The government will consider introducing identification numbers for directors of Australian companies, after the Productivity Commission labelling it a necessary reform to the country’s insolvency practices.
On Thursday Small Business Minister Michael McCormack handed down the government’s response to the commission’s final report from its review of business set-ups, transfers and closures in Australia, which considered the major factors driving businesses being launched and exited, and whether policy adequately supports the business community.
The government’s response, which comes 16 months after the Productivity Commission’s final report in December 2015, indicates it is open to investigating the implementation of a Director Identity Number (DIN) scheme for company directors.
The ID number, which has been raised numerous times in the recent past as a way of tackling illegal phoenix activity and preventing fraudulent company directorships, was endorsed by the Productivity Commission in 2015.
“A DIN should be obtained from the Australian Securities and Investments Commission (ASIC) via an online form at the time of an individual’s first directorship. In order to obtain a DIN, individuals should be required to provide identity proof (based on the personal identification requirements for opening a bank account), and verify that they have read brief materials on directors’ legal responsibilities provided as part of the online registration,” the Commission said at the time.
Under this model, directors of existing companies would also have to apply for an ID number when the policy came into effect, and the Australian Securities and Investments Commission would be empowered to ask a company director to provide their DIN on request.
In its response, the government said it “notes” the recommendation and “will give this proposal further consideration as part of its ongoing work on insolvency reforms”.
“The Government notes the Commission’s recommendation to introduce the Director Identification Number as a transparency measure that could provide greater regulatory oversight of directors’ duties,” the government said.
In a statement provided to SmartCompany, Minister McCormack said that responsibility for the Corporations Act, and for ASIC falls under the portfolio of Revenue and Financial Services Minister Kelly O’Dwyer, and the government is still giving further consideration to the issue “as part of its ongoing work on insolvency reforms”.
In 2015 the Productivity Commission estimated the costs of illegal phoenix activity — in which directors transfer assets to new business entities and then liquidate a company, moving on to that new business so their company can ‘rise again” — was between $1.8 billion and $3.2 billion.
Major research into this area has been undertaken by a team of Monash University and University of Melbourne researchers, who suggested in a February report the DIN is one of the key policy elements for accurately tracking repeat offenders in this space.
University of Melbourne Law School Professor Helen Anderson says her research indicates a unique identifier for company directors would help all parts of the business community.
“Informally, we give a lot of talks and business people are so fed up with having phoenix companies steal their business and undercut them,” she tells SmartCompany.
Anderson says the model is not “a tracking mechanism in a negative way”, but would instead let regulators see when individuals register companies in the name of “fictitious directors”. It could offer honest businesses protection from dealing with other companies that are “abusing the system”, she says.
Anderson says cost estimates she has heard for the introduction of a DIN indicate the one-off expense would not be a big one.
“The cost I have heard roughly spoken of is somewhere between $20 and $40 [to register a DIN],” she says.
“When it comes down to it, pretty much everything has a number — whether it’s an ACN [Australian Company Number], ABN [Australian Business Number], your tax file number. This enables regulators to know who they are dealing with.”
In a statement, Minister McCormack said the government had already acted on a number of the Productivity Commission’s other recommendations, including through its response to the Financial System Inquiry. The government’s response also gives in principle support for a revised, simplified “small liquidation” process for companies with less than $250,000 of liabilities.
However, the government rejected a policy suggestion from the Commission that would compel administrators of companies to make a call within one month of being appointed on whether the business was capable of being viable in the long run. If it is found not to be viable, the Commission said administrators should have a duty to convert the administration to a liquidation.
“The recommendation would fundamentally change the purpose of a voluntary administration to focus only on restructuring,” the government said.
*This article was updated at 3:45pm on May 5 to include comment from the small business minister.