The war against phoenixing

The latest advance by the Commonwealth Government in its war against phoenixing (see our articles in our 2018 Spring and Autumn Reports) is the introduction to Parliament of the Treasury laws Amendment (Registries Modernisation and Other Measures) Bill 2019 (the DIN Bill). The DIN Bill has been “bundled” with the Commonwealth Registers Bill 2019 (Registers Bill) for modernisation of Commonwealth registers (see our article).

Schedule 2 of the DIN Bill amends the Corporations Act 2010 and the Corporations (Aboriginal and Torres Straight Islander) Act 2006 to introduce a Director Identification Number (DIN). The Explanatory Memorandum for the Bill estimates the total cost of “phoenixing” to the Australian economy is between $2.9 billion and $5.1 billion annually.

What is a DIN?

The concept of a DIN was first announced by the government on 12 September 2017 and had been recommended by the Productivity Commission in its September 2015 final report into Business Set-up, Transfer and Closure. The Explanatory Memorandum explains the intent and operation of the DIN as follows:

The DIN will require all directors to confirm their identity and it will be a unique identifier for each person who consents to being a director. The person will keep that unique identifier permanently, even if they cease to be a director. It is not intended that a person’s DIN will ever be re-issued to someone else or that one person will ever be issued with more than one DIN (except in limited circumstances such as when a record is corrupted). As such, the DIN will provide traceability of a director’s relationships across companies, enabling better tracking of directors of failed companies and will prevent the use of fictitious identities. This will assist regulators and external administrators to investigate a director’s involvement in what may be repeated unlawful activity including illegal Phoenix activity.

Who is required to have a DIN?

The new law will require a DIN to be obtained by a person defined as an eligible officer. This will include directors and alternate directors and any other officer of a registered body prescribed by regulation. This could, potentially, include secretaries. This does not, at least initially, include a “de facto” or “shadow” director within the definition of “director” in Section 9 of the Corporations Act.

registered body includes a company, registered foreign company or registered Australian body or an Aboriginal and Torres Straight Islander corporation, which is registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006.

Applying for a DIN

The recording and administration of DINs will be undertaken by a registrar in accordance with the new registration regime to be established by the Registers Bill. The registrar will not be able to allocate a DIN to a person without an application by the person, but the registrar will be able to direct a person to apply for a DIN.

When the law is in operation and a registrar has been appointed, a person intending to be a director must apply for a DIN prior to an appointment as a director. In the first year, however, there will be an additional 28 days allowed within which to apply. For existing directors, a period to be specified by legislative instrument to be made by the Minister (understood to be 15 months) will be allowed for an application to be made.

Verification of identity

The Registers Bill requires the registrar to give a person who has applied a DIN if “the Registrar is satisfied that the person’s identity has been established.” The Registers Bill does not specify how a person’s identity is to be established, but does allow the registrar to request a person’s tax file number. The provision of a tax file number cannot be required, only requested, but the Explanatory Memorandum says that “The use of a person’s tax file number (when provided) is likely to reduce the time and cost involved in establishing a person’s identity to the benefit of both the applicant and the registrar”.

It would seem from this that the main way of establishing identity for an Australian resident will be provision of a tax file number. However, establishment of identity of directors who are not Australian residents, whether for Australian companies or registered foreign companies, could give rise to some complexities.

Compliance with the requirements for DINs

As may be anticipated, there are civil and criminal penalties which will apply to contraventions of the requirements for DINs, such as failure to apply prior to appointment, or if directed by the registrar, applying for multiple DINs, misrepresenting a DIN, or being an accessory to misrepresenting a DIN. All of these carry a civil penalty of $200,000.00 for a natural person and imprisonment for 12 months for applying for multiple DINs.

Status of the Bill

This Bill, like the Commonwealth Registers Bill with which it has been “bundled” lapsed on the dissolution of the Parliament prior to the recent election. As the Government has now been re-elected, and as this has long been on the Government’s agenda, it can be expected that the Bill will be reintroduced.

No doubt the new law will be well-publicised if and when it comes into effect, but all eligible officers and registered bodies that will be affected by the law should be alert to ensure that when it does come into effect DINs are obtained within the prescribed periods.