Director Identification Numbers – ineffective against incompetent directors who may engage in illegal phoenix activity
As part of the crackdown on addressing illegal phoenix activity, the government has proposed the introduction of a Director Identification Number ("DIN") whereby a person who is currently a director or intends to become one will be assigned a unique identification number.

It is anticipated that this will allow regulators, in particular the Australian Securities and Investments Commission ("ASIC") to "interface with other government agencies and databases to allow regulators to map the relationships between individuals and entities and individuals and other people."

The government is anticipating that the DIN will be one measure, when combined with many other new measures to "deter and disrupt the core behaviours of phoenix operators, including non-directors such as facilitators and advisers".

We believe that the introduction of the DIN is a step in the right direction in  ensuring that ASIC has a good, and more importantly, accurate record of directors that can be traced to individual companies. However, we consider the issue of illegal phoenix activity will still remain (albeit possibly to a lesser degree) notwithstanding the implementation of DINs.
In our view, individuals who choose to sign on to the role of company director fall into one of four categories:

• Those with prior experience but without formal education or a professional background;
• Those who are educated and have a professional background but no prior experience;
• Those with prior experience, education and business acumen; and
• The ill equipped, uninformed and uninitiated.

With regard to the effectiveness of the DIN initiative in weeding out unsuitable directors, it is the final category that is of the most concern. Yes, there are bad directors who fall into the other categories. People who display conduct that is undesirable, do not adhere to the standard to which the Corporations Act requires and who seek to avoid or defeat the system. These will always exist in some form due to the self-interested nature of business and life in general, but the final category poses a different challenge to regulators. These individuals are effectively allowed to hold a position that the general public and common person perceives to have a level of standing in relation to a company, with a risk that they have none of the skills required or awareness of the legal obligations and duties that relate to the position they have taken and role they are agreeing to perform.

In order to be eligible to become a director an individual must:

• Be at least 18 years old; and
• Consent to taking on the role and responsibilities of becoming a director.
In addition to the above, in order to be a director an individual must not:
• Be an undischarged bankrupt
• Have entered into a personal insolvency agreement under the Bankruptcy Act 1966;
• Have been banned by ASIC or a court from managing corporations under the Corporations Act 2001.
• Have been convicted of various dishonesty related offences, such as fraud.

There is no requirement that a new director hold any qualifications, have any prior experience, complete any courses, pass any exams or even have a basic understanding of how a company operates. In fact, once an individual has turned 18 they can set up a company and begin incurring liabilities in that entity. These directors may be susceptible to unscrupulous 'advisers" or so called "pre-insolvency advisers" and the advice given, or simply activities undertaken by the director due to a lack of knowledge, could lead this type of director to 'illegally phoenix' their company without fully appreciating the implications.

Therefore, whilst the introduction of a DIN will assist in addressing some of the issues that the newly introduced changes seek to resolve, such as the verification of director information and the minimisation of duplicate records held by ASIC, it will do little to assist with ensuring only those that are competent and appropriate hold the role of director of a company.

Graeme Beattie
PartnerGraemeBeattie_Headshot.jpg
Worrells
Direct: 02 8844 1212
Phone: 02 8844 1200
Fax: 02 8844 1211
Graeme.Beattie@worrells.net.au

Jonathan Yee
Manager
Worrells

Phone: 02 8844 1200
Fax: 02 8844 1211
Jonathan.Yee@worrells.net.au

December 2017