This is a service specifically targeted at the needs of busy non-executive directors (NEDs). We aim to give you a ‘heads-up’ on the things that matter for NEDs in the week ahead – all in two minutes or less.

In this edition, we discuss the response published by the Federal Government in relation to the independent review of recent amendments to Australia’s continuous disclosure regime, and the disqualification of two directors by the Australian Securities and Investments Commission (ASIC) for their misconduct. 

In Over the Horizon, we examine the discussion revolving around enhancing ASIC’s effectiveness in regulating corporations and the financial market, which could see a further spike in enforcement activity. 

Regulation

Federal Government publishes its response to the Continuous Disclosure Review 

On 12 August 2024, the Federal Government published its response to the report of the independent review conducted by Dr Kevin Lewis, former Chief Compliance Officer at the ASX, into the amendments that were made to Australia’s continuous disclosure laws by the Treasury Laws Amendment (2021 Measures No. 1) Act 2021 (Cth). The purpose of the review was to consider: (1) whether the changes are working to support an efficient, effective and well-informed market; (2) the effect of the changes on the quality and nature of public disclosures by listed companies; (3) the consistency of Australia’s continuous disclosure regime with those of overseas jurisdictions; and (4) whether the changes have created barriers to compliance or enforcement. As an overarching comment, Dr Lewis considered that the two-year review period was not long enough to draw meaningful evidence-based conclusions. However, the government agreed with the recommendations that: (a) the Corporations Act 2001 (Cth) (Corporations Act) be amended to remove the requirement for ASIC to prove in civil penalty proceedings for alleged breaches of continuous disclosure laws that the disclosing entity acted knowingly, recklessly or negligently; (b) the same requirement be retained in connection with proceedings by private litigants; (c) the government consider the effect of the first two recommendations on legislation to implement climate-related financial disclosure; and (d) the government amend the Corporations Act to address more fully how knowledge, recklessness or negligence can be attributed to an entity. The government noted that it will consider the remaining two recommendations at a later time when the opportunity arises.

ASIC disqualifies directors for misconduct

On 15 August 2024, ASIC announced that it had disqualified Mr Richard Andrew Sparreboom and Mr Gregory Romano Lavopa from managing corporations due to their misconduct. Mr Sparreboom was director of Sparrk Logistics Pty Ltd and Hedgehog Logistics Solutions Pty Ltd, both of which were involved in the transportation, postal and warehousing industry and entered liquidation. ASIC found that Mr Sparreboom acted improperly and failed to meet his obligations as a director by failing to lodge documents with the Australian Tax Office, deleting company books and records and producing false records, failing to prevent the breach of a financing agreement, authorising payments that were not in the best interests of the companies, and permitted the companies to trade while insolvent for significant periods of time and after there were numerous indicators of insolvency. Mr Lavopa, on the other hand, was a director of three companies involved in the labour hire service industry. ASIC found that Mr Lavopa’s conduct as a director "fell significantly below the standard expected of an Australian director" because he had failed to lodge documents with the Australian Tax Office, did not keep and maintain sufficient business records, failed to assist the liquidator in the winding up of one of the companies and undercharged for services to clients such that there was not enough to pay for superannuation, workers’ compensation and taxation expenses. ASIC’s actions are a strong reminder of the standards that the regulator expects of company directors.

Over the horizon

ASIC – to eat what it kills? 

Since the publication of the Senate Economics Committee’s report into ASIC’s investigation and enforcement record on 3 July 2024, considerable debate has surrounded the topic of how best to enhance ASIC’s ability to effectively deliver on its broad mandate: the regulation of corporate, markets, financial services and consumer credit sectors. In his first interview since the publication of the report on 3 July 2024, Committee Char Mr Bragg stated that ASIC should be carved up into specialist segments and have new appointees with "genuine law enforcement experience … who are prepared to show the [US] SEC-style approach" (that is, to aggressively litigate breaches of corporate law for fast results, with powers to hand whistleblowers a fee for information). Furthermore, some critics, including Mr Bragg, have also argued that ASIC should be able to take a slice from the penalty pie – or "eat what it kills" – to incentivise better enforcement outcomes. Any penalties and settlement costs awarded from successful cases can be reinvested by ASIC into ASIC’s budget, bypassing delays brought by government funding approvals, which could allow ASIC to be more proactive and more self-sufficient. Although there are attractions to this model, considerable legislative change would be required and there is the potential for the public to perceive that ASIC’s independence would be compromised. ASIC is still considering the Committee’s report, but it seems reasonable to speculate that the increased public scrutiny of ASIC’s enforcement record may prompt more aggressive action by the regulator in the short term.