The Australian Government has proposed a new system to allocate a unique identifier numbers to each Australian director in an effort to clamp down on illegal phoenixing.
On 1 October 2018, the Australian Government released the Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2018 for public consultation. This Bill introduces a new regime featuring a Director Identification Number (DIN) which will be assigned to each director, with the aim of better tracking directors and tackling the practice of illegal phoenixing.
What's prompted this new legislation?
The DIN has been in public discussion since 2015 as part of a comprehensive package of reforms to address illegal phoenixing. Phoenixing is the act of stripping and transferring assets from one company to another by individuals or entities to avoid paying liabilities to creditors and employees and is estimated to cost the Australian economy up to A$5.1 billion annually. One of the measures proposed in this package of reforms is the introduction of a unique identifier for each person who consents to be a director.
The aim is that the DIN will operate across Government agencies and databases, allowing regulators to better map the relationships between individuals and entities, track directors associated with failed companies and flag higher-risk individuals and entities. Reducing phoenix activity will lead to flow-on benefits by offering greater data integrity and security, as well as accountability and efficiency in identifying and prosecuting director-related offences that threaten to undermine Australian businesses.
Of course, it is important to recognise that the introduction of the DIN is merely one measure that the Government is taking to crack down on illegal phoenixing. The Government has previously alluded to other measures such as specific phoenixing offences, a dedicated phoenix hotline, and stronger powers for the ATO, and so it remains to be seen whether any of these measures will be implemented to further deter and disrupt the core behaviours of phoenix operators.
Overview of the proposed Director Identification Number system
Who does this apply to?
"Eligible officers" of a "registered body" are required to obtain a DIN. An "eligible officer" includes appointed directors and acting alternate directors, but not de facto or shadow directors. A "registered body" includes a company registered under the Corporations Act 2001 (Cth) or Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act). In addition, any person who is not currently a director of a registered company but intends to become a director within 12 months may also apply for a DIN.
What do I or my company need to do?
Newly appointed directors must apply for a DIN within 28 days of being appointed a director, unless they are provided an exemption or extension by the Registrar.
Directors who are already in office will be given a transitional period of 15 months to apply for a DIN from the date the new law comes in force.
Directors must also apply for a DIN within 28 days if directed to do so by the Registrar, for example where the director's existing DIN has been lost or corrupted.
Who is in charge of administering this?
The Registrar will have powers to administer the new DIN requirements. This includes powers to issue DINs, keep necessary records, cancel and reissue DINs and determine how directors are to establish their identity. The remaining functions and powers are administered by ASIC and the Office of the Registrar of Indigenous Corporations, as relevant.
What happens if I don't sign up in time?
There are civil and criminal penalties for breaching various DIN requirements.
For example, the maximum criminal penalty for failing to apply for a DIN within 28 days of appointment is 60 penalty units (strict liability) and the maximum civil penalty is A$200,000 (individual) or A$1,000,000 (body corporate). Other offences which would attract these penalties include failing to apply for a DIN if directed by the Registrar, applying for additional DINs, mispresenting a DIN and accessorial liability for being involved in any of the above. These penalties are broadly consistent with current penalties applicable to comparable provisions in the Corporations Act and CATSI Act.
Failure to apply for a DIN can also be subject to an infringement notice. This is primarily to deal with minor breaches, so as to avoid the significant delay and cost associated with court action. There is however a defence available if the director was appointed without their knowledge, for example, due to identity theft or forgery. The requirement to apply for a DIN is regardless of the length of appointment to ensure that it also captures any person stepping into the role of a director for short periods at critical times.
The legislation proposed is a positive step towards acting as a deterrent to illegal phoenixing, allowing Australia's regulatory regime to better adapt to technological disruption and combat crime and fraud in the economy. Companies should also prepare for the legislation's enactment, for example by monitoring the progress of the Bill, and informing its directors of the upcoming introduction of the DIN.