Will DINs Burn Illegal Phoenix Activity? By William Buck on 03/12/18 To combat a wide-range of illegal activities, the Australian Government announced targeted Black Economy measures in the Federal Budget 2018. One of the measures – aimed at reducing the costs to the economy due to illegal Phoenix activity and capturing repeat director failures – is the introduction of a Director Identification Number (DIN). These measures will impact current and future directors, but the biggest question remains – will DINs burn illegal phoenixing? What is Illegal Phoenixing? Illegal phoenix activity involves the process of deliberately liquidating a company to defeat creditors. It involves stripping assets of a company and transferring them at minimal consideration to a new entity for the purpose of carrying on new business. Common warning signs of illegal phoenix activity for insolvency practitioners include unpaid superannuation, unpaid employee entitlements or a recently completed sale of the company’s business and assets. Other features are significant debt to the Australian Taxation Office, similar business name in new company and pre-appointment sale of assets to a related party. Currently, there is no educational or previous experience required to become a director – making it rife for criminal advantage. The numbers then, are not surprising: Directors with two company failures or more, account for $1.6 billion of outstanding employee entitlements over the past 10 years. Furthermore, Illegal phoenix activity is estimated to cost the Australian Economy between $2.9 billion and $5.1 billion annually. What are Director Identification Numbers? The Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2018 sets out to introduce a Director Identification Number (“DIN”) requirement. This would mean that new and all existing Company directors would be required to have their personal identification verified by the Commonwealth body that is appointed to administer the registry. For instance, the registrar could require an applicant to provide 100 points of identification and if verified provided with a DIN. What are the benefits of Director Identification Numbers? A DIN will allow Insolvency practitioners to investigate a director’s corporate history in a more effective manner, which may assist to identify repeated unlawful phoenix activity. Directors would be identifiable by number which can make it easier for the Australian Securities and Investments Commission (“ASIC”) to enforce director banning by eliminating the ability to use aliases to circumnavigate the system. This would reduce the time and cost of insolvency practitioners and improve the overall efficiency of the insolvency process. This would allow for insolvency practitioners to provide ASIC with comprehensive assessments of relevant facts regarding directors. Other common manipulations the DIN will stamp out, are directors changing birth details, spelling of name, and birth places to try and create confusion. There is existing precedence for the proposed law around the world as India introduced DINs in 2006. How would this would affect new directors? Newly appointed directors would be required to apply for a DIN within 28 days of appointment unless provided with an exemption or an extension of time by the registrar. The registrar would be provided with a wide range of powers which would include the ability to remove DINs and exempt an individual from becoming an officer of a company. How would this would affect existing directors? Existing directors will have 15 months to apply for a DIN from the date that the new requirement commences. How could the reform be improved? While the reform will help burn illegal phoenixing, William Buck have identified the following deficiencies in the proposed reform: Unknown what information will be publicly available; however, it has been floated that the Australian Taxation Office may be able to name and shame offenders in the future (much like the current ability to disclose outstanding arrears/defaults). Fails to capture de facto or shadow directors who can sometimes be the agent pulling the strings of an illegal phoenix in the background. Australia has high costs to obtain information (more than double the global average) which will deter some people from exercising the ability to access information on directors. No new powers are being granted to ASIC to punish directors for breaches of duties. Therefore, in the absence of the good behaviour bond system, ASIC and liquidators have limited ability (aside from costly legal proceedings) to use financial consequences as leverage to promote responsible corporate behaviour. What next? It will be important to monitor if, and when this law is implemented as there would be new civil and criminal penalties for directors failing to apply for a DIN in the applicable timeframe, that you or your clients should be aware of. There will also be criminal penalties for deliberately providing false identification information to the registrar, intentionally providing false DIN to a Government body or relevant body corporate, and intentionally applying for multiple DINs. If you need any guidance or assistance with a corporate restructuring, insolvency or a personal bankruptcy matter, please contact one of the William Buck Business Recovery Specialists.