Can I serve a statutory demand on a foreign company?
Business Law: 24 March 2024
Author: Isaac Choi - Our People
In this article, we explore some key decisions and points made by Australian Courts regarding statutory demand (SD) – an imperative mechanism for creditors against corporate debtors.
As we see more foreign entities conducting various businesses in Australia post-COVID19, there will be an escalation of commercial disputes between domestic and foreign companies. Perhaps the most realistic and practical issue that domestic entities will face is demanding and enforcing any outstanding debt owed by a foreign entity. In Australia, we have yet to see ample cases related to the same.
Can Foreign Entities be served with a Statutory Demand?
Although a creditor should explore other avenues and enforcement options to recover any outstanding debt owed by a debtor company, at times, issuing and serving a SD can be the most cost effective way to recover an unpaid debt, particularly, when the creditor is of the view that there is no dispute in relation to the debt owed.
The question then becomes, can domestic companies issue a SD against a foreign entity? And if so, is it legally binding?
Generally, a foreign company that is not registered under Division 2 of Part 5B.2 of the Act but carries on business in Australia is known as a Part 5.7 Body.
A domestic company can issue a SD pursuant to section 585 of the Corporations Act 2001 (CA) against a A Part 5.7 body pursuant to s 585 of the CA:
“A Part 5.7 body is taken to be unable to pay its debts if: (a) a creditor to whom the Part 5.7 body is indebted in a sum exceeding the statutory minimum [$4,000], then due has served on the Part 5.7 body a demand requiring the body to pay the sum so due and the body has, for 3 weeks after the service of the demand, failed to pay the sum or to secure or compound for it to the satisfaction of the creditor”.
The application of the section was considered by the Federal Court in TCL Airconditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd, Re TCL Airconditioner (Zhongshan) Co Ltd (No 2) 2019 FCA 257 (TCL).
In TCL, Castel purported to serve a demand for payment on TCL Airconditioner (Zhongshan) Co Ltd at an address in Quuensland. They also copied it to TCL’s solicitors who had acted for TCL in respect to ongoing disputes between the parties. Relevantly, TCL did not have a registered office in Australia. TCL brought an application seeking a declaration that it was not a Part 5.7 body.
The Court considered the following issues [2]:
- Whether the debtor, TCL, ‘carries on business in Australia’ so as to constitute a Pt 5.7 body; and
- If it is found that TCL ‘carries on a business’, whether the SD came to the notice of TCL such that service of the SD was effected.
1) Carries on Business in Australia
Section 21 of the CA provides a useful definition of what it means to be carrying on a business in Australia. However, it was noted in TCL that this “expression may have different meanings in different contexts. So care must be taken to understand the context in which the requirement is being considered. However, when used to ensure a jurisdictional nexus as a matter of comity it will have a meaning informed by the requirement to ensure there is sufficient connect with the country asserting jurisdiction” [17].
In TCL, the Court observed that TCL Airconditioner (Zhongshan) “was doing more than simply selling and exporting goods disinterestedly from China to buyers in Australia. Rather, it was actively developing, protecting and controlling its Australian market, even though some of these steps were carried out remotely” [33]. In considering the totality of the factors, it was found that the company was carrying on a business in Australia at relevant times.
2) Serving SD
Whereas in the case of a domestic company, a SD can generally be served on the registered address of the company, this is not as straight forward when dealing with a foreign entity that does not have a registered office in Australia.
In TCL, the Court observed that it will be deemed to be good service if a creditor can establish that the notice came to the attention of the person to be served. In TCL, the Court ultimately determined that service had been effected as the SD was served on the debtor’s lawyers, Norton Rose Fulbright, who had instructions to then advise the creditor that their client was not registered in Australia and did not carry on business in Australia. In other words, the creditor’s SD came to the debtor’s attention through its lawyers in Australia which was indeed accepted by TCL Airconditioner (Zhongshan).
Summary
In dealing with SD, one need to consider the risk that once served, a debtor has an opportunity to set aside the SD by issuing a court proceeding. In general, the threshold is very low for the debtor to successfully set aside the SD which could result in a significant costs order against the creditor should the debtor be successful. When dealing with a foreign company, these is an added layer of complexity.
Therefore, we recommend you seek advice from our team before issuing a SD against a foreign entity. At Aitken Partners, we have the expertise and can advise and guide you through the process.