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Rising from the ashes: DINs and director resignations

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Written by Miriam Kleiner

The Commonwealth Government currently has a number of initiatives underway to deter and penalise phoenix activity in order to protect those who are negatively affected by such fraudulent behaviour and to prevent directors from abandoning companies.

One such initiative is the introduction of a director identification number (“DIN”), which the Government announced on 12 September 2017. The other initiative is a new law which prevents the backdating of director resignations in breach of the 28-day rule in section 205B of the Corporations Act unless ASIC or the Court is satisfied the change took place on the purported date.

DINs

The DIN will require all directors to confirm their identity and will be a unique identifier for each person who consents to being a director. The person will keep that unique identifier permanently, even if they cease to be a director. It is not intended that a person’s DIN will ever be re-issued to someone else or that one person will ever be issued with more than one DIN (except in limited circumstances such as when a record is corrupted). As such, the DIN will provide traceability of a director’s relationships across companies, enabling better tracking of directors of failed companies and will prevent the use of fictitious identities. This will assist regulators and external administrators to investigate a director’s involvement in what may be repeated unlawful activity including illegal phoenix activity.

Summary of new law

Schedule 2 of the Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2019 amends the Corporations Act and the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (“CATSI Act”) to introduce a DIN requirement.

Under the new requirement, a person appointed as a director of a body corporate registered under the Corporations Act or the CATSI Act must apply to the registrar for a DIN. The person must apply before they are appointed a director unless the period is extended by the regulations or unless they are provided an exemption or extension by the registrar. After receiving an application, the registrar must provide the director with a DIN if the registrar is satisfied that the director’s identity has been established.

There are civil and criminal penalties for directors that fail to apply for a DIN within the applicable timeframe. The registrar, or a senior member of its staff, may also issue infringement notices in relation to such conduct. There are also civil and criminal penalties which apply to conduct that would otherwise undermine the new DIN requirement.

The new requirement contains transitional provisions that apply in relation to a person that is appointed as a director at the time the new requirement starts to apply. Such a person has the period specified in a legislative instrument made by the Minister to apply for a DIN. In addition, during the first 12 months of the operation of the new requirement, a person who is appointed as a director will have an additional 28 days to apply for a DIN (that is, for the first 12 months a person must apply for a DIN within 28 days of being appointed as a director).

To whom does the new requirement apply?

Eligible officers of body corporates registered under the Corporations Act or the CATSI Act

Who is an eligible officer?

An eligible officer is a director of a registered body who:

  • is appointed to the position of director, or is appointed to the position of an alternate director and is acting in that capacity (regardless of the name that is given to that position); or
  • any other officer of the registered body who is an officer of a kind prescribed by the regulations.
  • The DIN requirement therefore initially operates with respect to only appointed directors and acting alternate directors. It does not, at least initially, extend to what are commonly referred to as de facto or shadow directors.
What is a registered body?

A director must:

  • apply for a DIN prior to being appointed as a director
  • apply for a DIN within a prescribed period of being directed to do so by the registrar.

It is a defence if the director applied to the registrar for a DIN prior to being first appointed as a director of any registered body (or within such later period as the regulations may allow) and the application has not yet been dealt with.

A director must not knowingly apply for multiple DINs. However, the prohibition does not apply where the registrar has directed the person to reapply for a DIN or where the person applied for the additional DIN under another Act.

Who may apply for a DIN?

The first category of persons who may apply for a DIN are directors. The second category of persons who may apply for a DIN are persons who are not directors but intend to become directors within 12 months. It is not compulsory or required that such a person apply for a DIN unless they are actually appointed as a director.

A DIN allocated to a prospective director is automatically cancelled by operation of law if the person does not become a director within 12 months of being given the DIN.

What are the consequences of contravening the new law?

Civil and criminal penalties apply to contraventions of the DIN requirement. The registrar may also issue infringement notices in relation to some contraventions. A contravention of every obligation in the new law is both a civil penalty provision and an offence. See table below.

Penalties concerning obligations

Obligation
Maximum penalty
Example uses 2

Requirement to apply for a director identification number prior to appointment or within such other period as allowed by the regulations or registrar

Corporations Act

  • Criminal – 60 penalty units (strict liability)
  • Civil penalty – Greater of 5,000 penalty units or three times the benefit derived or detriment avoided because of the contravention

CATSI Act

  • Criminal – 25 penalty units (strict liability)
  • Civil penalty – $200,000

Requirement to apply for a director identification number if directed by the registrar

Corporations Act

  • Criminal – 60 penalty units (strict liability)
  • Civil penalty – Greater of 5,000 penalty units or three times the benefit derived or detriment avoided because of the contravention

CATSI Act

  • Criminal – 25 penalty units (strict liability)
  • Civil penalty – $200,000

Applying for additional DINs

Corporations Act

  • Criminal – 120 penalty units or imprisonment for 12 months, or both
  • Civil penalty – Greater of 5,000 penalty units or three times the benefit derived or detriment avoided because of the contravention

