Is the DIN coming in? – An update on Australia’s proposed introduction of a Director Identification Number (DIN) regime

27 March 2020
Edward Martin, Partner, Sydney

Scrutiny of corporate governance and the role of directors is set to continue throughout 2020 as the aftermath of the banking royal commission continues to play out. Against that background, Australian directors and corporations may also be facing a significant new administrative burden if the registry modernisation legislation, which is currently before the Senate, is passed which will bring in a new Director Identification Number (DIN) regime.

Key takeaways

If the legislation passes:

  • Every director would need to register for a DIN, adding a new layer of red tape to existing operations and potentially delaying new board appointments going forward, if proper planning is not in place.
  • All directors and companies would have a keen interest in ensuring they comply with the new regime as criminal and civil penalties may apply for non-compliance.
  • The DIN regime should drive more efficient and cost-effective insolvencies.

The DIN regime, which seems to have bipartisan and ASIC support, is another further cause of combatting illegal phoenixing (which costs Australia between $2.9 billion and $5.1 billion annually[1]) but it would also have immediate impacts for all directors and companies.

Given that attempts to introduce this legislation have failed before, the question of whether the DIN is really coming in this time is ‘live’. There is good reason to believe that this is likely now a question of ‘when’ rather than ‘if’, but there are some real practical hurdles with the potential to delay implementation particularly with the government distracted by the unprecedented challenges posed by coronavirus.

Overview

On 4 December 2019, the Federal Government reintroduced[2] the Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2019 (Bill) to:

  • introduce a single business register to improve and streamline how businesses engage with the Australian Government; and
  • provide a legal framework for the introduction of the DIN, which is a unique identifier that a director would keep forever.

The purpose of the legislation is to combat phoenixing (i.e. controllers of a company deliberately avoid paying liabilities by shutting down an insolvent company and transferring its assets to another company) as the current law does not require ASIC to verify the identity of directors.

The regime also offers benefits for insolvency practitioners in terms providing for a more efficient and cost-effective process with director traceability. For example, a liquidator should have better success locating a director in order to obtain the company’s books and records for the purpose of their statutory investigations.

Impacts on business as usual for directors and companies

At present, directors may have multiple records within ASIC systems with minor variations of name (with a middle name), address and/or other personal details. Such incorrect information has hindered regulators, insolvency practitioners and credit providers.

Under the re-introduced Bill:

  • directors would need to apply for a DIN prior to their appointment, with a grace period for existing directors to continue in their current roles;
  • the resignation of a director will then only take effect from the date of notification and a director that fails to notify the ASIC of his or her resignation within 28 days can be held to account; and
  • there are proposed criminal and civil penalties for contravention of DIN requirements including fines up to $200,000 or imprisonment for up to 12 months.

Despite being supportive of the proposed DIN regime, the Australian Institute of Company Directors (AICD) expressed some concerns in relation to some aspects of the February 2019 iteration of the bill, which highlighted the sorts of practical challenges that companies and directors might face. These included:

  • The proposed 12-month transition period for existing directors to obtain a DIN may not be sufficient to allow for the massive communication and education effort that will be required to inform such existing and even potential directors across companies of all types and sectors of their obligations.
  • The cancellation of DINs after 12 months for inactive directors might be unreasonably short.
  • Privacy considerations such that it is presently unknown whether the new register will sufficiently cater for director privacy, cyber-security and personal safety.
  • Defendants should perhaps not carry the evidentiary burden for proving defences to offences for breaches of the requirement to apply for a DIN prior to appointment. For example, what if a director alleges they were appointed without their knowledge?

The December 2019 iteration of the Bill is only marginally different and does not appear to have dealt comprehensively with the issues raised in the course of 2019.

If introduced, the practicalities of the operation of the DIN regime could have real implications for common corporate governance matters, such as the appointment of a new director on an urgent basis. Companies will need to be very familiar with the potential challenges that the DIN regime might pose.

