A Detailed Look At Director ID’s

On 12 September 2017, the then Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, announced a package of proposed reforms aimed at deterring and disrupting the core behaviours of phoenix operators. Relevantly, the focal point of this package was the concept of director identification numbers (director IDs).

In the more than three and a half years that have followed this announcement, the Federal Government has been working towards the introduction of director IDs and ironing out many of the associated challenges and complexities. Whilst June 2020 saw this concept transform into law, it was not until April of this year that its operation commenced.

Accordingly, the purpose of this article is to provide an overview of the newly operative director ID regime, including a detailed look at the tranched approach to its application.

What is phoenixing?

As noted at the start of this article, director IDs were first formulated as a potential response to illegal phoenix activity.

According to ASIC, illegal phoenix activity occurs when a new company is created to continue the business of an existing company that has been deliberately liquidated to avoid paying outstanding debts, including taxes, creditors and employee entitlements. Usually, phoenixing involves a company director transferring the assets of an existing company to a new company without paying true or market value, and therefore leaving debts with the old company. Once the assets have been transferred, the old company is then placed in liquidation. When the liquidator is appointed, there are no assets of the old company to sell and therefore creditors cannot be paid. Once the assets are transferred to the new company, the directors continue to operate the business.

As noted by Treasury, this kind of activity “impacts on creditors who fail to receive payments for goods and services, employees through lost wages and/or superannuation entitlements and the general public through lost revenue to the Government”.

In fact, the Australian Government has stated that the total cost of phoenixing to the Australian economy is estimated to be between $2.9 billion and $5.1 billion annually.

What is a director ID?

At its simplest, a director ID is a unique identifier that a person who consents to being a director will retain forever.

According to the ACNC, a director ID will provide traceability of a director’s relationships over time, and across companies, to help regulators and external administrators investigate a director’s involvement in unlawful activities, including illegal phoenix activity.

Treasury has also stated that director ID’s will help prevent the appointment of fictitious directors.

Accordingly, this unique identifier is aimed at promoting good corporate conduct and assisting regulators to deter, detect and address unlawful behaviour.

From a practical point of view, a person will keep their unique identifier permanently, even if they cease to be a director. It is not intended that a person’s director ID will ever be re-issued to someone else or that a person will ever be issued with more than one director ID (except in limited circumstances, such as if a record is corrupted).

The director ID system is to be administered by the Commonwealth Registrar, which will operate under a separate statutory function of the ATO.

What are the advantages of the director ID regime?

The director ID regime has been described by various parties as having multiple benefits, over and above that of simply combating phoenixing.

Firstly, although at present the law requires that director details be lodged with the relevant regulator (ASIC, ACNC etc.), it has not required regulators to verify the identity of directors. In contrast, in order to be issued with a director ID, a person will need to confirm their identity and this will be verified by the Commonwealth Registrar. It is therefore hoped that this verification aspect will improve the integrity of regulator data (via the removal of fictitious directors) and assist with general enforcement action where necessary.

In addition, the Government has noted that “simpler more effective tracking of directors and their corporate history will reduce time and cost for administrators and liquidators, thereby improving the efficiency of the insolvency process”.

It has also been posited that director IDs will improve data integrity and security by providing for the identification of directors on the basis of their unique identifier, rather than on the basis of more personally identifiable information.

How will director ID’s wok?

Under the new regime, a person seeking appointment as a director of a body corporate that is registered under the Corporations Act 2001 (Cth) (the Corporations Act) or the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (the CATSI Act) will be required to apply to the Commonwealth Registrar for a director ID.

Depending on the timing of the person’s appointment, they will ordinarily be required to apply for the ID before they are appointed as a director. Further details on this are set out below.

It should be noted that the application process requires that directors provide their names, former names, addresses, former addresses, contact details and date of birth. New directors will also need to prove their identity using key identifying documents.

Following this, the Registrar must then provide the person with a director ID if is satisfied that the persons’ identity has been validly established.

