By John Vaughan-Williams, Associate
As part of a suite of amendments introduced by the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020 (Cth) in June, all company directors will soon be required to be identified by unique “Director Identification Numbers”.
These amendments incorporate new provisions in the Corporations Act 2001 (Cth), as well as the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth).
What does this mean?
Once the new scheme is introduced, before becoming a director of a company, each individual must obtain a Director Identification Number from the registrar which is appointed to manage the new scheme.
This means that it will be advisable for anyone who is considering becoming a director in the future – but does not already hold a directorship – to apply for a Director Identification Number in advance. Otherwise, companies will not be able to appoint that person as a director as quickly.
Under the new scheme, prospective directors will be able to apply for a Director Identification Number if they intend to become a director within the next 12 months. This person must actually become a director within those 12 months to retain the Director Identification Number.
What is the reasoning behind the changes?
The introduction of Director Identification Numbers has been discussed by the Federal Government since 2017, and the formulation of the model has been underway since then.
The Productivity Commission’s report entitled Business Set-up, Transfer and Closure, released in 2015, recommended the introduction of Director Identification Numbers.
The reasoning behind the scheme is to reduce the likelihood that a director is able to appear as a different person on different company records, through using a middle name, nickname or false name. It is much more difficult for regulators to track whether directors have repeatedly been involved in failed companies of illegal ‘phoenix’ activity, without clear and consistent identification of a director. Phoenix activity is broadly where directors of a company transfer the company’s assets to a new company, so as to frustrate litigation against the first company.
Further, by hiding a director’s identity, that director can potentially avoid being banned or disqualified as a director.
By implementing Director Identification Numbers, regulators and advisors are able to obtain a holistic picture of a director’s corporate history, ascertaining every company of which that director has been a part. Further, it will give a clearer view of whether companies have participated in related party transactions, and whether directors have had conflicts of interest.
To which types of organisation will the new scheme apply?
Director Identification Numbers will apply to companies, registered foreign companies, registered Australian bodies (for example, an incorporated association which has registered with the Australian Securities and Investments Commission (ASIC) (so as to be able to operate nationally), and Aboriginal and Torres Strait Islander Corporations.
Are only directors covered by the new scheme?
The new statutory provisions will apply to any person who is deemed an ‘eligible officer’.
At this stage, it has been made clear that directors and alternate directors are considered to be ‘eligible officers’, but there is also provision for other types of officers to be prescribed by regulation. Accordingly, it is possible that other types of officers will be included in the future, such as secretaries.
How does an eligible officer obtain a Director Identification Number?
The new law requires that in order for the registrar to issue a person with a Director Identification Number, the registrar must have verified that person’s identity.
In order to satisfy the registrar of a director’s identity, the director will be required to submit prescribed personal information and undergo a 100 point identity verification process with ASIC, which may request the disclosure of their tax file number.
When does the new regime come into effect?
It is anticipated that the new laws will come into effect during 2021 and must not come into effect later than June 2022.
However, there will be a grace period for existing directors to apply for a Director Identification Number.
Similarly, during the first year of the scheme, all new directors will have a 28-day period to obtain a Director Identification Number after being appointed. After this grace period, directors will be required to obtain a Director Identification Number before appointment.
Who will administer the scheme?
One of the aims of the changes which incorporated Director Identification Numbers is to merge existing business registers in Australia into one Commonwealth Business Register, which will be administered by a Commonwealth body.
It is anticipated that ASIC will be appointed to administer the new register, and function as the ‘registrar’ under the new scheme, but this is yet to be confirmed.
Penalties for non-compliance
Under the new scheme, there are both civil and criminal penalties for non-compliance. By way of example, if a person applies for multiple Director Identification Numbers, or uses false information in an application, there is the possibility of 12 months imprisonment.
Implications for charities
If charities are one of the types of organisations covered by the scheme, then their directors will be subject to it.
However, given that currently directors of companies which are charities only need to report changes to the Australian Charities and Not-for-Profits Commission, rather than ASIC, it remains to be seen how this will impact upon the introduction of a centralised Commonwealth Business Register.
Some commentators have suggested that there may be further reforms in charity reporting as a result of the introduction of Director Identification Numbers, but whether this will occur is unknown.
It is important that all charities which are covered by the scheme quickly become familiar with the requirements for directors to obtain Director Identification Numbers and include it as part of their director onboarding processes. This will include ensuring that applicants are familiar with the verification of identity requirements and are able to satisfy them quickly.
Further, given the greater visibility that the scheme will provide of directors’ corporate history, there is likely to be an increased regulatory focus on related party transactions and proper management of conflicts of interest.