Embattled Allco Financial Group has produced a remarkable back-flip in response to an ASX query regarding non-disclosure of material information to shareholders. On Tuesday, the ASX sent a letter to Allco, questioning why the company had not disclosed the fact that its bankers had the ability to review a $900 million debt if its market capitalisation fell below $2 billion.

On Tuesday, it was reported that Allco had “obtained legal advice, and that advice was clear that disclosure of the ‘review event’ wasn’t required. It [was] not a debt covenant, there had been no default on the debt, and no late payment of interest.”

That explanation was preposterous.

Listing Rule 3.1 requires that a company to inform the ASX of any event which a reasonable person believes may have a material effect on the share price. There is no doubt that a reasonable person would believe that the ability for bankers to send a company into administration would have a material effect on Allco’s share price. That materiality is even more so given the state of market.

After receiving the ASX letter, someone at Allco must have realised their initial excuse wouldn’t cut it. In a reply to the ASX last night, Allco confessed that the real reason it didn’t disclose the fact that its lenders had the ability to call in their loan was because it was confidential. The sage legal advice it had previously referred to was conveniently not mentioned.

The reason for all the confidentiality was because Allco was in “negotiations with the syndicate banks” and that:

Premature disclosure of AFG’s negotiations with its lenders in relation to the review event and its assessment of the prospective outcomes of those negotiations would have been unreasonable prejudicial to the outcome of those negotiations.

Listing Rule 3.1 has one enormous carve-out (which is a legal term for “excuse for not disclosing”). That is, Listing Rule 3.1A allows non-disclosure of material information if that information is confidential due to it relating to “an incomplete proposal or negotiation” or it is “insufficiently definite”.

Companies rely on the carve-out all the time. The intention of the carve-out is so that companies are able to consider a large transaction or event without alerting the market at a premature point (and also to avoid deluging shareholders with unnecessary information). However, relying on the confidentiality carve-out to avoid informing the market that for all practical purposes, a banking covenant has been breached is bending the law to such an extent that a yoga master would be proud.

Alan Kohler put is best in Business Spectator when he noted that:

Continuous disclosure more or less optional. Anything can be confidential or incomplete, and what a reasonable person may or may not expect is entirely up for grabs – especially in times of financial stress.

Allco has made a complete mockery of the continuous disclosure regime. It’s time for the ASX and ASIC to do something about it.