Jurisdiction - Australia
Reports and Analysis
Australia – Winding Up Foreign Companies not so easy.

3 November, 2011

 

 

In brief

 

A recent Federal Court decision has provided important guidance for creditors of foreign companies who are considering using the special winding-up regime for foreign companies contained in the Corporations Act. 

 

How does it affect you?

 

  • Part 5.7 of the Corporations Act 2001 (Cth) (the Act) establishes a special regime for winding-up a 'Part 5.7 body', which is defined to include a foreign company carrying on business in Australia.

 

  • The Federal Court has determined that, where an order is sought for substituted service of a creditor's demand under Part 5.7, the creditor seeking the order must provide satisfactory evidence that the entity to which the order relates is in fact a Part 5.7 body.

 

  • Following this decision, creditors who seek to make use of the special regime for issuing demands on a foreign company which is not registered in Australia and who wish to obtain an order permitting service of that demand in Australia will need to be able to provide evidence that the foreign company was carrying on business in Australia.

 

Winding-up a foreign company

 

Part 5.7 of the Act establishes a special regime for winding-up 'Part 5.7 bodies'. Part 5.7 bodies include foreign companies which are either registered or carry on business in Australia.* The question of whether an unregistered foreign company 'carries on business in Australia' often requires a difficult factual examination of the company's activities over time to determine whether it has a place of business in Australia.

 

Section 585(a) of the Act provides that a creditor may serve a demand for payment of a debt on a Part 5.7 body. Service may be effected by leaving the demand at the Part 5.7 body's principal place of business in Australia, delivering it to an officer of the Part 5.7 body, or in accordance with the terms of a court order.

 

Following service of a creditor's demand under s585(a), the Part 5.7 body must pay, secure or compound the sum due within three weeks. This is similar to the statutory demand regime provided for ordinary Australian companies** in that, if the demand is not paid, secured, or compounded to the satisfaction of the creditor within the same timeframe, the Part 5.7 body will be taken to be unable to pay its debts and can be wound up in Australia on an application by a creditor under s583(c)(i).

 

Background

 

In August 2011, the Australian Taxation Office (ATO) issued creditor's demands under Part 5.7 of the Act on two companies registered in the Cayman Islands and Luxembourg. The ATO claimed that the two companies owed approximately $750 million in taxes and penalties assessed against them.

 

The ATO made an ex parte application to the Federal Court seeking orders for substituted service of the demands. The ATO presented the court with supporting material which the court was satisfied established that, if the demands were served on a particular officer of an Australian company, the demands would in all likelihood be brought to the attention of the two foreign companies. The court granted the orders and the ATO proceeded to serve the demands.

 

Prior to the expiry of the three week period for payment under the demands, the two foreign companies brought an application to the court seeking that the ex parte orders allowing substituted service be set aside on the grounds that the ATO had not provided any evidence that the companies were Part 5.7 bodies.*** 

 

The decision

 

Justice Middleton heard the application and considered that the words of s585(a) should be interpreted by reference to their context. Under the section, the court has a power to order service 'in such manner as the court approves or directs'.  However, this discretionary power can only be engaged by a creditor to whom a Part 5.7 body is indebted. Accordingly, the court held that before an order for substituted service is made under s585(a), the court must be satisfied that the relevant entity is in fact a Part 5.7 body.

 

The court found that the ATO had provided no evidence that the foreign companies were Part 5.7 bodies. Accordingly, it set aside its earlier orders allowing substituted service of the creditor's demands.

 

Comment

 

This decision highlights that a creditor who seeks to wind up a foreign company which is not registered in Australia by using the special demand process must provide evidence that the foreign company was in fact carrying on business in Australia to obtain an order for substituted service of a creditor's demand under Part 5.7.

 

Footnotes

 

*Part 5.7 bodies are also defined to include certain types of incorporated or unincorporated Australian entities which are registrable under the Act.

**As set out in Part 5.4 of the Act.

***TPG Newbridge Myer Ltd v The Deputy Commissioner of Taxation [2011] FCA 1157.

 

 

For further information, please contact:

 

Michael Quinlan, Allens Arthur Robinson

Michael.Quinlan@aar.com.au

 

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