New and improved or simply new? – Director Identification Numbers

Insolvency practitioners have been anticipating the introduction of unique Director Identification Numbers (“DIN”) for many years now. With the passing of the Treasury Law Amendment (Registries Modernisation and Other Measures) Bill 2019 (Cth) in late June 2020, which made amendments to the Corporations Act 2001(Cth), we are one step closer to the implementation of the new scheme. Once operation of the DIN scheme commences, insolvency practitioners can expect to gain an extra tool for tracking the relationships between directors and corporate entities.

The DIN scheme forms part of the Commonwealth Government’s ongoing attempts to investigate, deter, penalise and prosecute misconduct relating to directorship and illegal phoenix activity. Phoenix activity has been estimated to cost the Australian economy between approximately $2.9 billion and $5.1 billion annually (according to the Explanatory Memorandum to the Bill).

The mechanics are currently uncertain and it is unknown how effective DIN will work in practice to deter unlawful activity. Directors will be obliged to verify their identity and apply for a unique DIN to be recorded on a register. The new law relies on hefty civil and criminal penalties to motivate compliance, but it is likely that warnings will be issued at the first instance by the Registrar (of the regulatory body which is yet to be established/determined).

There is understandable doubt on whether the scheme will be effective in practice as shadow and de facto directors, who would not require a DIN, could continue to work outside the attention of the authorities and would likely continue to move between companies engaging in illegal practices.

Not only does this failure mean the scheme may not properly assist with the tracking of criminal actors through positions of directorship, but it may encourage those individuals who purposefully seek to undertake illegal activity to step further back into positions of obscurity to avoid attention under the new system.

The additional red tape of requiring new directors to obtain DIN prior to their appointment may reduce the speed between transitions of control at the helms of a company and at which a retiring director may be relieved of their director duties. This along with the other recent changes that prohibit a company from being left director-less may see ‘director runs’ from faltering companies or may discourage individuals from accepting directorship for fear of being the last man or woman left on a sinking ship. With shrewd directors being the first to retire, a struggling company may be left with the least attentive or least capable director at the end of its life, which is unlikely to yield many benefits to the company’s creditors. As such, the recent legal reforms may not necessarily serve the intended purpose of encouraging accountability.

As for the usefulness of DIN from the perspective of a liquidator’s investigations, there are already tools in place to track directors using the ASIC database. It remains to be seen whether the directors of a company in liquidation would be required to apply for DIN during the transitional phase and whether the records of deregistered companies will be updated to reflect DIN.

Should you have any queries regarding the rollout of the DIN system or the implications for you, Gavin Parsons and Associates can assist you. Please contact us today on (02) 9262 4471.

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Date posted: 2020-08-03