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Section 553C & Preference Payments

A recent decision in the Queensland District Court has extended the operation of section 553C.

A recent decision in the Queensland District Court in Moreton & Anor v Rexel Electrical Supplies Pty Ltd [2015] QDC 49 has extended the operation of section 553C to allow creditors to set off other debts due from an insolvent company against unfair preference payments.[1]

Traditionally, section 553C of the Corporations Act 2001 (the “Act”) automatically applied “where there have been mutual credits, mutual debits or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company”. The section does not however allow a set-off where, at the time of giving or receiving credit to/from the company, the person had notice of the fact that the company was insolvent (see section 553C(2)).

In this case proceedings were brought by the liquidator of Aran Management Pty Ltd (“Aran”) to recover the sum of $197,469.16 from Rexel Electrical Supplies (“Rexel”) as preference payments (the “Payments”). The Payments were made between March 2012 and June 2012 with the liquidator being appointed in August 2012.

Rexel argued that if the Payments were found to be preference payments, it would be entitled by operation of section 553C to set off the sum of $92,323.00 (being another debt owed to it by Aran (the “Debt”)) against the Payments.

In response the liquidator argued that:

  1. section 553C should be read consistently within the context of the entire Act because a defendant’s ability to rely on section 553C in these circumstances would frustrate the purposes of the unfair preference provisions; and
  2. applying section 553C to preference payments would mean that a creditor who has been paid its entire debt by preference payments would be disadvantaged as compared to a creditor who only received part of their debt by preference payments. This is because a creditor who was paid in full would have nothing to set off against the preference payment.

The Court agreed with Rexel and, relying on comments of the New South Wales Court of Appeal in Buzzle[2] that it would apply section 553C to preference payments, held that section 553C would allow a creditor to set off other debts against payments which are held to be preferential.

The Court held, however, that Rexel had notice of facts that would have indicated to a reasonable person that Aran was insolvent from mid‑February 2012.

As a result, section 553C(2) applied and Rexel was deprived of the right to set off $27,665.73 of the Debt but section 553C still operated to allow Rexel to set off $64,657.27 against the $197,000.00 preference claim under section 553C.

This case is likely to be viewed as highly persuasive to a South Australian Court given the reasoning is based on the comments of the New South Wales Court of Appeal in Buzzle and the fact that the Full Court of the South Australian Supreme Court has previously accepted that it was reasonable to argue that section 553C could set off an unfair preference claim against a pre-liquidation debt.

Further, in a decision in April 2015, the Federal Court has decided that section 553C can be used to set off preference payments.

Liquidators should be mindful that recipients of potential unfair preference payments who are still owed money by the company in liquidation may seek to set off those debts under section 553C. Liquidators should therefore turn their minds to whether creditors had notice of any facts which would have revealed that the insolvent company lacked the ability to pay its debts at the time of the preference payments that could activate section 553C.

Cowell Clarke has significant experience in pursuing recovery of unfair preference payments. Please contact us if you require any advice on pursuing these payments in light of the above decision.

[1] On 2 April 2015, Rexel filed a Notice of Appeal. We will release a further update once the appeal decision is handed down.

[2] Buzzle v Apple (2011) 81 NSWLR 47

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