At the start of this month, a new law came into place requiring all directors of Australian companies to apply for a Director Identification Number. The Director ID requires all companies to register their directors, just as you would typically register for a driver’s license, with Directors provided with a unique 15-digital ID.
The new law aims to stop the practice of illegal phoenix; a practice where a director transfers all company assets into a new company whilst the old company is deliberately liquidated in an attempt to avoid paying the debts the old company owes to its creditors. In this way, the new company rises from the ashes of the old company free of any debts or liabilities.
Illegal phoenixing costs $1.8 to $3.2 billion annually and affects small businesses, employees, and suppliers. If an SME is found practising illegal phoenix activity, there is little to no likelihood that they will have the resources to pay the fines and rebuild their reputation. New Director ID laws will make this activity easier to spot and will impose hefty fines on any company that partakes.
Eliminate dummy directors
Traditionally, one of the common forms of illegal activity is the use of “dummy directors”. This technique involves listing someone as a director without their permission or someone that has no knowledge of the responsibility they are taking on. The dummy director is unknowingly appointed and acts solely to conceal the identity of the actual perpetrator/s. A dummy director can include relatives, friends or associates and can come at the suggestion of unsound pre-insolvency advisors for the illegal restructuring of the business.
The new Director ID laws will make it increasingly difficult to appoint dummy directors. In obtaining your 15-digit Director ID, you must undergo a substantial identity verification check. You must provide ATO documents, company documents, personal identity documents and much more. Basically, you must prove you are exactly who you say you are. As Director IDs require such an extensive amount of documentation, they aim to resolve this identity fraud issue once and for all…or at least, minimise it.
Avoid illegal phoenix activity
Seeking legal advice from reputable sources is also important as pre-insolvency advisors can lead SMEs astray by suggesting illegal phoenixing as a legitimate solution to avoid debt. If an advisor suggests renaming and transferring all assets to the new company, you should be wary. There are occasions in which re-naming and restructuring is legitimate, as not all phoenix activity is illegal. However, legal activity should not try to abrogate all tax and debt repayments. If you are given a solution that sounds too good to be true, chances are it is.
With new Director ID laws coming into play, it will be much easier to track and impose serious fines for companies partaking in illegal activity. The good news is it’s simple to get the process started. Here’s a link to the Australian Business Registry Service (ABRS) website where you can sign up and find out more information. For all new Australian businesses, it’s important to register directors within 28 days. Failure to register puts your whole business at risk with fines of up to 5,000 penalty units or up to $1.1 million. Holding a Director ID will help reduce illegal activity and make it easier and safer to operate a small business in Australia. So, don’t waste any time and register for your Director ID today.