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Focus: Corporate Governance – June 2003

CLERP 7 – simplified lodgment and compliance

In brief: The CLERP 7 changes that will come into effect on 1 July 2003 change the way companies and managed investment schemes need to report to ASIC. Partner Paul Quinn and articled clerk Alistair Newton outline these changes. 

• Background
• Annual statement
• Changing the review date
• Solvency resolutions
• Notifications
• Commonly used forms replaced
• Register of members
• Use of ABN
• Age restrictions on directors
• Conclusion

Background

In late March 2003, a package of three new laws was passed to give effect to the proposals set out in the Federal Government's CLERP (Corporate Law Economic Reform Program) discussion paper, CLERP 7 – Simplified Lodgments and Compliance. The new legislation contains a number of amendments to the Corporations Act 2001 (Cth), and is intended to simplify the lodgment of documents with ASIC and reduce the overall compliance burden on companies and managed investment schemes (referred to as 'companies' in this publication). Most of the amendments apply from 1 July 2003 and can be summarised as follows.

• Annual returns are abolished and replaced by a new annual company review procedure.
• Proprietary companies will be required to notify ASIC within 28 days of changes to their top 20 members of each class of share and any change to their ultimate holding company.
• A number of commonly used forms have been replaced by a single multi-functional form.
• The register of members must include details of amounts paid up on shares and whether shares are fully paid.
• A company's ABN can be used instead of the ACN, ARBN or ARSN, when the last nine characters of the ABN is the same as the ACN, ARBN or ARSN.
• The provisions regulating directors of public companies over 72 years of age have been abolished with effect from 11 April 2003. 

Annual statement

An important change is the abolition of annual returns. Instead, a system of annual company reviews will be introduced.

From 1 July 2003, ASIC will send each company an annual statement and an invoice within 14 days following the company's review date. The review date is the anniversary of the company's date of registration. However, companies can apply to change the review date in certain circumstances. The annual statement will set out the company's details as recorded by ASIC and will be similar to the former annual return.

Once a company receives the annual statement, it must review the contents and:

• if the information is correct, no further action is required; or
• if the information is incorrect, the required changes must be notified to ASIC within 28 days of the date of issue of the annual statement.

Companies must pay the annual review fee as shown on the invoice within two months of the review date. The review fees are based on the 2002 annual return lodgement fees but have been increased in line with changes to the CPI since July 2000. Late fees will apply.

ASIC may issue a 'return of particulars' if the company has not paid its annual review fee, if ASIC suspects that the details in its register are inaccurate, or if ASIC has not received any documentation from the company in the preceding 12 months. A company will be required to confirm the information set out in the return of particulars or provide other details as required by ASIC.

Changing the review date

ASIC has indicated that it will agree to a change of the review date in the following circumstances:

• for companies with a common holding company;
• for companies with common officeholders;
• for managed investment schemes with a common responsible entity; or
• in other 'exceptional circumstances' as determined by ASIC.

To date, ASIC has given little indication as to precisely what are 'exceptional circumstances'. An adverse financial circumstance of itself will not be sufficient reason to change a review date. ASIC is now in the process of developing and consulting on a final policy on changes to review dates, and it expects to complete and release the policy later in 2004.

Companies with numerous Australian subsidiaries should take action to align the review dates of each subsidiary. If not, companies could face increased administration time and cost post 1 July 2003.

Solvency resolutions

The CLERP 7 legislation will also change the way small proprietary companies deal with solvency resolutions.

Currently public companies, large proprietary companies and small proprietary companies controlled by foreign companies are required to prepare and lodge financial reports in accordance with Part 2M of the Corporations Act, unless they have relief under one of ASIC's class orders. Small proprietary companies, however, do not generally fall within these financial reporting requirements. When financial reports have not been lodged in the 12 months preceding the signing of the annual return, directors of companies must pass a 'solvency resolution' in the month preceding the date of signing the annual return. Essentially, the directors must resolve whether, in their opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable.

The new provisions alter these requirements so that directors of companies that have not lodged financial reports within 12 months of the review date must pass a solvency resolution within two months of the review date and:

• if the directors pass a resolution that there are not reasonable grounds to think the company will be able to pay its debts, the company must lodge a form with ASIC within seven days following the passing of the negative resolution;
• if the directors have failed to pass any solvency resolution, the company must lodge a form with ASIC within seven days following the two months after the review date; and
• if the directors have passed a solvency resolution, no further notifications are required.

A failure to pass a solvency resolution or notify ASIC when required remains an offence.

Notifications

Apart from disclosures required in connection with annual statements and solvency resolutions, companies must notify ASIC of certain changes to company details as they occur. Currently, these requirements cover, among other things, changes to the registered office, changes to the principal place of business, and changes to company officers and their particulars. The new laws expand the range of notifications to ASIC to be made by proprietary companies so that from 1 July 2003, ASIC must be notified when:

• details of the top 20 members change of each class;
• the ultimate holding company changes; and
• changes are made to the company's share structure.

In most cases, ASIC must be notified of changes within 28 days.

Public companies will continue to advise details of their top 20 shareholders on an annual basis by advice to ASIC within the 28 days of the issue date of the annual statement.

Commonly used forms replaced

A new general Form 484 Change to company details will be introduced to replace the forms currently used to notify changes in office hours, address, changes to officeholders and notification of share issues and share cancellations (Forms 203, 207, 284, 304 and 316). This form is to be lodged within 28 days of the change. 

Register of members

Section 169(3) of the Corporations Act has been amended so that, in addition to the current requirement that the Register record the amount unpaid on the shares, the Register of Members for a company with a share capital must also record:

1. the amount paid on the shares; and
2. whether or not the shares are fully paid.

Use of ABN

A company will be able to use its ABN in lieu of itsr ACN, ARBN or ARSN on public documents, negotiable instruments and its common seal, provided that the last nine digits of the ABN are the same as its ACN, ARBN or ARSN.

Age restrictions on directors

A key reform for public companies is the repeal of provisions regulating directors over the age of 72.

Previously, a director of a public company and its subsidiaries could hold office only until the next annual general meeting after the director turned 72. To continue as a director, the person must have been appointed by a special resolution at the annual general meeting of the company, and the notice of the meeting must have stated the person's age. These restrictions have been removed in their entirety, and a director 72 years of age or over is now treated the same as any other director.

Conclusion

Company secretaries and directors will need to consider what internal processes must be put in place to meet the new reporting requirements.

For many companies, particularly, small proprietary companies or companies whose details change regularly, the overall compliance burden may in fact be increased as a result of the new provisions.

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