Coming soon – Director Identification Numbers And Their Major Flaw
In late June 2020, the Commonwealth Government passed the Treasury Law Amendment (Registries Modernisation and Other Measures) Bill 2019 (Cth) (“Bill”). Amongst other things, this Bill introduces a legal framework to introduce unique Director Identification Numbers (“DIN”) for each appointed director of a company and other registered bodies.
The introduction of DIN forms an important part of the Commonwealth Government’s recent initiatives to investigate, deter and penalise the controllers of companies who engage in illegal phoenix activity. This is a practice whereby an insolvent or unsuccessful company transfers its assets to another company, leaving its liabilities behind. Such activities adversely impact on the company’s creditors and employees, and the general public, who do not receive, respectively, payment for goods and services, their wages, and the benefit of lost revenue to the Government. Phoenix activity has been estimated to cost the Australian economy approximately $2.9 billion to $5.1 billion annually (according to the Explanatory Memorandum to the Bill).
The Bill amends the Corporations Act 2001 (Cth) and the Corporations (Aboriginal and Torres Strait Islander) Act 2006 to require directors to apply for a DIN. The director will keep that unique DIN permanently, which will enable regulators and external administrators to track and investigate the director’s relationships across companies within Australia, for example, whether the director has been involved in repeated illegal phoenix activity.
Powers will be conferred on the Registrar to administer DINs, including the power to issue DINs, keep records, cancel DINs and determine how directors will be required to verify their identity.
What do I have to do?
1. Directors must apply for a DIN prior to being appointed (there will be transitional arrangements for current directors);2. Directors must apply for a DIN upon being directed to by the Registrar;3. A person must not knowingly apply for multiple DINs;4. A person must not misrepresent a DIN to a government or registered body.
What does this mean?
The intention of the scheme is that by establishing the identity of directors, the integrity of Australian companies will improve, and regulatory bodies will have an additional tool to combat fraudulent and fictitious identities.
With all appointed and acting alternate directors being required to apply for a DIN regardless of the period or status of their directorship, these regulations will assist with including most directors in the register, including foreign directors. Despite this stated intent, the legislative regime will not initially require the registration of shadow, or de facto directors.
This limitation is a major flaw for the operation of this new system, as criminal actors may continue to act illegally and violate tax and corporate governance legislation from the relative anonymity of the position of de facto director.
Without covering de facto directors, the system of regulation operates as at best a partial solution to the issues it seeks to address by failing to monitor those directors most likely to engage in illegal practices, and encouraging any directors seeking to engage in such activity to operate in a de facto manner.
Further, there are concerns that without catching those most likely to engage in illegal activity, DIN may operate as further red tape for new directors unfamiliar with the system. This may further impose additional barriers to participation in the market, in addition to the privacy concerns such a register raises.
Beware of non-compliance
The law imposes civil and criminal penalties to any contraventions of the DIN regime, this includes failing to apply for a DIN. Warnings may first be sent as an infringement notice to avoid creating a backlog within the judicial system.
There will be penalties for the failing to comply with the following obligations:
1. Requirement to apply for a DIN prior to appointment, or within a period as allowed by regulations or the Registrar;2. Requirement to apply for a DIN if directed by the Registrar;3. Applying for any additional DINs;4. Misrepresenting a DIN;5. Involvement in a contravention of these obligations.
What should I do?
We recommend both companies and directors pay close attention to the rollout of this new regulatory system, and apply for a DIN where appropriate when provided the opportunity.
Should you have any queries regarding your obligations or commercial and business law issues more widely, Gavin Parsons and Associates can assist you. Please contact us today on (02) 9262 4471 or via email to our Managing Director at gavin@gpalaw.com.au.