This phoenix may not rise

Key Points

• Directors of Australian companies will soon be allocated a unique Director Identification Number.

• The Director Identification Number will enable authorities to track the activities of directors and map their relationships with other directors and companies.

• Various ancillary measures have also been proposed to help curb phoenixing activities.

Every director of an Australian company will soon be allocated a unique Director Identification Number (DIN) in an effort to stop unscrupulous directors from engaging in “phoenixing” activities. Phoenixing refers to the practice of stripping a company of all its assets, liquidating it, moving the assets to another corporate entity and carrying on business as usual under the guise of the new company. This practice leaves creditors out of pocket and is estimated to cost the Australian economy more than $3 billion per annum.

The government has not yet announced a preferred model for the DIN scheme, however, it is understood that the scheme will allow authorities to track the activities of directors through various government databases and map their relationships with other directors and companies.

In addition to the introduction of DINs several other ancillary measures have been proposed to help tackle phoenixing activities. It has been suggested that:

• amendments will be made to prevent directors from backdating appointments
• a new dedicated phoenix hotline will be set up to provide the public with a single point of contact for reporting illegal phoenix activity
• further prohibitions will be implemented to preclude directors from resigning in circumstances where doing so would leave the company without a director
• directors suspected of engaging in phoenixing may be required to pay a security deposit to the Australian Taxation Office (ATO), which the ATO could then use to recover future unpaid tax debts
• the government may implement a system whereby liquidators will be assigned to companies at random so as to prevent companies from appointing liquidators who are sympathetic to their plight
• new offences may be introduced
• existing penalty provisions may be extended to apply to consultants, facilitators and advisors who assist phoenix operators.

These reforms compliment the government’s action to combat crime and fraud including:

• strengthening disciplinary measures for insolvency practitioners
• establishing new phoenix, black economy and serious financial crime taskforces
• legislating to improve information sharing between regulatory agencies
• strengthening ASIC’s powers and enforcement measures
• continuing to consult on law reform initiatives to minimise the unnecessary drains on taxpayer funds.

The crackdown is a welcome change to an increasingly publicised problem. Labor’s Andrew Leigh commented that under the current system it is easier to become a company director than it is to open a bank account. While the DIN initiative is a step in the right direction, some commentators have questioned whether it will bring about any real change given the fact that the ASIC taskforce charged with policing and monitoring phoenixing activity is woefully under-resourced.

Post by Vanja Simic and John Kell