Australian company directors will soon be identified by distinct and permanent 'director identification numbers' (DINs), under the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020 (Cth) passed by the Federal parliament on 12 June 2020.
- Directors must have their identity verified and apply for a DIN (this includes alternate directors acting as directors, and other officers such as company secretaries as might be prescribed by regulations).
- Directors are only permitted to have one DIN, even if they are directors or officers of multiple companies.
- The scheme applies to Australian body corporates, Aboriginal and Torres Strait Islander corporations, and registered foreign companies.
- Having been first announced in September 2017, the DIN has been in development for some time, and is part of a wider regulatory strategy to deter and penalise illegal phoenix activity.
The DIN is designed to reduce the likelihood of directors being able to hide behind pseudonyms or use multiple variations of their names (i.e. nicknames, middle names or minor variations of their names) to appear as a different person in respect of different company directorships.
In addition, the DIN is intended to assist companies appointing directors to have complete visibility into the director's corporate history.
Once the scheme is fully in place (ie. after the transitional period has passed) a director will not be able to hold a directorship without first securing a DIN. We can see this becoming an operational issue if a company wishes to appoint a director quickly and that director does not yet have a DIN. A work around could be that candidates maintain a DIN in advance; however that would be a matter for the relevant individual.
For companies, we expect that the baseline will be to update their onboarding processes so that appointment paperwork and verifications are undertaken as soon as possible for new directors who have not previously held a DIN. We also expect that under shareholders agreements the ability to secure a DIN will be a condition of holding a directorship (as a matter of contract).
What this means for the timing of registering a new company with new directors who have never held DINs before is unclear.
Why is it being introduced?
The key driver behind the scheme is to reduce illegal "phoenixing" – where an existing business deliberately avoids paying its debts by transferring assets from an insolvent company to a new company.
Currently, ASIC doesn't take steps to verify the identity of company directors. The DIN system is designed to not only ensure that directors are who they say they are, but also allow traceability of directors to prevent the use of fictitious identities and allow tracking of a director's involvement with failed companies. It is intended to prevent directors from attempting to disassociate with a company by using variations of a name, and should increase public faith in ASIC's company registers.
A further benefit of the identity verification process involved in issuing DIN numbers is that it will also assist creditors, administrators and liquidators, as often it can be difficult to locate directors in insolvency matters.
The DIN scheme is part of a wider strategic overhaul of company regulation in Australia, including a modernisation and consolidation of various registers (some of which are hosted on technology that is over 30 years old).1 Together with other measures being introduced, the DIN will allow regulators to see connections between individuals and companies and detect phoenix activity more readily.
When will the scheme become operative, and when do directors need to apply?
The date for commencement of the scheme is not yet set. The first step is for the Minister to appoint an existing Commonwealth body to be the Registrar (which we expect will be ASIC). The regime will commence some time after this occurs (anticipated in the first half of 2021). However, given the huge impact of the global coronavirus pandemic, and the additional changes to ASIC's business register that are likely to commence at the same time, it's possible the projected commencement will be delayed.
After the start of the scheme:
- Existing company officers continuing in office will have a transitional or "grace" period to make an application for a DIN (this period is not yet known).
- New directors commencing office in the first 12 months of the scheme will have 28 days to apply for a DIN. After the first 12 months, any proposed new director will need to apply prior to their appointment (unless an exemption applies). The application can be made up to 12 months before the person intends to become a director.
Consequences of non-compliance
If a director fails to comply with the requirements to apply for and obtain a DIN, the Registrar can require a director to make such application and give a time period for compliance.
The Registrar will also have the ability to issue infringement notices, and civil and criminal penalties may apply. Penalties also apply for providing false information and applying for, or holding multiple DINs. A contravention is an offence of strict liability, and implicates anyone involved in the contravention.
The civil and criminal penalties for breaches of DIN requirements are generally consistent with existing penalties to comparable provisions in the Corporations Act 2001 (Cth).
We note that penalties for a director applying for multiple DINs or misrepresenting a DIN could be up to $21,000 and/or 12 months imprisonment.