7.1 The previous chapter outlined the principal factors in Australian law and practice affecting international litigation. Against that backdrop this chapter summarises the civil remedies available in Australian courts under Australian law for two of the six types of claim identified in the inquiry's terms of reference: debt recovery and corporate insolvency. The other types of claim are discussed in the following chapter. This chapter discusses debt and insolvency remedies in three sections
first, the remedies available as a matter of general principle, disregarding the particular international features of the claim
then, the territorial limits to those remedies
third, the extent to which those remedies are enforceable outside Australia.
As noted in the previous chapter, to simplify the analysis the chapter considers only the remedies available to a party in the District and Supreme Courts of New South Wales and the Federal Court of Australia.
7.2 This section considers the remedies available for debt recovery against assets outside Australia. The following example reflects section 3(a) of the terms of reference of this inquiry.
Debt recovery example
This example concerns a straightforward import/export transaction. A sole trader who is not a resident of Australia owes money on the purchase of goods sold by an Australian company. The goods have been received by the trader in his home country. The trader has no assets in Australia but owns land in his home country.
The range of remedies available
7.3 The civil remedies generally available in Australia for debts owed where goods have been supplied but not paid for arise through
obtaining and enforcing a money judgment
7.4 There are also anticipatory remedies available where there is a risk that the debtor will leave the jurisdiction or remove or dissipate his or her assets. These include
a Mareva injunction
an Anton Piller order
interim bankruptcy orders.
7.5 For jurisdictional reasons some of these remedies will not be available or will be of limited value in the debt recovery. To illustrate this the remedies are first discussed in general terms and then the jurisdictional issues are considered.
7.6 The simplest procedure available to the Australian company is to seek a default judgment in its favour for the amount of the debt. To do so the exact amount claimed must be stated in the initiating process. If the defendant does not file a defence, judgment is entered in favour of the plaintiff for the amount claimed. Default judgments have the same force as those made after a fully heard trial and the same methods of enforcement are available. They can be set aside but only in limited circumstances. The methods of enforcement include
examination of the debtor
levy against property
attachment or garnishment of debts or income owed to the debtor
charging and stop orders
court appointed receivership.
Each of these methods of enforcement is discussed below to illustrate the range of remedies contemplated by Australian law. However they are generally of little value to the Australian company in the debt recovery example because (as discussed later in this chapter) they generally do not extend to individuals or assets outside the jurisdiction.
Examination of debtor
7.7 All courts with jurisdiction to hear a debt recovery matter in New South Wales have procedures by which the attendance of the judgment debtor at an examination hearing can be compelled for the purposes of discovering what assets the judgment debtor has with which to satisfy the judgment.[ccclxxvii] A judgment creditor may seek to use this order to determine which of the judgment debtor's assets it would be easiest to enforce the debt against.
Levy against property
7.8 All courts of relevant jurisdiction in New South Wales have power to issue warrants to seize the property of a judgment debtor.[ccclxxviii] Such orders authorise the sheriff to seize and sell the judgment debtor's property and pay the proceeds of such sale to the judgment creditor.
7.9 All courts have power to issue these warrants against goods and chattels as well as money, negotiable instruments, bonds and securities. The New South Wales Supreme and District Courts may also authorise seizure and sale of interests in land.[ccclxxix] This remedy is not available in the Local Court but an unsatisfied judgment in the Local Court can be registered in superior courts and enforced against land.
7.10 Items that are owned in conjunction with several owners or are subject to claims or rights by other parties (for example, a finance company) may be seized and the judgment debtor's share sold. Certain interests such as stocks and shares cannot be seized but income generated from them may be, and the assets themselves may be subjected to a charging order (see below). Other items such as money in court held for the benefit of the judgment debtor also may not be seized but may be subjected to a stop order (see below).
Attachment or garnishment
7.11 Debts and income owed to judgment debtors may be accessed by the judgment creditor through attachment or garnishee orders.[ccclxxx] The debts must be present debts which are payable at the date of the order. Specific legislation in New South Wales permits attachment to bank deposit accounts which are not otherwise recognised at common law as currently owing or accruing to the judgment debtor.[ccclxxxi]
7.12 In the New South Wales Supreme Court this is a two stage process. The court first grants an order which attaches to the debt and sets a hearing date. The second stage is an order absolute which requires the judgment debtor to pay the debt attached to the judgment creditor.[ccclxxxii] In the two lower courts this procedure is combined into one order.[ccclxxxiii] The orders in all cases are directed to the garnishee (for example, the bank) and cover all debts owed by the garnishee to the judgment debtor.