CATSI Act

  • Criminal – 100 penalty units or imprisonment for 12 months, or both
  • Civil penalty – $200,000

Misrepresenting a DIN

Corporations Act

  • Criminal – 120 penalty units or imprisonment for 12 months, or both
  • Civil penalty – Greater of 5,000 penalty units or three times the benefit derived or detriment avoided because of the contravention

CATSI Act

  • Criminal – 100 penalty units or imprisonment for 12 months, or both
  • Civil penalty – $200,000

Accessorial liability (being involved in a contravention of one of the above obligations)

Corporations Act

  • Civil penalty (natural person) – Greater of 5,000 penalty units or three times the benefit derived or detriment avoided because of the contravention
  • Civil penalty (body corporate) – Greater of: 50,000 penalty units; three times the benefit derived or detriment avoided because of the contravention; or, 10 per cent of the annual turnover of the body corporate up to a maximum amount of 2.5 million penalty units

CATSI Act

  • Civil penalty – $200,000 for a natural person

Breaching either of the first two obligations is an offence of strict liability. The application of strict liability negates the requirement for the regulator or prosecutor (as the case maybe) to prove fault.

Civil penalties also apply to any person who is involved in a contravention of any of the obligations. Breaches of the two obligations relating to failing to apply for a DIN (see the first two items in the table) are also subject to the infringement notice regime in Part 5 of the Regulatory Powers (Standard Provisions) Act 2014.

Commencement

The new requirement commences on a date set by proclamation. However, if any provisions do not commence within 24 months of the Bills receiving Royal Assent, they automatically commence the day after the end of that period.

Transitional arrangements

The new law provides that a person who is a director immediately before the application day must apply for a DIN within a period specified by a legislative instrument made by the Minister. Until this period is specified, there is no requirement on such directors to apply for a DIN.

In addition, the new law provides a person who is appointed a director within the first 12 months of the new regime’s operation with an additional 28 days to apply for a DIN. After this transitional period ends, the standard rule applies.

Resignations

Comparison of key features of new law and current law

New Law
Current Law
Example uses 2

If the resignation of a director is reported to ASIC more than 28 days after the purported resignation, the resignation takes effect from the day it is reported to ASIC. This amendment also applies to alternative directors who resign prior to the end of their term of appointment

A company or a director may apply to ASIC or the Court to give effect to the resignation notwithstanding the delay in reporting the change to ASIC.

Directors may resign at any time in writing, subject to the company’s constitution.

The company (or the former director) must notify ASIC within 28 days of the resignation.

A director may not resign from a company if doing so would leave the company without a director (unless the company is being wound up). A director may not resign if the resignation would leave the company without a director.

To accommodate temporary absences of a director, the amendment applies at the end of the day on which the director purports to resign. If another director is appointed the same day as the resignation, the resignation is effective. The end of day test also applies in situations where multiple directors resign on the same day. In this case, all the resignations will be ineffective unless at least one director is appointed to the company at the end of the day.

Similar restrictions apply to the power of a proprietary company’s members to remove a director by resolution. A single director may resign or be removed if the company is being wound up at the time.

These amendments do not prevent a sole director being removed because they are disqualified from being a director.

Directors may resign at any time in writing, subject to the company’s constitution.

The company (or the former director) must notify ASIC within 28 days of the resignation.

A director may not be removed by a resolution of members of a proprietary company if doing so would leave the company without a director (unless the company is being wound up).

A director may be removed by a resolution of company members, subject to a proprietary company’s constitution.

Applications to ASIC and the Court

Either the former director or the company may apply to ASIC or the Court to backdate a resignation that is lodged after the 28-day period. The applicant must satisfy ASIC or the Court (as appropriate) that the director did in fact resign on the purported date.

If the application is made to the Court, the applicant must satisfy the Court that it is just and equitable to make the order to backdate the resignation.

If the application is made to ASIC, ASIC must take into account the conduct and representations of the applicant, including the reasons for the delayed notification, when determining whether to allow the resignation to be backdated.

If the application is made to ASIC, it must be made within 56 days of the purported date of the director’s resignation. Applications to the Court can be made within 12 months of that date or at a later time allowed by the Court.

If the Court makes an order to backdate the effective date of a director’s resignation, the applicant must provide a copy of the order to ASIC within two business days. Non-compliance is a strict liability offence subject to 120 penalty units.

If the applicant is a company, its secretary or directors may be subject to a civil penalty for a failure of the company to provide a copy of a Court order to ASIC. It is a defence if the secretary or director (as appropriate) took all reasonable steps to ensure the company provided the copy of the Court order to ASIC.

The amendments commence on the day following Royal Assent. The amendments apply to director resignations and resolutions to remove directors taking effect on or after the day 12 months after Royal Assent.

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