Additional information on what information may be requested and collected in an application for a director ID can be found in legislative instrument Corporations Director Identification Number Data Standard 2021. This instrument includes information on:

• what information may be requested and collected
• how such information may be collected
• how an application is to be made
• when information is to be given to the Registrar
• how the Registrar uses information to authenticate, verify or validate information
• how information held by the Registrar is to be recorded and stored

Another legislative instrument has also been recently introduced in order to authorise the disclosure of protected information (director IDs) to government entities, Public Governance, Performance and Accountability (PGPA) bodies, courts and tribunals so as to enable these entities to exercise their functions or powers.

Significant civil and criminal penalties will apply to directors that fail to apply for a director ID within the applicable timeframe.
Penalties will also apply where there is conduct aimed at undermining this regime, for example, deliberately providing false identity information to the Registrar, intentionally providing a false director ID to a government body or body corporate, or intentionally applying for multiple director ID’s.

What is the current status of director ID’s?

It is important to note that the commencement, operation and transitional arrangements accompanying the introduction of this regime are complex and, at times, hard to follow. For this reason, we have included below a detailed overview of the relevant status updates/tranches of application.

On 22 June 2020, the Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2019 (Cth) received Royal Assent. Amongst other things, this Bill amended the Corporations Act and CATSI Act in order to give effect to the new director ID regime. At this time, it was noted that the regime would commence operation on a future date to be set by proclamation.

This commencement-by-proclamation mechanism was used so that a future commencement date could be set when administrative arrangements were in place to support the operation of this new regime.

Following this, Treasury announced that the director ID system would need to be tested before the full population of existing directors could be onboarded to ensure that the system provides a robust, reliable and consistent user experience.

It was estimated that this testing phase will run through to 31 October 2021. During this testing phase, the director ID application system will not be available publicly, and only a controlled number of existing directors will be invited to participate.

In order to conduct this end to end testing in a live environment, it was essential the director ID provisions commence in order for the Registrar to have legislative basis to process applications and issue a valid ID to those participating. Accordingly, these provisions commenced on 4 April 2021.

So that directors are not disadvantaged or found to be in breach of the law during this testing stage, legislative instruments were published on 29 April 2021 to ensure that directors do not immediately need to apply for an ID. Broadly, these instruments provide that:

• directors appointed under the Corporations Act prior to the commencement of the director ID regime or during the testing phase have between the end of testing (i.e. 31 October 2021) and 30 November 2022 to obtain a director ID;
• directors appointed under the CATSI Act will begin to be issued ID’s after Corporations Act directors have been fully onboarded to the system (i.e. from the end of the testing phase to 30 November 2023).

Individuals appointed as a director under the Corporations Act in the period following the testing phase and within 12-months of the commencement date (i.e. after 31 October 2021 and on or before 4 April 2022) will have 28 days to apply for a director ID as part of transitional arrangements announced as part of the Bill.

For anyone who wishes to become a company director after these dates, they will need to apply for a director ID prior to being appointed as a director or within any later period specified in the regulations, unless they are provided with an exemption or extension by the registrar.

Will all NFP officers be required to apply for a director ID?

Given that a large majority of our clients operate in the not-for-profit (NFP) space, we wanted to include a comment here on the interaction between NFPs and director IDs.

As it currently stands, the director ID regime is drafted so that the requirement to obtain an ID only applies in relation to body corporates registered under the Corporations Act or the CATSI Act. This therefore captures appointed directors, acting alternate directors and other officers of registered bodies (as prescribed by the regulations). Note: it does not currently extend to what are termed defacto or shadow directors.

This means that officers of NFP’s that are not registered under either of these Act’s will not be required to obtain a director ID.

How can we help?

It has been estimated that the introduction of director ID’s will increase compliance costs by approximately $21.5 million per year on average over ten years. Treasury has, however, noted that most of this regulatory burden will occur in the first 18 months as existing directors fulfil their obligations to obtain an ID.

It is also expected that 10% of Australia’s population will be required to apply for a director ID.

Given this broad application, we would be more than happy to answer any questions that you may have about it or assist with implementation when the time comes.

As is evident from the above, this is a new and complex area of the law, which continues to evolve on an almost monthly basis. We will be sure to keep you updated regarding any new developments in this area.

Get in Touch