In a recent decision, the Full Court of the Federal Court of Australia has confirmed that a creditor cannot rely on set-off under section 553C of the Corporations Act 2001 (Cth) (‘the Act’) to reduce an unfair preference claim under section 588FA of the Act.
This decision (Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Limited [2021] FCAFC 228) addresses a longstanding point of controversy in insolvency law. It will be warmly received by insolvency practitioners.
Background
The facts before the Court were relatively straightforward.
Metal Manufactures Pty Limited (‘the Creditor’) was an unsecured creditor of MJ Woodman Electrical Contractors Pty Ltd (‘the Company’).
The Company owed a debt to the Creditor for goods sold to it by the Creditor. The Company paid the Creditor $190,000 in respect of this debt during the relation back period.
The Company also owed the Creditor another debt of $194,727.23. It was agreed by the parties that the $194,727.23 debt was owed for reasons unrelated to the debt in respect of which the Company paid $190,000.
After the Company fell into liquidation, its liquidator sought to recover the $190,000 payment to the Creditor as an unfair preference under section 588FA of the Act.
The Creditor denied that it was liable to pay the Company’s preference claim. The Company contended that it was entitled under section 553C of the Act to set off the other debt owed by the Company to the Creditor against the liquidator’s preference claim.
Issue
The question reserved for consideration by the Full Court was whether set-off under section 553C of the Act was available to the Creditor as a defence against the liquidator’s claim for the recovery of an unfair preference under section 588FA of the Act. This is an argument that creditors have been making for several years in defence of an unfair preference claim following cases such as Morton & Anor v Rexel Electrical Supplies Pty Ltd [2015] QDC 49.
Findings
The Full Court unanimously held that the answer to this question was ‘no’.
Section 553C of the Act provides that set-off applies only to ‘mutual credits, mutual debts or other mutual dealings’ between a company and creditor. This requirement is commonly known as ‘mutuality’.
The Full Court observed that ‘mutuality’ under section 553C of the Act exists in circumstances where the rights and obligations in dealings are between the same parties, in the same interests, and as at the relevant date.
The Full Court found that there was a lack of ‘mutuality’ between the Creditor’s liability to pay the unfair preference to the Company, and the Company’s obligation to pay the other debt to the Creditor.
This was because the right to seek repayment of the unfair preference was not a right of the Company itself, and the right did not exist at the relevant time. Instead, it was a right of the liquidator, arising after liquidation, not for the benefit of the Company but rather for the benefit of the creditors. The Court also noted that to find otherwise would displace the statutory regime for priority of debts, and there could be no mutuality in those circumstances.
Practical considerations
This case confirms that creditors can no longer rely on set-off under section 553C of the Act as a defence to unfair preference claims.
Liquidators can now pursue unfair preference claims with certainty that creditors will not attempt to set off unfair preferences against other debt. This will assist liquidators in recovering more money for distribution to the creditors of insolvent company.
To discuss your concerns about unfair preferences, set-off, or other insolvency issues, please contact James Cudmore, Adam Rosser, John Vozzo or Hamish Gillis.
This article provides general comments only and does not constitute legal advice. You should always seek specific advice on your particular circumstances.