Illegal phoenixing activity appears when the controllers of a company deliberately avoid paying liabilities by closing an indebted company and transferring the company’s assets to another company. That is, the business continues under the guise of a new company but the debts of the old company remain unpaid.
This situation has a significant impact on creditors who fail to receive payments for their goods and services, employees who lose their wages and superannuation and leave entitlements and the Australian society by taxes not being paid. Illegal phoenixing activity costs the Australian economy between approximately $2.9 billion and $5.1 billion annually.
The Federal Government has introduced measure to penalise illegal phoenix activities and protect the victims of this fraudulent behavior. One of the latest initiatives, which was introduced to the House of Representatives last December, is Director Identification Number (DIN).
Under the proposed law, each person who agrees to be a director will have to confirm their identity and receive a unique identifier. The person will keep that unique identifier permanently, even if they cease to be a director. The person must apply for the identifier before they are appointed a director unless the period is extended by the regulations or unless they are granted an exemption or extension by the registrar. The extended period may be determined by the registrar specifying the number of days a director has to apply for a DIN. If the number of days is not specified in the direction from the registrar, the prescribed period is 28 days from the date the direction is given to the director. The DIN will supply traceability of a director’s relationships across companies, enabling better tracking of directors of failed companies and will prevent the use of fictious identities.
Currently, the identity of a director is not required to be checked, despite the requirement that the directors’ details must be lodged with ASIC. The new requirement will help with better detection, deterrence and disruption to phoenixing and aims to improve the integrity of corporate data maintained by the registrar.
The proposed changes will also offer more effective tracking of directors and their corporate history, which will reduce time and costs for administrators and liquidators. Directors will be identifiable by a number rather than other more personally identifiable details thus improving data integrity and security.
Directors who fail to apply for a DIN within the applicable timeframe will be subject to civil and criminal penalties. There are also criminal penalties for deliberately supplying false identity information to the registrar, intentionally supplying a false DIN to a Government body or relevant body corporate, or intentionally applying for multiple DINs.
The proposed changes contain transitional provisions that apply in relation to a person who is appointed as a director at the time the new requirement starts to apply. In addition, during the first 12 months of the operation of the new requirement, a person who is appointed as a director will have an additional 28 days to apply for a DIN. After the end of this transitional period, the standard rule will apply – a director will have to apply for a DIN prior to being appointed as a director or within any later period as may be allowed by the regulations or the registrar.
According to the proposed changes, a person who is a director immediately before the application day must apply for a DIN within a period specified by a Minister’s regulation. Until this period is specified, there is no requirement for current directors to apply for a DIN.