7.13 Attachment of income commonly appears in the form of an order for an employer of the judgment debtor to pay that person's wages or salary to the judgment creditor instead of the judgment debtor. At common law these orders may only apply to present debts and not future wages thereby making it necessary to serve a new order on the garnishee each time an amount is payable to the judgment debtor. However, the Local and District Courts of New South Wales have power to issue a variety of future wages attachment orders.[ccclxxxiv]
Charging and stop orders
7.14 Orders may also be sought in the New South Wales Supreme Court for the charging of the judgment debtor's stocks and shares as well as stop orders over any monies held in court for the benefit of the judgment debtor.[ccclxxxv] A charging order may also be used against a bank account. The procedure for obtaining and enforcing an order is similar to the two stage procedure outlined in relation to the attachment of debts. The effect of a final charging order is the same as if the judgment debtor had granted a charge over the relevant assets in favour of the judgment creditor.
Court appointed receiver
7.15 Section 67 of the Supreme Court Act 1970 (NSW) empowers the Supreme Court to appoint a receiver of a debtor's property where it is deemed just or convenient to do so. This is a particularly useful remedy where that court is of the opinion that none of the execution processes outlined above is adequate.
7.16 The Supreme Court may, in its discretion, appoint a receiver of specific items of the judgment debtor's assets.[ccclxxxvi] The court may make such an order in respect of assets that would not otherwise be subjected to any of the other execution orders or where the usual processes would be inadequate or inconvenient. A receiver in this instance is not given the power to sell the assets but is entitled to receive the alleged debtor's specified property and thus prevent it being dealt with. This may have significant practical benefits for the judgment creditor if bankruptcy proceedings are later commenced. The court is not likely to grant this order where the debt is small.
7.17 An alternative way in which a supplier such as the Australian company may recover its debt is to apply to have the debtor declared a bankrupt. There are two ways in which a creditor may seek to do this
present a creditor's petition to a Registrar in Bankruptcy (Supreme or Federal Court) or
obtain a final judgment or order against the debtor and then obtain a bankruptcy notice from the Registrar.
In both cases the debt sought to be recovered must be in excess of $1 500 and must be a liquidated sum (not merely the basis of a cause of action).[ccclxxxvii]
7.18 A creditor's petition can only be presented if the debtor has committed one of the 'acts of bankruptcy' set out in s 40 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) within the previous six months. These are acts or events which indicate that the debtor is not willing and not able to pay its debts.
7.19 Where a final judgment has been obtained and the debtor fails to pay the amount owing under the judgment, the debtor is deemed to have committed an act of bankruptcy which is an act upon which any creditor may found a creditor's petition.[ccclxxxviii]
7.20 Alternatively the creditor could seek to establish other acts of bankruptcy. Assuming at this stage bankruptcy proceedings could apply in the case of this example, they might include
certain dealings (within or outside Australia) by the debtor with his/her property (eg assignments and dealings that would otherwise be void against the trustee in bankruptcy if the debtor were to become bankrupt)
certain conduct intended to defeat creditors, or
certain conduct indicating an inability to pay debts as they fall due,
occurring within the relevant six month period.
7.21 The consequences of the debtor being declared a bankrupt are that all the property of the bankrupt vests in either the Official Trustee or a registered bankruptcy trustee for distribution to creditors. The relevant property available for distribution will include property of the bankrupt at the date of the act of bankruptcy, any preferences given to other creditors within six months before the petition ('relation back period'), property acquired after the date of the act of bankruptcy, and any property acquired by the bankrupt on or after the date of bankruptcy and before discharge.[ccclxxxix]
7.22 Section 81(1) of the Bankruptcy Act gives the court, on application by a creditor with a provable debt or by the relevant trustee in bankruptcy, power to summon certain persons for public examination, whether before, during, or after the end of the bankruptcy proceedings. The people who can be summoned include the bankrupt, a person suspected of possessing property of the bankrupt, and any person believed to be indebted to the bankrupt. This is an important tool for creditors such as the Australian company as it enables the discovery of property to which the trustee is entitled.
7.23 Although not relevant to the debt recovery example (because the debtor and assets are already out of the jurisdiction), anticipatory remedies are important where there is a risk that the alleged debtor will leave the jurisdiction, remove his or her property from the jurisdiction or generally set up his or her affairs to make recovery more difficult.
