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Anybody home? The importance of checking whether your corporate clients have been deregistered

ASIC reregistered companies

 

There is no express obligation for a financial services provider to monitor its client lists for deregistered companies.  However, the recent case of ASIC v Westpac [2022] FCA 515 has demonstrated the importance of monitoring whether your corporate clients have been deregistered.  The case suggests that licensees that fail to have adequate processes and controls in place to identify deregistered company accounts, particularly when continuing to charge fees, may contravene the obligation to do all things necessary to provide financial services efficiently, honestly and fairly.

Consequences of deregistering a company

A company ceases to exist on deregistration.  Section 601AD of the Corporations Act 2001 (Cth) (‘Corporations Act’) states that, upon deregistration of a company, all property of the company (other than property held by the company on trust) vests in ASIC.  All property held on trust immediately before deregistration vests in the Commonwealth.  ASIC then has the power of an owner over any property vested in it.

The ASIC v Westpac case suggests that financial service providers whose clients have become deregistered must ensure their systems and services are used in a manner that is consistent with section 601AD(2).  In other words, licensees must be careful to implement and maintain procedures and controls to identify deregistered corporate clients and ensure that funds are not diverted to entities other than the rightful owner – ASIC or the Commonwealth.

The ASIC v Westpac case indicates that this is part of a licensee’s obligation to do all things necessary to provide financial services efficiently, honestly and fairly under section 912A of the Corporations Act.

What happened in ASIC v Westpac?

On 22 April 2022, the Federal Court of Australia ordered Westpac to pay $20 million in civil penalties for contravening the obligation to do all things necessary to provide financial services efficiently, honestly and fairly.

The Court made this finding on the basis that Westpac did not have processes or controls in place to identify deregistered company bank accounts and manage these accounts in a manner consistent with the Corporations Act and ASIC guidance.

The Court noted that Westpac did not place blocks on withdrawals from deregistered company accounts and, where blocks had been put in place, Westpac did not have adequate controls in place to prevent staff from removing blocks on withdrawals.  As a result, approximately 21,000 deregistered company accounts remained open, with funds available to be transferred to various third parties when those funds, in fact, belonged to ASIC and the Commonwealth.

The Court held that Westpac benefited in that it continued to charge fees and receive interest, overdraft and loan repayments from funds held in deregistered company accounts when those funds, in fact, vested in ASIC and the Commonwealth.

Despite knowing about the issues with deregistered company accounts, Westpac did not implement ongoing processes or controls to identify and manage these accounts consistently with the law until at least two years later.

Who does this affect?

Although these proceedings were brought against a bank, the principles are likely to apply to financial service providers generally that provide services to corporate clients.

In particular, if a licensee continues to charge fees to a deregistered company for financial advice or other services, it may be at risk of contravening its general conduct obligations by failing to deal with funds consistent with the Corporations Act and ASIC guidance.  This conduct could also amount to charging ‘fees for no service’, given that a company ceases to exist on deregistration.

For example, if a stockbroker sells shares previously held by a deregistered company on the instructions of a former director, it would be allowing property that belongs to ASIC or the Commonwealth to be dealt with in a manner inconsistent with the Corporations Act.  Further, any fees or commission earned from this trading activity are likely to be funds vested in ASIC or the Commonwealth.

What if you have dealt with funds that belonged to ASIC?

You can breach your general conduct obligations even if you were unaware of your corporate clients having been deregistered.

If you have inadvertently dealt with funds that had vested in ASIC or the Commonwealth, you should seek advice.  It is important to identify the root cause of the breach and implement systems and processes to ensure the issue is addressed in a timely manner.  You should also consider a remediation plan, including remitting funds to ASIC or the Commonwealth where necessary, and assess whether the breach must be reported to ASIC.

In the ASIC v Westpac case, the Court paid little attention to whether Westpac had intentionally diverted funds from ASIC.  The Court found that Westpac had contravened its obligations by knowing that it did not have adequate controls in place to identify deregistered company accounts and prevent the withdrawal of funds from those accounts, and then failing to implement adequate controls in a timely manner.

Practical measures to take to protect your business

If you are a financial services licensee with corporate clients, you should:

  • Ensure you have adequate processes and systems in place to identify when a corporate client has been deregistered and manage their account consistent with the Corporations Act and ASIC Guidance;
  • Undertake regular checks for de-registered corporate client accounts; and
  • Implement, in a timely manner, adequate controls to ensure that further activities are suspended and funds or other property are blocked from being withdrawn. You should also investigate whether remaining funds or property must be remitted to ASIC or the Commonwealth.

Holley Nethercote Lawyers have extensive knowledge and experience in advising on financial services licensee obligations.  Please contact us at [email protected] if you wish to obtain specific advice about your obligations.  We also have a Reporting Obligations document template available on the HN Hub for businesses that require an updated breach reporting policy, or that want to reference it against their policy.

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Author: Ellie Khor (Lawyer) and Katherine Temple (Senior Associate)