ATO winding up applications: Not necessarily the end

Business survival can be negotiated...

The Australian Taxation Office (ATO) has been a hot subject in recent months, with it flexing its muscles in pursuing delinquent taxpayers to collect taxes, particularly in respect of companies.

The ATO have been vigorously issuing statutory demands on companies with outstanding taxes and swiftly following them with winding up applications where there is no response to, or payment of the statutory demand.

However, it appears there is hope, even once the winding up notice is filed in court, as the ATO has shown recently that it is open to consider the possibility of a commercial alternative.

As with most court proceedings, certain notices must be filed and certain notice periods must be given. In the case of ATO winding up proceedings, it usually involves:

• the ATO issuing the statutory demand
• the ATO filing the winding up application in court (post the 21-day statutory demand’s expiry)
• the court setting a hearing date (which in practice is usually 21-28 days, in some cases, even longer)
• the ATO serving the winding up notice on the company
• the winding up application being heard.

Accordingly, by the time a company is wound up by the court, several opportunities for the company—or rather its directors—were available to address the issue or defend the proceedings. While we don't have the statistics to hand for how many ATO instigated winding up applications are contested; we believe that most are not.

Once a winding up application is filed, the opportunity to commence a creditors’ voluntary liquidation is gone (by law). Consequently, only a voluntary administration (VA) can be instigated by the company as a formal insolvency appointment, where the company has some prospect to continue.

Recently we have had success with the ATO leaving the door slightly ajar to consider genuine attempts by directors (or other interested parties) to formulate a commercial proposal to creditors for a Deed of Company Arrangement (DOCA). A VA appointment while the ATO is waiting for the court to hear its winding up application will not necessarily stop the ATO pressing on with the winding up application hearing. But, if the administrator and the directors can show the ATO there is a genuine possibility of a DOCA then the ATO may agree to adjourn the court hearing while the proposal is formulated and reported to creditors.

The catch is the ATO will usually only agree to an adjournment to a date that falls between the administrators' statutory reporting date to creditors (20 business days after appointment) and the second VA meeting a week later where creditors vote on the proposal—this means that if the ATO doesn't like the proposal, they will push on with asking the court to wind up the company before creditors as a whole have the opportunity to vote on the DOCA proposal or otherwise.

The critical points to give businesses the best opportunity in gaining the ATO's support are:

1. The VA appointment cannot be made on the court's doorstep, as the ATO needs to be convinced to adjourn their winding up hearing in the first instance.
2. There must be a genuine and commercial DOCA being proposed.
3. The ATO needs to ‘like’ what they are hearing through the process, and eventually the proposal.

This shift in the ATO’s stance is a show of flexibility in an ever-changing business environment. Policy versus commercial outcomes i.e. the possibility of a greater return on a claim under a DOCA, shows that working with an insolvency expert willing to negotiate and advocate for all parties concerned, can make the difference between business life and business death.