High Court confirms statutory set-off is not a defence to unfair preference claim

The High Court has confirmed that a creditor of an insolvent company cannot rely on the right of set-off under section 553C of the Corporations Act 2001 (Cth) (the Act) in response to an unfair preference claim under section 588FA of the Act.[1]

This decision is significant because it is binding law and will likely have broader application to other voidable transactions.

Liquidators and creditors alike should review their accounts and presently asserted positions in current disputes. If applicable, creditors should consider their ability to rely on other defences.

If you have any questions about how this decision may affect your business, don’t hesitate to reach out to us.

Background

MJ Woodman Electrical Contractors Pty Ltd (the Company), now in liquidation, made two payments totalling $190,000 to Metal Manufactures Pty Ltd (the Creditor) within the six months prior to the winding up of the Company.

The liquidator of the Company (the Liquidator) sought to recover those payments from the Creditor on the basis that each was an unfair preference under section 588FA of the Act.

Before going into liquidation, the Company obtained goods from the Creditor on credit terms in the amount of $194,727.23.

The Creditor sought to set-off the $190,000 payments (unfair preference payments) by the amount owed by the Company to the Creditor (debt) pursuant to section 553C of the Act.

Under section 553C, where there have been “mutual credits, mutual debts or other mutual dealings” between an insolvent company that is being wound up and a creditor, an account will be taken of amounts owing from one party to the other and sums due from one party may be set off against sums due from the other party. Only the balance of the account is admissible to proof against the insolvent company or is payable to the insolvent company.

Full Court decision

The Full Court of the Federal Court decided that liability to repay an unfair preference payment did not fall within the scope of section 553C of the Act. In so deciding, the Full Court held that:

  1. There was a lack of mutuality between the indebtedness of the Company to the Creditor, and the liability of the Creditor to pay the Company at the suit of the Liquidator. The right to seek repayment of the unfair preference payments is not the right of the Company, but the right of the Liquidator.[2]
     
  2. The purpose of the statutory set off is to protect creditors where there are genuine mutual debts or dealings, without affecting the distribution.

The Full Court distinguished the preference regime, which is “directed to the protection of the access of all creditors of the company to equality of distribution”, from sections 588M, 588G, 588V and 588W of the Act (which had been subject of previous cases).

Appeal to High Court

The Creditor appealed and argued to the High Court that there had been a mutual dealing between it and the Company and that its future liability under section 588FF(1)(a) was no different to any other claim owing to the Company, because the Company would be entitled to receive that amount beneficially.

The High Court dismissed the appeal, holding that any liability for unfair preference payments was not eligible to be set off against the debt:

  • Section 553C(1) required that the mutual credits, mutual debts or other mutual dealings be credits, debts or dealings arising from circumstances that existed in some way or form before the commencement of the winding up. Immediately prior to the Company being wound up, there was nothing to set off as between the Creditor and the Company because the Creditor did not owe anything to the Company. The Liquidator’s right to make a claim regarding the unfair preference payments did not exist before then.
     
  • There was no mutual dealing because there had been no dealing between the same parties and there was no mutuality of interest.

[1] Metal Manufactures Pty Limited v Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd (In Liq) (ACN 602 067 863) & Anor [2023] HCA 1.

[2] Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufacturers Pty Limited [2021] FCAFC 228 at [154].

This article was written by GRT Lawyers, Elizabeth Dowrie (Associate).

Glenn Vassallo (Managing Director), Scott Standen (Director) and Ashley Hill (Director) can assist you with any queries in relation to your corporate legal requirements.

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