7.24 The most useful anticipatory remedy is the Mareva injunction. This temporarily restrains the alleged debtor from dealing with some or (rarely) all of their assets in any way which may inhibit or prevent recovery of the alleged debt, pending hearing of the action for recovery of the debt. The injunction may alternatively be framed so that it applies even after judgment has been made in order to aid the judgment creditor in enforcing the judgment.[cccxc] This interim remedy does not operate so as to create a security interest for the applicant and may only be granted by the Supreme Court, the Federal Court or the District Court. Where the alleged debtor or the third party fails to comply with the order this is deemed to be contempt of court.
7.25 To obtain the remedy the applicant must show that
the debt is owing or there is a serious question to be tried
there is a real risk that the alleged debtor is about to leave the jurisdiction or is about to dissipate its assets and
proof or enforcement of the debt will be made more difficult if the alleged debtor's behaviour is not appropriately restrained.
7.26 To satisfy the first element, it is not necessary for the applicant to prove the claim will ultimately be successful, just that it has a good arguable case.[cccxcii] The other two elements require the applicant to show that the order is necessary to protect the debt claimed. There must be particular reasons why the applicant believes that the assets will be removed from the jurisdiction or liquidated. It is not sufficient simply that the alleged debtor intends to leave the jurisdiction[cccxciii] or is a foreigner. Nor is it sufficient that the debtor is actually disposing of its assets, as this may be just the debtor conducting its normal course of affairs.[cccxciv]
7.27 A Mareva injunction may be granted in Australia whether or not the defendant is domiciled or present within the jurisdiction.[cccxcv] However in The Siskina[cccxcvi] it was held that a Mareva injunction could not be granted where the defendant was not amenable to the jurisdiction of the court independently of the claim for the injunction. Therefore a plaintiff cannot claim a Mareva injunction against a defendant who is not subject to the jurisdiction or where the action to which the Mareva injunction relates cannot be heard by the court in the jurisdiction where the Mareva injunction is sought.[cccxcvii]
7.28 One further advantage of the Mareva injunction to parties claiming from debtors is that it can be framed to bind third parties instead of or as well as the debtor. This is of particular relevance where the debtor's assets may be in the control of other parties (usually items such as funds in a bank account, goods in the hands of others held on behalf of the debtor etc). In such situations the applicant would have to demonstrate that the account or the goods are that of the debtor before the court will make the requested order.
7.29 The Mareva injunction is a discretionary remedy of the court and as such there are no rules or considerations which a court is bound to follow. However there are a number of issues the court will consider in exercising its discretion to make such an order
the harm likely to be caused to the debtor
whether there was some kind of culpability in the applicant's actions leading up to the application
whether it will require a great degree of court supervision to police the order, and
whether the order will cause undue hardship on the parties or any relevant third party (where applicable).
7.30 Before granting this remedy the court will also usually require the applicant to give an undertaking to compensate the debtor (or a third party where appropriate) for damage suffered as a result of a wrongfully issued order.
Anton Piller order
7.31 Where goods supplied by a party are still in the hands of the debtor (or its agent), the applicant may seek an order requiring the debtor or third parties to authorise it to enter specified premises in order to search for and seize the relevant goods pending hearing of the debt claim in court.[cccxcviii] As with Mareva injunctions, failure by the debtor to comply is a contempt of court. Such orders, known as Anton Piller orders, may be obtained before or during proceedings or after judgment in aid of execution.[cccxcix]
7.32 Before such an order will be granted there must be clear evidence that the debtor has the goods in its possession and that there is a real possibility that the goods will be destroyed or disposed of before the debt recovery matter can be heard.[cd] As this remedy is also only awarded at the discretion of the court the considerations outlined in relation to Mareva injunctions apply in the case of Anton Piller orders, including the requirements that
the applicant has a good cause of action against the debtor
the applicant has a sufficiently strong case to justify the order
the applicant has fully disclosed all relevant facts
there will be a serious loss to the applicant if there were a denial of the relevant order and this is greater than the loss likely to be suffered by the debtor, and
the applicant's undertaking as to damages is adequate.
7.33 Traditionally these orders have largely been confined to the areas of infringement of intellectual property rights and have only been used in debt recovery matters in isolated instances.[cdi] The courts are generally reluctant to make such orders as they are at the 'extremity of the court's powers'.[cdii]
Interim orders in bankruptcy proceedings
7.34 Anticipatory remedies are also available in bankruptcy proceedings. As soon as a creditor's petition is filed (and before the debtor is declared bankrupt) any creditor may apply to the court for a direction that a trustee take control of the property of the debtor and make such orders in relation to that property as the court deems fit.[cdiii] The court will only do this where it considers it to be in the interest of creditors. This direction is on an interim basis only and will invariably require proof that the petition is well founded.
