Deeds of cross guarantee – be aware of the ongoing obligations

As many companies are required to lodge annual financial statements this month, we hope this note serves as a timely reminder to ensure that your company is meeting its ongoing obligations under any deed of cross guarantee.

Corporate groups often assume that lodging a deed of cross guarantee (Deed) and an annual consolidated set of financial statements is sufficient to obtain financial reporting relief for each reporting entity in the group.

In reality, there are a number of ongoing obligations that must be complied with in order to maintain eligibility for financial reporting relief. These obligations are set out in ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 (the Instrument) for financial years ending on or after 1 January 2017.

The Instrument repealed the previous ASIC Class Order [CO 98/1418] (the Class Order) for financial years between 1998 and 2016.

Importantly, all of the obligations in the Instrument must be complied with in order to be eligible for financial reporting relief.

The effect of non-compliance is that companies will not be able to rely upon a Deed, and must file their own financial statements.

Ongoing Obligations

There are a number of ongoing obligations under the Instrument that must be addressed, including:

• before the end of the first financial year on which the Deed is relied for financial reporting relief (first reliance year), the directors must resolve and sign a solvency statement containing Directors’ Declarations that there were reasonable grounds to believe that the company would be able to pay its debts as and when they become due and payable;
• each company relying on the Deed must lodge an ASIC Form 389 (opt-in notice) within four months of the end of the first reliance year
• each year, each company relying on the Deed must resolve whether it should remain party to the Deed, after assessing the advantages and disadvantages;
• the notes to the financial statements must include a summary of the nature of the Deed;
• the notes to the financial statements must also contain details of companies that have joined the Deed or left the Deed in the relevant financial year; and
• for the relevant financial year, consolidated financial statements of the holding entity must be lodged with ASIC.

The full list of criteria is set out in the Instrument.

The Good News

Fortunately, extensions of time and/or relief from civil liability is available in certain circumstances to companies and their directors and officers who have inadvertently failed to comply with the ongoing obligations under the Instrument, pursuant to section 1322 of the Corporations Act 2001 (Cth).

The NSW Supreme Court discussed the relevant factors that Courts will consider when determining whether to grant an extension of time, or relief from civil liability, in In the matter of Flight Centre Technology Pty Ltd [2022] NSWSC 367. Factors include whether:

• the non-compliance arose as a result of imprudence, carelessness or wilful ignorance of the law;
• the steps taken by the applicant were likely sufficient, in substance, for the relevant relief instrument to achieve its object;
• public policy would be undermined by granting relief;
• the applicant acted reasonably promptly upon becoming aware of the error;
• ASIC opposes the relief sought; and
• the Court is satisfied that no substantial injustice has been, or is likely to be, caused to any person.