Business groups welcome change to continuous disclosure laws

Image of Jennifer Westacott, CEO of the Business Council of Australia
Jennifer Westacott, CEO of the Business Council of Australia, at the BCA’s 2019 annual dinner. (Source: bca.com.au)

The government’s decision to lift the continuous disclosure obligations that apply to companies and their officers for the next six months has been welcomed by business advocacy groups as a key step towards recovery, but it is not without risk.

Jennifer Westacott, CEO of the Business Council of Australia (BCA), said the decision would help businesses focus on keeping Australians in work and lay the groundwork for new jobs.

“Our recovery must be jobs focussed and that means every resource businesses have should be focussed on getting Australian’s safely back to work and creating new opportunities,” she said in a statement.

Angus Armour, CEO and managing director of the Australian Institute of Company Directors (AICD), said it was an acknowledgement of the challenges the business community faces as it looks to rebuild in the wake of COVID-19.

“While we are strongly supportive of a robust continuous disclosure regime to maintain market integrity, practically the current environment does not allow the same confidence in making forward statements or providing guidance,” Armour said.

However, Andrew Spring, partner at insolvency firm Jirsch Sutherland, believes companies may be overlooking the benefits of meeting their continuous disclosure requirements.

“It is arguable that the continuous disclosure regime protects companies by providing confidence to investors and the market – being a source of funding for business growth,” Spring told Inside Retail.

Lifting these obligations, he said, could have negative consequences.

“A potential risk for the market is to be destabilised by a perception that there is less accountability as a result of relief for companies and their directors. This may inhibit companies’ access to debt or capital, due to market fluctuations.”

Companies, officers now only liable if reckless, negligent

Treasurer Josh Frydenberg on Monday announced a temporary amendment to the Corporations Act 2001, so that companies and their officers are only liable for failing to meet their continuous disclosure obligations if there has been “knowledge, recklessness or negligence” with respect to updates on price sensitive information to the market.

Frydenberg said the changes were necessary given the uncertainty generated by the impact of the coronavirus crisis, which has made it more difficult to release reliable forward-looking guidance to the market.

He suggested companies might hold back from making forecasts to protect themselves against the possibility of a class action in case they turn out to be inaccurate, and said the changes would make it harder to bring such actions during the coronavirus crisis and ensure the market continues to stay informed.

The changes will be in effect for six months from today, May 26.

“This gives company directors the space they need to more confidently provide guidance to the market during this uncertain period,” Westacott said.

“Left unchecked this issue would have hampered business confidence and performance which would have adversely impacted on the broader community at a time when business needs certainty to power the recovery, rehire workers and create more jobs.”

The decision follows the government’s move in March to place a moratorium on insolvent trading laws, including relieving company directors from personal liability for any debts incurred in the ordinary course of the company’s business.

While this decision was welcomed by business groups, Spring believes it may simply lead directors to delay the inevitable.

“The move to provide relief in continuous disclosure accountability, as with the relief from potential insolvent trading claims, as a reaction to the COVID-19 crisis, does not seem to support that decision-making process,” he said.

“In my experience, the impact of the moratorium for insolvent trading on directors whose business is in financial distress is hypnotic – they know that the position is dire, but they do not seem to be able to act on their own.”

Spring believes the worst of the economic fallout is still to come, particularly for those that have deferred liabilities, such as rent. 

“The retail sector will be heavily exposed to landlord and other accrued liabilities as the community moves out of ‘lockdown’ restrictions,” he said.

“The competitive fight for the consumer dollar will see retailers jostling to hold market position and margin while dealing with the weight of deferred liabilities.”

The government has also recently cracked down on litigation funders, requiring them to hold an Australian Financial Services Licence and comply with the managed investment scheme regime.

It has also launched an inquiry into litigation funding and regulation of the class action industry, which is due to report in early December.

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