC had failed to comply with the court's orders, ASIC would have been entitled to apply to the court for further orders including:

    • an order that a pecuniary penalty be imposed on the company, including a penalty for each day the order was not complied with;

    • "sequestration", ie an order that the company be wound up by the court; and

    • an order that there be leave to issue a writ of attachment for the arrest and imprisonment of the company directors.

    The Mandarin Club Limited In similar proceedings in the Supreme Court of New South Wales, ASIC obtained an order and declaration against The Mandarin Club Limited (MCL), compelling MCL to file an audited annual financial report and directors' report for relevant financial years. ASIC also obtained an order for costs against MCL. In this case, ASIC relied on the power to apply for a mandatory injunction under s1324(2). MCL's obligations were contained in s319(1) (preparing and lodging a report for the financial year) and 345(1) (lodging an annual return). Although the source of power was different, the orders granted were similar to those in the proceedings against Rural Traders Company Limited. What does this mean for you? The proceedings taken against Rural Traders Company Limited and the Mandarin Club Limited show that state Supreme Courts can and will make orders against defaulting companies that fail to comply with their financial reporting obligations under the Law. Failure to comply with such court orders could expose directors personally to enforcement action by ASIC for non- compliance. While the above cases illustrate civil action taken by ASIC, some of these provisions also carry criminal penalties. Further, if a listed company fails to comply with financial reporting obligations, ASIC also has the power to make a determination under s713(6) preventing the company from being able to use a short form prospectus. Of course, companies and their directors can avoid these risks by ensuring that they meet their financial reporting obligations. For more information on reporting obligations and how they apply to you, contact your accounting or legal professional. ASIC Infoline on 131 300 630 can answer your general questions about these obligations.

    * Michael Gething is ASIC's regional commissioner, Western Australia.


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