An application to have a liquidator appointed to a company is usually made by a creditor who is owed money by the company.

Understandably, when that happens it is very common for the company to think it can remove the risk of having a liquidator appointed by paying the amount claimed by the creditor. Unfortunately, this is not always the case as has been confirmed in a recent decision of the Federal Court of Australia – Deputy Commissioner of Taxation v Swoosh Hand Car Wash Pty Limited [2014] FCA73.

This article explains why paying the amount said to be due as referred to in the winding up application may not be enough to stop a winding up application from proceeding.  Unfortunately, the situation can arise far more often than is realised and care needs to be taken when dealing with a winding up application.

In Swoosh the ATO had issued a Statutory Demand on Swoosh for unpaid tax of approx. $160,000. Swoosh failed to pay the amount referred to in the Statutory Demand within 21 days of service of the Statutory Demand and did not apply to the Court within that time to set aside the Statutory Demand.

In these circumstances and in accordance with the s.459C(2) of the Act, Swoosh was presumed to be insolvent.  Relying upon that presumption of insolvency, the ATO made an application to the Court to have a liquidator appointed to Swoosh.

The facts above are common place and arise in the vast majority of winding up applications made to the Court. Where Swoosh differed from the usual circumstances is that Swoosh in fact paid the amount referred to in the Statutory Demand but did not pay that amount within the 21 day period required to satisfy the Statutory Demand.

The ATO filed evidence to show that after payment of the amount referred to in the Statutory Demand, Swoosh had incurred a further tax debt of approximately $148,000. In these circumstances, the ATO sought to proceed to have Swoosh wound up despite payment of the amount referred to in the Statutory Demand.

As the Court pointed out, a failure to comply with the Statutory Demand creates a presumption of insolvency under s.459C(2). A creditor is entitled to rely upon the presumption of insolvency to have a winding up order made. If the company wished to challenge the presumption of insolvency (i.e. it wished to demonstrate that it was able to pay its debts as and when they fell due) it is up to the company to present evidence making full disclosure of its financial position and solvency. In this case Swoosh did not do that.

Swoosh complained that evidence of the further debt was only served on it after the matter first came before the Court. It said that to allow the ATO to rely on this further debt was unfair as it did not give Swoosh the advantage of having 21 days with which to deal with the debt, which it would have had if the proceedings were dismissed and a further Statutory Demand served.

The Court rejected this submission out of hand. The Court stressed that the incurring of a further liability after the expiry of the Statutory Demand and payment of the amount referred to in the Statutory Demand constituted a good reason why the Court would be entitled to, and in this case should, make a winding up order. The Court proceeded with the hearing and a liquidator was appointed over Swoosh.

It is not unusual for a substituting creditor to appear on the hearing of a winding up application. In that instance, even if the amount due to the original creditor has been paid, the substituting creditor may apply for a winding up order in reliance upon a debt owed to it even though it did not issue the Statutory Demand upon which the original winding up application is founded. The Court correctly compared the position of the ATO in Swoosh with that of a substituting creditor. The analogy is indeed a good one – rather than there being a different creditor, there is a different debt but the underlying basis of the application has not changed and provided all the other requirements are met, the application can be proceeded with.

Swoosh does not represent new law but it is a useful reminder that paying the amount due when a winding up application is made is no guarantee that the winding up application will be dismissed.

Great care needs to be taken by any company facing the risk of the appointment of a liquidator.