Demise of the Phoenix – new identification requirements for directors

Key Points:
  • The Commonwealth Government has made legislative changes to combat illegal phoenixing activities by company directors.
  • The Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2019 (the Bill) received Royal Assent on 22 June 2020.
  • The Bill imposes a requirement for directors to obtain and hold a Director Identification Number (DIN), designed to trace director activity, prevent fraud and encourage good corporate conduct.

In recent years, the Commonwealth Government has made efforts to deter and penalise phoenix activity in order to protect those who are negatively affected.  One of those efforts is the DIN requirement for directors, which is poised to disrupt phoenixing and deliver additional benefits.

What is ‘phoenixing’?

Illegal phoenixing occurs when a company is deliberately liquidated in order to avoid its creditors and other liabilities.  Its assets are transferred to another company – the new company ‘rises from the ashes’ of the old+ and continues the business.  This impacts on creditors, goods and services providers, employees and the general public.  Phoenixing is estimated to cost the Australian economy between $2.9 billion and $5.1 billion annually.

The DIN regime

DINs were first recommended by the Productivity Commission in its 2015 report into Business Set-up, Transfer and Closure, noting a significant benefit to the community as a whole. The Bill brings in the DIN regime, along with other registry modernisation measures.

Schedule 2 of the Bill amends the Corporations Act 2001 (Cth) and the Corporations (Aboriginal and Torres Strait Islander) Act 2006.  Accordingly, each person who consents to be a director is required to obtain and hold a DIN.

A DIN is a unique identification number designed to trace director activity.  The DIN will require all company directors to confirm their identity – this verification is not currently required by the Australian Securities & Investments Commission (ASIC).  Directors will keep the unique identifier permanently, even if they cease to be a director.

DINs will be administered by a registrar appointed by the Minister. Civil and criminal penalties apply for non-compliance with DIN obligations, including failure to apply within the applicable timeframes.

Benefits – tackling phoenixing and beyond

Ultimately, the new law is intended to encourage good corporate conduct. It is one of several measures to limit the opportunities for companies and directors to engage in illegal phoenixing activities.

The DIN provides for traceability of a director’s activity and relationships across companies.  Directors of failed companies can be tracked more effectively.

The verification component prevents identity fraud and will prevent a single director from holding multiple records (for example, through minor variations in names, etc).  These improvements are critical to regulation and will hopefully drive more efficient insolvencies by reducing time and cost for administrators and liquidators.  In addition, it may assist in detecting a director’s involvement in what may be repeated unlawful activity, including illegal phoenixing.

In addition, the switch to DINs improves information security, as it allows directors to be identified by a number rather than by other more personally identifiable or sensitive information.

What does this mean for corporations?

An ‘eligible officer’, defined as a director, alternate director or any other officer of a registered body, will be required to apply for a DIN prior to being appointed, or within a set period of time as directed.  Eligible officers will be subjected to a 100-point identity verification process with ASIC – identification requirements will be determined by the registrar.  A DIN will be issued to the director once their identity is established.

All directors will require a DIN including directors of charities and other not-for-profit companies that are regulated by the Australian Charities and Not-for-profit Commission.

Existing directors will be allowed a transitional period in which to apply for a DIN (which will be specified by a legislative instrument made by the Minister). Until this period is specified, there is no requirement on such directors to apply for a DIN.

The penalties for non-compliance essentially align with current penalties under the Corporations Act 2001 (Cth). As previously mentioned, it is an offence to apply for multiple DINs or misrepresent a DIN – these carry a maximum criminal penalty of 12 months imprisonment, or a $200,000 civil liability.

The new requirement commences on a date set by proclamation, and no later than 24 months from the date of Royal Assent.  We expect implementation in early 2021, at which point the Minister will appoint a registrar to administer the new regime.

Post by Hicksons Partner, John Kell, and Solicitor, Aidan Allen.

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