Federal Court broadens statutory presumption of insolvency

In the recent decision Deputy Commissioner of Taxation v Melking Holdings Pty Ltd [2019] FCA 988, Colvin J extended the application of s 459 of the Corporations Act (Cth) (Corporations Act) by determining that the presumption of insolvency may apply to a company's failure to comply with a statutory demand after a winding up application is commenced. The judgment also confirmed the procedures on how to serve statutory demands on a company under the Corporations Act.

‍You can read the full decision here.

‍Background

‍Earlier this year, a Federal Court Registrar made an order under s 459 of the Corporations Act, winding up Melking Holdings Pty Ltd (Melking) because it failed to comply with a statutory demand issued by the Deputy Commission of Taxation. The statutory demand was sent to Melking by ordinary prepaid post, and copies sent to three of its directors.

However, Melking's registered address was in Serpentine, a location at which, according to 'common knowledge', it is known that mail is not delivered but instead is taken to an unofficial post office and held for 14 days for the recipient to collect.

No notification is given to the recipient when the mail arrives.[1]Ultimately, the Melking statutory demand was returned to sender with a sticker marked 'unclaimed'.Although the ATO later sought to effect service by sending the statutory demand to Melking's registered tax agent and business portal address [35], the statutory demand was ultimately not received until one day after the commencement of winding-up proceedings under s 459P.

‍Issues

‍The Court considered two main submissions from the parties: First, whether the Registrar's decision could be reviewed and reconsidered on the grounds of procedural fairness, and that the statutory demand had not been served properly (meaning that the Registrar erred in applying the presumption of insolvency); and Second, whether the application to wind up could be amended to show that the statutory demand was served by other means, and that Melking was actually insolvent.

‍Decision

‍Reviewing the Registrar's DecisionIn reviewing a Registrar's decision to wind up in insolvency, the Court may receive fresh evidence and depart from factual findings of the Registrar, as it is a hearing de novo. However, a rehearing under s 35A(5) of the Federal Court of Australia Act 1976 (Cth) fundamentally remains a process for review, confined to the issues raised before the Registrar.[3]In this case, the Court had the power to review the Registrar's decision.

The fact that the Commissioner commenced proceedings by relying upon service at the registered office in Serpentine did not amount to an abuse of process.[4] It was proper for the Commissioner to have relied upon a claim that the statutory demand had been served by sending it by prepaid mail.[5]Amending Winding Up Applications The Court refused to allow the amendment alleging actual insolvency because it was brought at short notice, and because the financial position of Melking had since changed.[6]However, the Commissioner was permitted to amend its claim to include alternate modes of serving the statutory demand.[7]

In doing so, Colvin J considered a number of "important matters", including:

1. First, that the application for review was urgent because liquidators had been appointed, leaving Melking in hiatus while the review application proceeded;
2. Second, that there was possible prejudice arising from Melking having its business operations suspended, affecting the interests of the public and other creditors;
3. Third, as a result, the Court did not have the option of allowing the amendment on the basis that there will be an adjournment and provision for costs; and
4. Fourth, that the Court was required to consider the review application on the basis of the original application before the Registrar.

Ultimately, the Registrar's decision was upheld, and Melking was presumed insolvent under s 459C.

‍Key takeaways

‍Service

1. To effect service on a company, a document may be delivered personally to a director who lives in Australia, pursuant to s109X of the Corporations Act. However, there is no provision allowing service on a company by postal delivery to its director.[8]
2. In this case, there was no service by receipt because of the markings on the returned envelope.[9] However, the Commissioner was able to amend its winding up application to allow for alternate modes of service.

Insolvency

1. An application to wind up in insolvency (due to alleged failure to comply with a statutory demand) must satisfy s 459Q of the Corporations Act. Section 459Q requires an application to set out particulars of service on the company and its failure to comply, and must also attach a copy of the demand.[10] There must be a bona fide basis for those particulars that exists prior to the commencement of the application  if not, the application will be an abuse of process. However, a finding that the alleged failure to comply with the statutory demand (as listed in the particulars) was not made out does not necessarily mean that there has been an abuse of process.[11]
2. If the claim is properly commenced, amendments may be made to introduce new particulars of an alleged failure to comply with a statutory demand. This includes amendments for claims based upon events occurring after the commencement of the proceedings.[12] The Court may also require an amendment to provide particulars under s 459Q, depending on fairness and the interests of justice.[13]

If you require our assistance, or have any queries about this decision or insolvency in general, please contact Aaron McDonald on (08) 6188 3340, aaron@pragma.law‍

‍[1]Deputy Commissioner of Taxation v Melking Holdings Pty Ltd [2019] FCA 988, [38].[2] Ibid [37][3] Ibid [4].[4] Ibid [49][5] Ibid [50].[6] Ibid [43]-[44][7] Ibid [43][8] Ibid [57].[9] Ibid [54][10] Ibid [25]-[26].[11] Ibid [29].[12] Ibid [30].[13] Ibid [32].