Australia’s corporate regulator, the Australian Securities and Investments Commission (ASIC), has ramped up scrutiny of large private companies and warned of enforcement action for non-compliance with financial reporting obligations.
The recent probe into a beauty retailer, one of the country’s largest privately owned businesses, is the latest high-profile example in what an ASIC spokeswoman has described as a “broader crackdown” (according to an article by The Australian Financial Review (opens a new window)).
This intensifying regulatory environment creates significant implications for directors, officers, and boards, both from a legal liability and insurance coverage perspective.
Key takeaway: Private company directors must treat financial reporting obligations with comparable seriousness to that of listed companies. Insurers are no doubt monitoring, and so is ASIC.
ASIC turns its attention to private companies
Traditionally, private companies have operated under less public scrutiny than their listed counterparts.
However, in most recent times, large proprietary companies (defined as those with revenue of $50 million or more, assets over $25 million, or more than 100 employees) must lodge annual financial reports with ASIC under Sections 292 and 319 of the Corporations Act 2001 (Cth).
The beauty retailer referred to above had consistent delays in filing, with its 2021 accounts lodged more than a year late and its 2023 and 2024 accounts still pending, placing it firmly in ASIC’s crosshairs.
Importantly, the company’s use of a less visible corporate structure to house profits and pay dividends has triggered further regulatory interest in the true financial picture of such private entities.
ASIC has made clear it will use its full range of enforcement and compliance tools, including:
Financial penalties (civil fines up to $825 million in extreme cases);
Public enforcement actions;
Regulatory investigations; and
Mandated auditor reporting (Section 311).
This signals a new era of transparency expectations for large private companies and greater legal exposure for their executive teams.
Heightened exposure and legal risk for Directors and Officers
Directors and officers (D&Os) of private companies have fiduciary duties to act in the best interests of the company, maintain accurate financial records, and ensure compliance with relevant legislation.
Failures in these areas can expose individuals to civil penalties, regulatory action, and even derivative shareholder suits.
ASIC’s increased activity means:
Delayed or inaccurate reporting can now lead to direct regulatory investigations into individual conduct.
Opaque corporate structures may be seen as attempts to obscure financial reality, attracting further scrutiny.
Directors could face investigation or be found liable for misleading disclosure, failure to comply with statutory obligations, or breach of duty of care.
If a frequency issue were to emerge and directors are found to be repeatedly failing in these responsibilities, (particularly in light of public comments by ASIC urging proactive compliance), D&O insurers may tighten underwriting guidelines and impose more restrictive policy exclusions.
Potential insurer action
As ASIC intensifies its efforts, we expect insurers providing Directors & Officers Liability Insurance to private companies to critically review their exposure to certain industries.
With a proactive regulator closely monitoring large private companies in such a manner there are several important considerations for purchasers of D&O polices. These include:
Exclusions for claims related to late lodgement or non-compliance
Insurers may include specific exclusions for claims arising from:
Late or non-lodgement of financials
Misleading statements in financial reports
Breach of continuous disclosure obligations (for disclosing entities)
This effectively shifts the liability risk back to directors, especially where repeated non-compliance is evident.
Greater transparency demands
Insurers are increasingly requesting:
Full details of the corporate structure, including parent and related entities
Clear mapping of intercompany financial flows
Disclosure of related-party transactions, dividend payments, and special purpose vehicles
Where structures are opaque or excessively complex, insurers may:
Increase premiums
Decline cover
Require warranties or disclosure statements from insureds
Insolvency exclusions and financial solvency clauses
Given the risk that poor financial reporting may mask solvency issues, insurers are also:
Imposing insolvency exclusions, particularly where red flags appear
Requiring solvency declarations from directors at renewal
Triggering notification clauses where late filing or adverse regulator action occurs If private companies in similar situations were to later face solvency issues, directors could find themselves exposed without coverage.
What directors should be doing now
To protect themselves and their companies, directors and officers of large private businesses should undertake the following:
Ensure timely lodgement of financials
Review internal processes to ensure all accounts are audited and lodged within the required four-month post-financial year deadline.
Simplify and disclose corporate structures
Identify all related entities, SPVs, and holding companies. Be prepared to explain the economic reality behind ownership and revenue streams.
Engage proactively with auditors and regulators
Communicate early and often with auditors. If ASIC approaches the company, cooperate fully and document all steps taken to address issues.
Review and update D&O coverage
Check for exclusions related to financial reporting.
Consider higher limits of cover if the company is undergoing rapid growth or regulatory attention.
Disclose compliance issues to the insurer during renewals to avoid coverage disputes.
Ask their insurance broker to arrange a meeting with their D&O insurer to explain anomalies and provide clarity with respect to complex corporate structures.
The era of privacy is ending for private companies
As ASIC moves toward a more transparent corporate environment, private companies will face public company levels of scrutiny, often without the same infrastructure or experience managing these risks.
Directors and officers must understand that poor compliance is no longer a private issue it is a regulatory, reputational, and insurable risk.
Failure to act now could leave boards dangerously exposed, both personally and financially.
In a transitioning D&O insurance market, transparency and compliance are key in helping to secure favourable insurance terms.
The contents of this publication are provided for general information only. Lockton arranges the insurance and is not the insurer. While the content contributors have taken reasonable care in compiling the information presented, we do not warrant that the information is correct. The contents of this publication are not intended as a legal commentary or advice and should not be relied on in that way. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action based on the content in this publication.
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