The DIN is coming in! Australia’s introduction of a Director Identification Number (DIN) regime

Scrutiny of corporate governance and the role of directors is set to continue throughout 2020 and into 2021 as the aftermath of the Banking Royal Commission and economic impact of COVID-19 play out. Against that background, Australian directors and corporations now face a significant new administrative burden as the long-time-coming registry modernisation legislation passed without amendment on 12 June 2020. This will bring in a new Director Identification Number (DIN) regime.

Key takeaways

• A new Commonwealth Business Registry will be established as a contemporary centralised business register.
• Every director would need to register to receive a permanent, unique director identification number, 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 new DIN regime will commence on a day/days to be fixed by proclamation (or within two years from the day the Act receives Assent) – which seems likely to be on the day the Minister appoints a registrar to administer the new DIN requirements (possibly early 2021).
• As soon as the regime becomes operation, a person who is appointed a director within the first 12 months of the new regime’s operation will have 28 days to apply for a DIN. However after this transitional period ends, a director must apply for a DIN prior to being appointed as a director or within any later period as may be allowed by registrar or the regulations.

The DIN regime is intended to further the 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. This is not a straightforward legislative change and, given that attempts to introduce this legislation failed before and the Government is currently fighting the impacts of the COVID-19 pandemic, the significance of this change should not be underestimated.

Notwithstanding the above, there are some real practical hurdles that lie ahead with the potential to delay implementation particularly with the government distracted by the unprecedented challenges posed by coronavirus.

Partner Edward Martin and Associate Benjamin Bronzon explore these impacts.

Overview

On 4 December 2019, the Federal Government reintroduced the following five bills: Commonwealth Registers Bill 2019; Treasury Laws Amendment (registries Modernisation and Other Measures) Bill 2019; Business Names Registration (Fees) Amendment (Registries Modernisation) Bill 2019; Corporations (Fees) Amendment (registries Modernisation) Bill 2019; and National Consumer Credit Protection (Fees) Amendment (registries Modernisation) Bill 2019 (Bills).

The Bills were introduced to do the following:

• Introduce a single business register to improve and streamline how businesses engage with the Australian Government.
• Provide a legal framework for the introduction of the DIN, which is a unique identifier that a director would keep forever – this DIN requirement can be found at Schedule 2 of the Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2019.
• 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’. In this regard, 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 34 business registers into one platform, in order to provide for more transparency of relationships between directors and multiple companies.

On 12 June 2020, both houses passed the Bills to create the Commonwealth Registers Act 2019.

As touched upon above, the purpose of this legislation is to combat phoenixing (i.e. controllers of a company deliberately avoiding 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

Prior to this legislation, directors could have had 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 this new legislation:

• 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.
• The criminal and civil penalties for contravention of DIN requirements are broadly consistent with current penalties applicable to comparable provisions in the Corporations Act 2001 and the Corporations (Aboriginal and Torres Strait Islander) Act 2006 respectively. By way of example, the criminal penalties for a director applying for multiple DINs or misrepresenting a DIN could be 12 months imprisonment.

DIN regime administration

The new regime will be administered by a registrar – which will be an existing Commonwealth body appointed by the relevant minister.

The register will have powers and functions around data standards including the collection, maintenance and disclosure of data. The explanatory memorandum sets out that a registrar will be able to create data standards in ways that increases the efficiency of registry services.

The registrar will also be required to issue a director with a DIN, where the registrar is satisfied of the identity of the director. The legislation will give the registrar power to administrator DINs including recording, cancelling and re-issuing a DIN.

Despite being supportive of the proposed DIN regime, the Australian Institute of Company Directors (AICD) did express some concerns in relation to some aspects of the regime such as privacy considerations such that it is presently unknown whether the new register will sufficiently cater for director privacy, cyber-security and personal safety.

These concerns may be addressed by the Minister and/or registrar prior to the introduction of the new register.

The registrar will also regulate the disclosure of ‘protected information’ noting that the maximum penalty for disclosing registry information without registrar authorisation is imprisonment for two years. In this regard, the legislation will also allow a person to apply to the registrar to stop ‘inappropriate disclosure’ of registry information that relates to that person.

The Administrative Appeals Tribunal will have jurisdiction to merit review decisions made by the registrar under the regime.

Regulatory considerations

ASIC’s regulatory functions and powers are not intended to be impacted by this new legislation as the explanatory memorandum that only the ‘registry functions’ are being transferred to the register such as the information relating to registry information (for example, information contained in DIN applications, etc.). This means present regulators’ interactions with Australian businesses including how information flows between regulators and businesses should be unaffected.

DIN obligations

Under the DIN regime, directors will be required to apply for a DIN prior to being appointed as a director or be required to apply for a DIN within a set period of time as directed by the registrar. The legislation includes criminal and civil penalties for applying for multiple DINs or misrepresenting a DIN.

As we understand, the legislation will mean that a director will keep this DIN identifier. So even if he or she ceases to be a director, the same identifier will not be re-issued to any other person.

Other practical considerations

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.

Further, the transition period for existing directors to obtain a DIN may not be sufficient to allow for the significant 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.

So when is the DIN coming in?

The Australian Financial Review reported an expectation that the DIN will implemented in the first half of 2021[2] and indications earlier this year were that more than $60 million has been set aside to 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.

However, there are various practical challenges affecting ‘when’.

For all the strong reasons for the Government to introduce the DIN, the practical reality is that combining the Australian Business Register administered by the Australian Taxation Office and 34 ASIC business registers on 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 appears to be mindful that the implementation of the DIN will need to work 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 in the first half of 2021 might be aspirational but we do know that it will be operation by 2022.

It will be important for companies as well as directors to stay on top of these changes and to prepare processes to ensure compliance before the legislation takes effect.

Authored by:

Edward Martin, Partner
Benjamin Bronzon, Associate

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

[2] Australian Financial Review, Directors to get ID number ‘for life’ to thwart phoenixing, T Burton (16 June 2020) <https://www.afr.com/politics/federal/directors-to-get-id-number-for-life-to-thwart-phoenixing-20200612-p55218>