7.35 Alternatively, a court exercising jurisdiction in bankruptcy has specific statutory power to grant injunctions or such other equitable orders as it considers necessary for the purposes of carrying out or giving effect to the Bankruptcy Act.[cdiv] This power includes Mareva injunctions.[cdv] When applying for an injunction pursuant to the Bankruptcy Act it is not necessary to prove necessity for the order, merely that relief is necessary in the interests of justice including the preservation of assets in order that they may be appropriately distributed among creditors.[cdvi]
Jurisdiction - the need for a connection
7.36 These remedies will only be available to the Australian company in the debt recovery example if there is a sufficient connection between the Australian jurisdiction and the non-resident businessman or the transaction. The necessary connection varies according to the remedy sought.[cdvii]
Jurisdiction in the enforcement of judgment debts
7.37 In the debt recovery example the judgment debt and the orders available to enforce it are based on a breach of contract. The Supreme Court of New South Wales has jurisdiction over claims arising out of a contract where
the contract is made in the State
the contract is made on behalf of the person to be served by or through a person carrying on business or residing in the State
the contract is governed by the law of the State
the breach of contract was committed in the State.
The position is similar in the Federal Court.[cdix] The District Court Act allows the Court to hear a matter where either a material part of the cause of action was in New South Wales or the defendant was resident in New South Wales at the time of service of the document commencing the action.[cdx]
7.38 There are several factors relevant to the issue of where the contract was made (all of which go beyond the assumed facts).
The contract will be taken to have been made within Australia if the offer was made by the businessman outside Australia and the Australian company accepted that offer in Australia.
The contract will also be taken to have been made within Australia if it is written and was executed within Australia or the last party to execute was within Australia.
If the contract was made within Australia but later varied outside Australia it will still be regarded as having been made in Australia.
The issue of jurisdiction to hear matters relating to a contract involving international elements is considered further in chapter 8.
Jurisdiction in bankruptcy proceedings
7.39 In general terms
the Bankruptcy Act extends to debtors who are not Australian citizens
upon bankruptcy all of the property of the bankrupt vests in the trustee whether it is situated in Australia or elsewhere
the system of priorities provided under Australian law is not affected by the place where the property is located or where the claimant is domiciled.
7.40 However there are territorial limits to this broad jurisdiction. Involuntary bankruptcy proceedings may only be commenced where there is a prescribed connection with Australia, there are special requirements for service of bankruptcy petitions, and there are comity considerations when there are parallel bankruptcy proceedings in different countries.[cdxii]
7.41 An applicant is not permitted to take bankruptcy proceedings on the filing of a petition against a debtor unless, at the time of the relevant act of bankruptcy on which the petition was based,
the debtor was ordinarily resident or had a dwelling house in Australia
the debtor has a place of business in Australia or was carrying on a business within Australia or
the debtor was the member of a partnership or a firm carrying on business in Australia by means of a partner, agent or manager.
7.42 A person is deemed to be ordinarily resident in a country where there is some element of permanence or the person lives in that country in the ordinary course of his or her life. A person can be ordinarily resident in more than one country.[cdxiv] A debtor carries on business within the jurisdiction if that person trades within the jurisdiction or, having ceased trading, still has any debts of the business outstanding within the jurisdiction.[cdxv]
7.43 A petition that has been filed with the court must be served on the debtor before the debtor is declared a bankrupt.[cdxvi] The Bankruptcy Act and Bankruptcy Rules displace all relevant rules of any court in regard to service and must be strictly adhered to. Generally service must be effected by delivering to the debtor personally a court authorised copy of the petition as filed together with other relevant documents.[cdxvii]
7.44 If the court is satisfied that for some reason prompt personal service cannot be effected it may order substituted service.[cdxviii] Substituted service is usually effected by delivering the authorised copy of the petition and ancillary documents to an adult person at the debtor's usual or last known residence or business,[cdxix] or by advertising notices in newspapers[cdxx] or, if the debtor is in another country, by sending a notice of the presentation of the petition.[cdxxi] The method of service must be one that is likely to bring the petition to the notice of the debtor.[cdxxii]
7.45 In the debt recovery example it is possible that bankruptcy proceedings have been commenced against the non-resident businessman in his own jurisdiction. An Australian court is not deprived of jurisdiction merely because of these proceedings overseas[cdxxiii] but in such a situation the Australian court has a discretion to stay the local bankruptcy proceedings.
7.46 The appropriate procedure for the Australian court in this situation is unclear. The traditional approach would be for the Australian court to administer the assets in Australia and leave the foreign court to administer the assets within its control, each jurisdiction requiring all creditors to prove their debts in each jurisdiction. Under this approach Australian creditors would need to prove in the foreign bankruptcy under the foreign law.