So, is the DIN coming in?

On 13 February 2020, the re-introduced bill took a big leap forward after the Bill was considered by the Parliamentary Joint Committee on Human Rights and subsequently passed the House of Representatives on its third reading. Therefore it seems to us that the question is now likely ‘when’ the DIN regime will come in as opposed to ‘if’. We say this because it seems like a sensible (perhaps necessary) step but also because:

  • the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 was passed by both Houses on 5 February 2020 and received Royal Assent on 17 February 2020. It is now the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2019 (Cth);
  • even with some reservations, interested parties seem to be speaking in favour of the DIN regime having regard to Australia’s push to combat illegal phoenixing; and
  • more than $60 million has been set aside begin developing the business register as part of the government’s ‘new deregulation agenda’ as set out in the 2019-20 mid-year economic and fiscal outlook.

That said, the Bill now sits with the Senate. Several aspects of the Bill are being considered by the Senate Standing Committee for the Scrutiny of Bills, in particular Scrutiny Digest 3 of 2020 of 26 February 2020 raised the following:

  • the disclosure framework be referred to a privacy impact assessment under the Privacy Act 1988 upon confirmation by the Assistant Treasurer;
  • further consideration of aspects of the delegation of the Registrar’s powers or functions;
  • a request for further advice from the Treasurer as to whether the Treasurer proposes to bring forward amendments to the Bill to limit the types of decisions that can be made by computers; and
  • further advice is sought from the Treasurer as to potentially reversing the evidential burden of proof for offence-specific defences.

These are important matters to address. However, they seem more likely to affect the timing, rather than whether the DIN regime will come in.

The introduction of the DIN seems like it should be an obvious step as it should:

  • Directly tackle phoenix activity and enable prosecution of culpable directors in Australia – this proposed director regime would also bring Australia in line with other countries, such as India.
  • Align with the government’s development of ‘a modern approach to managing Commonwealth registers to provide more user friendly and streamlined registry services’[3]. We expect that the DIN will fit neatly with an update of the 30-year-old technology used by government and the amalgamation of the current 32 business registers into one platform in order to provide for more transparency of relationships between directors and multiple companies.

A second reading debate of the Bill in the Senate has been moved, at which potential amendments to the Bill may be considered. Any amendments must be agreed to by both Houses before the Bill can proceed to presentation to the Governor-General for assent so there is still some way to run.

Practical challenge affecting ‘when’

For all the strong reasons for the government to introduce the DIN, the practical reality is that combining the Australian Business Register and 32 ASIC business registers in a contemporary technology platform with data relevant to an estimated 4 million companies will be a major project with significant challenges and could be a logistical nightmare.

ASIC Commissioner John Price described ASIC’s current systems as ‘expensive to maintain, hard to improve, and increasingly vulnerable to outages and service disruptions‘ in his keynote address at the Australian Institute of Credit Management 2019 National Conference. While the Commissioner (and ASIC) appear supportive of the DIN proposals for various counter phoenix reasons, ASIC is clearly mindful that the implementation of the DIN will need to work hand-in-hand with modernising the business register. That is easier said than done.

With the government facing unprecedented coronavirus-related challenges in 2020 the timeframe for implementing a DIN regime could well be quite long.

 

 


[1] Explanatory Memorandum 2016-2017-2018-2019, Treasury laws Amendment (Registries Modernisation and Other Measures) Bill 2019 (Cth) 39

[2] In February 2019, the government introduced the Treasury laws Amendment (Registries Modernisation and Other Measures) Bill 2019 with the Commonwealth Registers Bill 2019. These bills got as far as the House of Representatives before it lapsed at the dissolution of parliament in April 2019.

[3] Explanatory Memorandum 2019, Treasury laws Amendment (Registries Modernisation and Other Measures) Bill 2019 (Cth) 6

 


Authored by:

Edward Martin, Partner
Benjamin Bronzon, Associate

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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