The long-standing uncertainty about the availability of statutory set-off to unfair preference claims has finally been determined by the High Court. The Court in Metal Manufactures Pty Ltd v Morton unanimously found that section 553C set-off is not available to creditors that are found to have received an unfair preference.
The decision provides much need certainty to liquidators and creditors alike.
Metal Manufactures Pty Ltd (“Metal Manufactures”) supplied goods to MJ Woodman Electrical Contractors Pty Ltd (“MJ Woodman”) on credit. MJ Woodman had two debts owing to Metal Manufactures. The value of the second debt exceeded the value of the first debt.
MJ Woodman repaid the first debt owed to Metal Manufacturers in two instalments. MJ Woodman subsequently entered liquidation. Both payments were made during the relation-back period, being the six months before the liquidation of MJ Woodman commenced.
The liquidator, Morton, sought to recover the two payments as unfair preferences under section 588FF of the Corporations Act 2001 (Cth)(“the Act”).
Metal Manufactures sought to set off its obligation to pay back the unfair preference liability under section 553C of the Act. The set-off was on the basis that the second, larger debt was still owing to Metal Manufactures, which would net off to a zero liability to repay the sum potentially received as an unfair preference.
The High Court held the ability to set-off under section 553C is not available for creditors to set-off against an unfair preference liability.
In reaching its decision, the High Court reasoned:
1- Set-off will only be available if there is an obligation or liability prior to liquidation that might mature into a debt owing.
The rights of parties are identified at the time of winding-up. The liability only arose after the company’s liquidator had exercised its right to recover unfair preference payments.
New claims commenced by a company’s liquidator cannot vary existing rights.
2- There must be “mutuality” of the dealings.
Specifically, the credits, debts or claims to be set-off must be between the same persons, their benefit or burden must lie in the same beneficial or equitable interest and they must ultimately sound in money.
In this case, the potential liability owed by Metal Manufactures was to the liquidator Morton. Metal Manufactures was attempting to set this off against a debt owing by MJ Woodman, the company.
The liquidator sues for an unfair preference in a special capacity as an officer of the Court, distinct from the company’s interest, and applies that amount in accordance with the statutory scheme of liquidation. The interests were therefore not mutual.
The High Court found that Metal Manufactures could not set-off the potential liability under s553C of the Act as none of these requirements had been satisfied.
What this means for liquidators and creditors
Liquidators will welcome the decision of the High Court. The availability of set-off in claims such as this has long been disputed and the subject of conflicting court authority.
The High Court’s reasoning does not leave room for set-off in the context of unfair preference claims. Liquidators can now pursue unfair preference claims with greater certainty.
The other defences to an unfair preference claim remain available to creditors, and we can expect greater focus from creditors on those defences (particularly the running account defence, which was also recently considered by the High Court in Bryant v Badenoch Integrated Logging Pty Ltd  HCA 2).
Importantly, the High Court’s discussion of the significance of mutuality is likely to have broader effects on creditors’ ability to rely on set-off in defending other types voidable transaction claims where mutuality does not exist.
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.