7.47 There is however some conflicting authority on this point. One suggestion is that if a bankruptcy has commenced in a foreign country an Australian court would probably not be competent to hear the matter and the relevant proceedings in Australia would probably be discharged to allow the court to assist the foreign trustee with such orders as may be required in respect of property within Australia.[cdxxiv] This position runs contrary to Re Artola Hermanos[cdxxv] but recent cases suggest that Australian courts will follow this 'stepping back' approach.[cdxxvi] Other commentators take the view that '[it] is undoubtedly the current English and Australian point of view, viz that there should be separate and independent proceedings in every jurisdiction in which assets exist'.[cdxxvii]
Jurisdiction: Mareva injunction
7.48 It now appears to be settled law in Australia that a court can grant a Mareva injunction against assets located outside Australia, even when they had not been located in Australia at any time beforehand.[cdxxviii] However, if such an order is to be made the court will need to be satisfied that there is some link with the local jurisdiction. The connection on which the courts have concentrated is the connection of the defendant with the local jurisdiction. There is insufficient information in the facts outlined in the debt recovery example to determine whether a Mareva injunction would be available in that situation.
Jurisdiction: Anton Piller orders
7.49 The courts generally appear to have discretion to make an Anton Piller order in respect of premises located outside Australia. However this discretion has rarely been exercised.[cdxxix] When exercising its discretion the court will consider the possibility of harm to the debtor located overseas. Generally the court will be unwilling to make an order in respect of foreign premises where the debtor is situated outside the jurisdiction unless the debtor is a person 'over whom the courts have unquestionable jurisdiction'.[cdxxx]
Enforcement of remedies outside Australia
7.50 If the Australian company is able to obtain Australian court orders of the kind discussed above, there are three further factors it will need to consider when seeking to enforce them outside Australia: the special position of land, local forms of relief, and letters of request in bankruptcy proceedings.
7.51 The law relating to land presents a fundamental obstacle to the Australian company. It is settled law that a local court does not have jurisdiction to hear any action for the determination of title to land or other immovable property outside the jurisdiction.[cdxxxi] The one exception is where the action relates to enforcement of a contract or implied contract in relation to that land.[cdxxxii] Consequently there is no jurisdiction in any court in Australia to entertain an action in relation to the non-resident businessman's land or to allow any execution against it.
7.52 This principle applies to bankruptcy proceedings as well as to direct enforcement of judgment debts. A transfer of a bankrupt's movable property to the trustee in bankruptcy operates as an assignment of the movables wherever locally situate.[cdxxxiii] However, real property is governed by the law of the jurisdiction in which it is located. Accordingly a declaration of bankruptcy will not operate as an assignment to the trustee in bankruptcy of such property outside the jurisdiction unless the law of the country where the property is located makes provision to this effect.[cdxxxiv]
7.53 As noted in chapter 6, s 29(4) of the Bankruptcy Act permits the court to request a court of an external jurisdiction in bankruptcy to act in aid of and be auxiliary to it in a matter of bankruptcy. In some jurisdictions this may be of particular benefit. For example, s 426 of the Insolvency Act 1986 (UK) requires that courts having jurisdiction in bankruptcy in the United Kingdom assist a court in 'a relevant country' when requested by applying the insolvency law which is applicable by either court in relation to comparable matters falling within its jurisdiction. For the purposes of this Act Australia is a 'relevant country'.
7.54 The Australian court has a discretion whether to make this request and that discretion is to be exercised with regard to considerations of utility and comity.[cdxxxv]
7.55 This section considers the remedies available for debt recovery in a corporate insolvency where control of the corporation is outside Australia. The following example reflects section 3 (b) of the terms of reference of the inquiry.
Corporate insolvency example
This example deals with the insolvency of a multinational corporation. A multinational corporation incorporated in Europe has assets in Australia and Europe and is controlled by directors and shareholders in Europe. It is put into liquidation in its home jurisdiction with debts owing to an Australian supplier.
The range of remedies available
7.56 The first remedy the Australian supplier should consider is proving its debt in the foreign liquidation. This would be governed by the laws of the foreign jurisdiction. In terms of remedies available in Australia, the principal remedy is to commence Australian proceedings to wind up the European corporation in Australia. These would be parallel proceedings to the European liquidation. There are also anticipatory remedies available to preserve the European corporation's assets, including the appointment of a provisional liquidator, Mareva injunctions and Anton Piller orders.
