COVID-19: shifting regulatory landscape

COVID-19 poses a range of regulatory complications for boards, from holding AGMs to financial reporting to continuous disclosure obligations. Our policy team highlight the key issues boards need to consider and where we need government to move.

In this rapidly evolving COVID-19 crisis, directors are faced with an ever-expanding list of challenges, ranging from solvency concerns to employee relations to operational matters. Regulatory relief and clear regulatory positions are crucial to ensure directors and senior management can focus on ensuring their organisations financial sustainability.

We believe directors and senior management should be focused on keeping businesses afloat, looking after employees, and maintaining relationships with suppliers, customers and financiers. It helps no one if the board’s limited time is diverted from these urgent issues and instead spent on regulatory complications.

While the Federal government has responded swiftly by putting in place economic stimulus measures and turning off personal liability for insolvent trading for directors, we believe further action is urgently required, including from regulators. Significant regulatory relief can now be offered from Corporations Act requirements, given new powers recently granted to the Treasurer.

Over recent weeks, the AICD has been advocating to government across a range of issues including AGMs, continuous disclosure, financial reporting, and pausing upcoming new regulatory obligations. See link here for our list of issues.

This article provides a brief summary of regulatory relief and reform introduced to date as well as an overview of matters that, in our view, still require urgent government attention.

Regulatory reform to date

• Temporary insolvency safe harbour

The government has legislated a six-month temporary relief for directors from personal liability for trading while insolvent.

This is an important and significant reform given the need for directors to potentially make urgent decisions regarding incurring debt. The temporary safe harbour is designed to give directors the confidence to continue to trade, pay their bills and retain staff through the COVID-19 crisis without pressure to enter their organisation into administration. However, it does not exempt directors from their core duties, such as to act in the best interests of the corporation (including to consider creditors in insolvency-type scenarios), and to act with due care and diligence.

Further guidance on the temporary safe harbour can be found here.

• ASIC’s temporary relief for AGMs

ASIC has announced temporary measures to facilitate AGMs amid the spread of COVID-19. For public companies (both listed and unlisted) with a financial year end of 31 December 2019, ASIC has announced:

• a two-month extension by ‘no action’ position; and
• a ‘no action’ position on virtual AGMs.

ASX has also endorsed ASIC’s temporary 'no action’ position for upcoming AGMs for listed companies as part of updated guidance released 31 March 2020 (see below for further detail).

See AICD update on ASIC’s ‘no action’ positions here for further detail. Notably, the Treasurer has flagged this as an area where he may use his new emergency power to apply some relief to Corporations Act requirements, such as to allow virtual AGMs (given a physical meeting is currently still required) – further details below.

• ASX response to COVID-19 market conditions for listed companies

To assist entities in resolving some of the novel issues arising during the COVID-19 crisis, the ASX has released a package of temporary relief measures for listed companies. It includes various temporary measures and updated guidance on continuous disclosure obligations (including earnings guidance and decisions not to pay a dividend), reporting deadlines and capital raisings. Of particular note, is that the ASX is encouraging organisations to remove their earnings guidance given COVID-19 uncertainty and emphasising that continuous disclosure obligations do not “extend to predicting the unpredictable”.

See AICD update on ASX’s temporary measures here for further detail.

Key areas of reform required

• Securities class actions and continuous disclosure

To recognise the extreme volatility of the current market, the AICD has put a proposal to the Treasurer recommending the introduction of a temporary safe harbour so that no action can be brought against listed entities or their directors in relation to earnings guidance or forward-looking statements in the context of the COVID-19 pandemic.

This proposal is targeted at recognising the challenges associated with giving earnings guidance and forecasts in the current volatile and uncertain environment. This uncertainty creates a material securities class action risk given the attractiveness of the Australian class actions market to third party litigation funders.

The AICD considers this proposed safe harbour will give boards greater comfort to be able to provide relevant information to the market where possible. While the ASX’s updated guidance has recommended that companies simply withdraw all guidance to the market, we believe a better and more sustainable approach is to encourage bona fide efforts from companies and their officers to inform the market that are appropriately protected from subsequent claims or proceedings. This will become even more important as consensus starts to develop, which may lead to a gap between market and company expectations and potentially require a corrective disclosure from the company.

Further detail regarding the AICD’s continuous disclosure proposal can be found here.

