Setback for Tax Office in issuing demands on foreign companies

This week the Federal Court delivered an interlocutory judgment setting aside leave for substituted service of demands made by the Australian Taxation Office on two companies registered in the Cayman Islands and Luxembourg. The ATO claims that the two companies owe approximately $750 million in taxes and penalties in relation to the 2009 Myer float.

In Australia, Part 5.7 of the Corporations Act provides a special regime where a creditor can issue demands on foreign companies and potentially rely on such a company's failure to satisfy the demand as evidence of insolvency in a later attempt to apply to have a foreign company wound up. This regime is only available if the foreign company is carrying on business in Australia or it is a registered foreign company in Australia so that it satisfies the definition of a 'Part 5.7 body'. The ATO obtained ex parte orders allowing substituted service of such demands as a creditor on the two foreign companies : a Cayman Islands' and a Luxembourg company.

In this week's hearing, the companies successfully applied for the orders to be set aside on the grounds that the ATO has not provided any evidence that the companies were Part 5.7 bodies when it obtained the ex parte orders. The Federal Court's decision highlights that it is necessary for a creditor to provide evidence that the foreign company was in fact carrying on business in Australia or that it was a registered foreign company in Australia if it seeks to obtain orders for substituted service of a demand on a foreign company under s585(a) of the Corporations Act.