7.57 There are a number of jurisdictional issues to consider in relation to these remedies, including the connections between the foreign company and Australia and the implications of parallel proceedings. These are discussed below as jurisdictional and enforcement issues. It is assumed for this analysis that the Australian supplier is a trade creditor and is not the holder of any security over assets of the European corporation.
Creditors' winding up
7.58 Winding up a company in Australia is governed by the Corporations Law. The Corporations Law applies to foreign companies (as well as locally incorporated companies) if, in broad terms, the foreign company carries on business in Australia. The Corporations Law empowers the various State Supreme Courts and the Federal Court to hear all matters relating to the liquidation of corporations. In general terms, the grounds on which the winding up of a corporation may be sought under the Corporations Law include failure to comply with a statutory demand, execution returned unsatisfied, proof of insolvency, and the 'just and equitable' ground.
7.59 Where a company is unable to pay its debts as and when they become due and payable, a creditor may seek to have the company wound up in insolvency. The liquidator would then be required to distribute the assets of the company to all creditors in accordance with the priorities set out in the Corporations Law. Under s 459P of the Corporations Law any creditor of a company has standing to apply for an order that the company be wound up.
7.60 One of the grounds on which a company will be deemed to be insolvent is failure to comply with a statutory demand within the prescribed time.[cdxxxvi] A creditor can initiate this process (in cases where the debt is greater than $2 000) by serving a demand for payment on the company in a form that complies with statutory requirements. If the company does not pay within 21 days of service of the statutory demand and does not move to have the demand set aside, the company will be deemed to be insolvent. If the company is unable to prove that it is solvent at the time of the hearing of the winding-up application it will be wound up and a liquidator appointed to take charge of the appropriate distribution of company assets.[cdxxxvii]
7.61 Any creditor of the company (whether secured or unsecured) may serve a statutory demand.[cdxxxviii]
Execution returned unsatisfied
7.62 A second ground on which a company may be wound up in insolvency by a creditor is on an execution or other process, or a judgment or order of the court in favour of a creditor and against the company being returned unsatisfied in whole or in part.[cdxxxix] When considering such an application the court may go behind the return to ensure that it was in fact unsatisfied and may even investigate the judgment on which the proceedings are based.
7.63 In relying on this process to obtain a winding-up the creditor must first obtain judgment for its debt, seek enforcement of the judgment debt, have the execution returned unsatisfied and then make the application for winding-up on this basis.
Proof of insolvency
7.64 A third ground on which a company may be wound up in insolvency is on the basis of a party such as a creditor proving to the court the actual insolvency of the company.[cdxl] In all cases this is principally a question of fact. Examples may include that the company has failed to honour bills of exchange, that there are a large number of outstanding debts and unsatisfied judgments, or that admissions have been made by the company of its inability to pay.
7.65 In considering such a claim the court is entitled to exercise a wide discretion and will consider the nature of the business of the company,[cdxli] the character of the unpaid debt,[cdxlii] whether the debt was incurred to keep the company as a going concern rather than in the course of trading,[cdxliii] and whether the company's liquid assets exceed liabilities.[cdxliv]
Just and equitable grounds
7.66 A fourth ground on which a company may be wound up in insolvency is on the basis of a claim by a creditor that it is just and equitable to do so.[cdxlv] It is common practice for a creditor who is seeking a winding-up order on any of the above grounds to include in its application a claim that it is just and equitable that the court order the winding-up of the company. If such a claim is raised the court will apply a broad range of considerations which may include
whether the company was formed without a genuine intention that it should carry on business in a proper manner
whether the company was formed for the purposes of fraudulent or illegal purposes, and
whether the company has undertaken fraudulent trading.
Creditors seeking to wind-up a company on this basis will have to either satisfy the court that the matter falls into one of the previously recognised categories (for example, statutory demand, unsatisfied execution, proof of insolvency) or otherwise demonstrate that there are grounds on which it is just and equitable to wind the company up.
7.67 There are three anticipatory remedies available in Australia that are relevant to a winding up: the appointment of a provisional liquidator, a Mareva injunction and an Anton Piller order.