• Reporting

Given the challenges that COVID-19 poses for organisations, including their auditors, the AICD believes that reporting deadlines for all entities who are balancing on 31 March 2020 should be extended urgently. Similarly, those entities whose financial year ends 30 June should be offered similar relief given the COVID-19 environment is expected to last for at least six months. ASIC has the power to offer such relief on a class basis, and in doing so, we would be moving in lock step with relevant overseas regulators.

Further issues potentially arise regarding completing audited reports and directors’ declarations as to solvency and assessment of going concern. The AICD is in dialogue with other interested stakeholders, the regulators and standard setters about these issues, noting the difficulty in making accurate financial assessments in the current economic environment.

• General meetings

Although ASIC has announced that it will take a ‘no action’ position to companies holding online AGMs, there is still a concern that such meetings will not be allowed under the Corporations Act or a company’s constitution. ASIC’s position also doesn’t remove the risk of legal action from third parties or resolutions being deemed invalid.

We have proposed modifications to the Corporations Act that would facilitate physical distancing and manage public health risks associated with holding large meetings. For example:

• allowing companies to hold virtual general meetings that are conducted solely online;
• extending the deadline by which companies must hold an AGM after the end of the financial year from five to seven months;
• enabling companies to postpone or cancel already convened meetings; and
• reducing a general meeting notice period for both listed and unlisted companies.

• Replaceable rule

The AICD has suggested a new replaceable rule in company constitutions that would give boards the temporary ability to amend their constitution to deal with some of the above issues, such as postponing an AGM, holding virtual meetings and similar matters.

• Moratorium on regulatory change and consultations

It is crucial that distractions and additional costs are reduced at this time. The AICD has asked the government and regulators to pause any regulatory change or open consultations that are not time-critical or necessary to protect significant harm to consumers or the market.

• Clarifying regulatory and enforcement posture

The AICD would welcome clarity from the regulators about how they are approaching board decision-making in the COVID-19 environment.

Directors are often having to make rapid finely-tuned judgement calls that consider multiple stakeholder interests, including employees, creditors, shareholders as well as wider community interests. Flexibility and pragmatism are needed in the current environment, and we have encouraged regulators such as ASIC to re-consider their ‘why not litigate’ approach in light of COVID-19. Directors should be able to focus on these urgent and difficult issues without constantly looking over their shoulder. At the same time, we support regulatory action focused on those individuals and entities that are seeking to exploit the current COVID-19 situation.

Clarity from ASIC regarding how it will enforce directors’ duties in light of the temporary safe harbour from insolvent trading would also be welcome.

• Not-for-profits and charities

It will be difficult (if not impossible) for many NFPs to financially withstand the impact of COVID-19 without substantial additional support and regulatory relief. This is the case given NFPs typically have scarce reserves and limited ability to access other sources of capital (via equity or debt).

While the ACNC has addressed certain concerns regarding AGMs and Annual Information Statements, the measures proposed do not apply to charities and NFPs regulated at the State and Territory level. The AICD has recommended that a clear and nationally consistent statement regarding the regulatory approach that the ACNC and all state and territory regulators will take during the COVID-19 crisis to NFPs and charities be released. In particular, we have advocated for the following matters to be addressed:

• The extension of the insolvent trading safe harbour to all ACNC regulated entities and state and territory regulated incorporated associations.
• A consistent approach to fundraising laws to ensure that red tape is not an obstacle to fundraising.
• A consistent approach to financial reporting and filing extensions.

In welcome news, the ACNC Commissioner has released new guidance on ‘ACNC compliance during COVID-19’ (found here) which confirms the ACNC will not investigate certain breaches of the Governance Standards and the External Conduct Standards that occur from 25 March until 25 September 2020.

Notably, the ACNC is extending the temporary insolvent trading safe harbour to Governance Standard 5, provided (i) charities have an achievable aim to return to viability once the crisis has passed and (ii) inform members and the ACNC if trading insolvent.

While the temporary safe harbour will be extended to all charities and not just those that operate as companies limited by guarantee, the states and territories have not yet confirmed this same relief will apply for committee members of incorporated associations.

More broadly the AICD is advocating for an urgent relief package for the NFP and charities sector to support their financial sustainability, including measures to accelerate government funding and extend existing funding commitments for an initial 12 months.

Refer to this article here for further information about COVID-19 and NFPs.

For more COVID-19 information and tools please visit our Resource Hub