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19
Feb 2018

A foreign regime – winding up overseas companies

Foreign entities conducting business in Australia are an incredibly common feature of Australia’s modern corporate landscape. The growth in international companies conducting business in Australia has, unsurprisingly, led to an increase in commercial disputes of all shapes and sizes arising between foreign companies and domestic entities based in Australia. A classic example of such a dispute is a company’s failure to pay a debt due to another company.

Winding up domestic companies

The statutory demand regime (the Regime) contained in Part 5.4 of the Corporations Act 2001 (Cth) (the Act) provides a mechanism for creditors to recover debts from corporate debtors.

Pursuant to section 459E of the Act, a creditor can issue a creditor’s statutory demand (Demand) on Australian companies for the payment of a debt. Where the Australian company fails to pay or satisfy the debt within 21 days following the service of the Demand, in the absence of an application to set the Demand aside, the company is presumed to be insolvent. The creditor is then entitled to apply to the Federal Court of Australia or the relevant state Supreme Court to wind up the company in insolvency.

The operation of the Regime is strict. A debtor company can be prevented from opposing a winding up application on the grounds that they should have raised the opposition during the 21-day period following service of the Demand, not after. In those circumstances, the debtor company must seek the permission of the court to challenge the Demand outside of the 21-day time limit. The court will only hear the application to set the Demand aside if the matter is material for proving the company is solvent.[1]

The policy rationale behind the Regime is to ensure that there are efficient resolutions of winding up applications, including ensuring any challenges to a Demand are made within the 21-day time limit (ASIC v Lanepoint Enterprises Pty Ltd (Receivers and Managers Appointed) [2011] HCA 18).

Winding up foreign companies

In contrast to Australian companies, the strict protocol of the Regime does not apply to companies incorporated overseas.

Pursuant to section 585 of the Act, a ‘Part 5.7 body’ (Body), including a foreign company either registered or carrying on business in Australia, can be served with a demand by a creditor requiring the body to pay the sum due (being a debt of $2,000 or more) within 21 days. If a Body fails to pay the sum demanded it is ‘taken to be unable to pay its debts’. In these circumstances, a court may wind up a Body where it is ‘unable to pay its debts’ or where it is otherwise ‘just and equitable to do so’[2]. Interestingly, the Act does not provide any automatic presumption of insolvency for foreign companies, in contrast to their Australian counterparts.

Unlike a Demand against an Australian company under the Regime, a Body can challenge the amount or existence of the debt at any time, including after the expiration of the 21 day period following service of the demand. Leave is not required to argue a matter that should have been raised during the 21 day period (Cato Brand Partners Pty Ltd v Air India Limited [2016] VSC 28).

Importantly, where the Body is a ‘registerable Australian body’, section 583 of the Act states that the winding up must deal only with the affairs of the Body ‘outside of its place of origin’ i.e. where the Company was initially incorporated. Where the Body is unregistered and carrying on business in Australia, either Division 9 of Part 5.6 of the Act and/or the Cross-Border Insolvency Act 2008 (Cth)UNCITRAL Model Law on Cross-Border Insolvency may be invoked. This involves the cooperation of Australian and foreign courts to aid in external administration matters and is beyond the scope of this article.

Take away points

  1. It is possible to wind up a foreign company that is either registered in Australia or who conducts business in Australia.
  2. An application to wind up a foreign company can be made after 21 days following a written demand for payment of debt of $2,000 or more.
  3. In contrast to Australian companies, there is no presumption of insolvency created by the foreign company’s failure to comply with the demand.
  4. The foreign company is at liberty to dispute any aspect of the claim at any stage.
  5. The court’s power to wind up a foreign company is ultimately discretionary.

For more information please contact ERA Legal

[1] Corporations Act 2001 (Cth) s 459S

[2] Corporations Act 2001 (Cth) s 583