Appointment of a provisional liquidator
7.68 At any time after the filing of a winding-up application[cdxlvi] the court can appoint a provisional liquidator where it is demonstrated that there is a need to protect the company's assets for fear of dissipation pending the hearing of the application, and these assets cannot otherwise be protected by appropriate undertakings.[cdxlvii] The courts have indicated that they have a wide discretion in deciding whether to appoint a provisional liquidator.[cdxlviii]
7.69 In exercising its discretion to make such an order the court will consider such issues as the possibility of dissipation of the assets, the likely outcome of the application for winding-up[cdxlix] and the consequences of the effect on the company of the intrusion into its affairs as a result of the appointment.[cdl]
7.70 The provisional liquidator takes control of the company and is charged with responsibility for maintaining the position of the company at the time of its appointment. The basis of this appointment is to preserve the assets of the company to enable the court to correctly decide whether the company should be wound up.[cdli] In exceptional cases the court will also entrust the provisional liquidator with power to sell assets, for example in those cases where sale is the only appropriate means by which to preserve the company's assets.[cdlii] Provisional liquidators are subject to supervision of the court and have certain fiduciary obligations in the exercise of their powers.[cdliii] The appointment of a provisional liquidator may be sought by any creditor of the company.
7.71 However, if another creditor has already appointed a receiver, a provisional liquidator will not be appointed unless the receiver is shown to be dissipating the company's assets.[cdliv]
Mareva injunctions and Anton Piller orders
7.72 A creditor to a corporation may also consider the possibility of seeking Mareva injunctions and Anton Piller orders in much the same way as a creditor may seek these remedies against an individual debtor. A significant advantage with these forms of orders compared with the interim protection afforded by the provisional liquidator is that the Mareva injunction can be framed to immediately bind third parties that may be in possession of the company's assets. A creditor could not always rely on a provisional liquidator to take such extreme steps to protect the company's property.
7.73 The general framework for winding up a corporation that is described above is qualified by territorial limits when it is applied to the European corporation in the corporate insolvency example.
Winding up a foreign company in Australia
7.74 The European corporation is a foreign company for the purposes of the Corporations Law.[cdlv] An Australian court will only have jurisdiction to wind it up in Australia if it has been registered under the Corporations Law or carries on business in Australia.[cdlvi] Broadly, the grounds on which it can be wound up are that it is unable to pay its debts, has been dissolved, has ceased to carry on business in Australia or has a place of business in Australia only for the purpose of winding up its affairs, or the court is of the opinion that it is just and equitable that it should be wound up.
7.75 In practice the critical jurisdictional issue is whether it carries on business in Australia. The concept of carrying on business is not defined in the Corporations Law. In broad terms, at common law it means conducting some form of commercial enterprise, systematically and regularly, with a view to profit.[cdlvii] It generally refers to some repetitive act in trade and would rarely be satisfied by the proof of only one transaction.[cdlviii] There would usually need to be some repetitive contacts and activities, or physical presence, in Australia to find that a company is carrying on business in Australia.
7.76 The Corporations Law supplements the common law concept with some indicative provisions. First, a foreign company will be regarded as 'carrying on business' in Australia if it
has a place of business in Australia
establishes a share transfer office or share registration office in Australia or
administers, manages or otherwise deals with property situated in Australia (whether as an agent, legal personal representative or trustee), whether by its employees or agents or otherwise.
7.77 Secondly, the Corporations Law provides that certain conduct is not of itself enough to lead to the conclusion that a foreign company is carrying on business in Australia, including
maintaining a bank account
effecting sales through an independent contractor
soliciting or procuring an order that becomes a binding contract only if the order is accepted outside Australia
creating evidence of a debt or creating a charge on property
conducting an isolated transaction that is completed within 31 days, not being a transaction repeated from time to time, or
investing any of its funds or holding any property.
7.78 The question of whether a foreign company is 'carrying on business' in Australia is one of fact in which all the circumstances surrounding the company and its activities will be taken into account.[cdlxi] There is insufficient information in the facts outlined in the corporate insolvency example to determine whether the European corporation is carrying on business in Australia. It seems unlikely that its purchases from Australian suppliers are isolated transactions but it is not known where the supply orders are accepted and there is no information on the type or level of activity or assets of the European corporation in Australia.
7.79 In addition to the 'carrying on business' factor, the court may also take into account other connections with Australia. The court's jurisdiction to wind up a foreign company is discretionary. There is case law suggesting that it is necessary to establish a 'proper commercial connection' with the relevant Australian jurisdiction such as assets within the jurisdiction and some reasonable possibility of benefit accruing to creditors from the winding up order.[cdlxii]
7.80 If, as in the situation outlined in the corporate insolvency example, winding up proceedings have already been commenced in the foreign company's home jurisdiction, this will also be a significant consideration in the exercise of the court's discretion. This is discussed further below.
Jurisdiction where foreign winding-up is in progress
7.81 In broad terms where a foreign company is already being wound up in its home jurisdiction, the ability to commence Australian winding up proceedings is preserved but Australian law encourages cooperation between the local and foreign insolvency administrations.
