In an effort to reduce the instances of phoenixing, where the controllers of a company deliberately avoid paying liabilities by shutting down indebted companies and transferring assets to another company, a new initiative of director identification numbers (DINs) has been passed and will come into effect in the near future.
Currently, while the law requires that directors’ details be lodged with A SIC, it is not a requirement that the regulator verify the identity of directors, which could lead to fraudulent use of stolen identities as well as other illegal activities.
It is estimated that black economy and phoenixing activity in particular costs the economy between $2.9bn and $5.1bn annually. This includes creditors not receiving payment for goods and services, employees not receiving back wages or superannuation entitlements and the general loss of tax revenue for the government.
The new DIN will require all directors to confirm their identity and will be a unique identifier for each person who is a director or elects to become a director. The identifier is permanently linked to the individual even if they cease to be a director, in other words, the DIN is not intended to be re-issued to another person and each person will only be issued with one DIN.
It is intended that the DIN will provide traceability of a director’s relationships across companies, enabling better tracking of directors of failed companies and prevent the use of fictitious entities. This will allow regulators with ASIC and external administrators to investigate a director’s involvement in what may be repeated unlawful activity including illegal phoenixing.
In addition to illegal phoenixing, the new DIN regime will also offer other benefits such as simpler more effective tracking of directors and their corporate history to reduce time and cost for administrators and liquidators, improving overall efficiency of the insolvency process, improve data integrity and security. Under the new regime, any individual wishing to become a director must apply for a DIN with the appropriate registrar before they are appointed as a director.
However, under certain circumstances, such as a transitional time period, there will be additional time allowed for directors or potential directors to apply for the DIN. For example, during the first 12 months of the operation of the DIN regime, an individual that is appointed as a director has an additional 28 days to apply for a DIN. If a DIN is not applied for within the applicable timeframe, civil and criminal penalties may be imposed on directors.
Further, any conduct that would be considered to undermine the DIN requirement will also be subject to civil and criminal penalties (eg deliberately providing false identity information, intentionally providing a false DIN, or intentionally applying for multiple DINs).
For current directors, don’t fret, there appears to plenty of time to get ready for this change. The legislation is currently not set to commence for nearly 2 years, although an earlier date may be proclaimed by the Governor-General so watch this space.