7.82 On one hand the fact that the company is already in the process of being wound up in the place of incorporation is no bar to the making of a local winding-up order.[cdlxiii] Conversely, the fact that liquidation proceedings have not been commenced in the place of incorporation does not prevent the commencement of local winding-up proceedings.[cdlxiv] The winding-up of a foreign company (whether registered or not) in Australia is required to be conducted pursuant to the law of Australia even where there are winding-up proceedings in the jurisdiction of incorporation.
7.83 On the other hand where the foreign company is being wound up outside Australia, the Australian court must act in aid of courts of prescribed countries under the Corporations Law, and may do so at its election in relation to courts of other countries.[cdlxv] The prescribed countries are Jersey, Canada, PNG, Malaysia, New Zealand, Singapore, Switzerland, United Kingdom and USA.[cdlxvi] The winding up proceedings in the Australian jurisdiction, where commenced subsequently to the foreign proceedings, are expressed to be 'ancillary' to the foreign proceedings and if a formal request from the foreign court is filed requesting aid in an external administration matter, the relevant Australian court may exercise the same powers in assisting the foreign proceedings as it could in relation to the winding-up of a local corporation.[cdlxvii]
7.84 The Australian court may, in its discretion, refuse to wind up the foreign company if in its view a local winding up is not necessary, for example where there are few local assets and these can be adequately administered by the foreign liquidator.[cdlxviii]
Jurisdiction where foreign winding-up has been completed
7.85 Where the foreign company has been dissolved in its place of incorporation, the commencement of the winding up order in the local Australian jurisdiction may still be undertaken. On such an application the foreign dissolved company will be revived for the purposes of the local winding up. This means that local debts owed by the company are revived together with its legal personality provided those debts are not adversely affected by the foreign dissolution.[cdlxix]
7.86 Australia is not a party to any international convention regarding insolvency. Its international cooperation is therefore sourced legally in s 581 of the Corporations Law (and, in relation to natural persons, s 29(4) of the Bankruptcy Act). This provides for particular cooperation with the prescribed countries listed in paragraph 7.83 and for discretionary cooperation with other countries.[cdlxx]
Enforcement of remedies
7.87 If an ancillary winding up of the European corporation is commenced in Australia, there are two further considerations for the Australian supplier: to what extent will its access to the local assets be affected by the foreign liquidation and how can it recover assets located outside Australia?
7.88 As a general principle, in local winding-up proceedings local creditors are not entitled to priority ahead of foreign creditors. Apart from the general priority rules all creditors of the company rank equally wherever they are or wherever the debts were contracted.[cdlxxi]
7.89 Where there are parallel proceedings the local liquidator in Australia has specific duties placed upon it pursuant to the Corporations Law in addition to the usual obligations of a liquidator, including the requirements
to obtain a court order before paying out any creditor of the foreign company, to the exclusion of another creditor and
to recover and realise the property of the foreign company in Australia and pay the net amount to the liquidator of the foreign company in its place of incorporation unless ordered otherwise by the court.
7.90 These requirements make it clear that, without prior court approval, the local liquidator is not permitted to do more than recover and realise the local assets of the foreign company and pay the net amount to the foreign liquidator. This reflects the general principle that Australian courts are obliged to ensure appropriate distribution to all creditors, whether foreign or local. The courts may indeed order that funds be transmitted to the foreign liquidator in the jurisdiction of incorporation even though the creditors who have proven their debts in the local jurisdiction have not all been satisfied.[cdlxxiii]
7.91 However the Australian courts clearly retain a discretion to direct that some other procedure be adopted. It would be expected that this would occur where there was a risk that the proceeds from the local assets, when remitted to the foreign liquidator, would not be divided appropriately among all creditors,[cdlxxiv] including local creditors.
7.92 The general practice appears to be for the ancillary winding-up to deal with creditors notified to the liquidator in the local jurisdiction and to remit any surplus to the principal liquidator.[cdlxxv] On this approach the Australian supplier would be able to participate directly in the distribution of assets in Australia pursuant to the local liquidation.
Recovery of assets located outside Australia
7.93 Where the assets are located outside Australia, as a general principle the Australian court will only make orders or issue letters of request to assist the Australian liquidator to collect and distribute those assets where they are appropriate as part of the ancillary winding up. Australian orders and requests are therefore unlikely where the assets are located in the foreign liquidator's home jurisdiction but may be considered for other jurisdictions if they would assist the foreign (and Australian) liquidation.[cdlxxvi]
7.94 Where Australian orders or requests are not available, the Australian supplier would need to seek recovery through the foreign liquidation or any ancillary winding up in any other jurisdiction.