In Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufacturers Pty Limited  FCAFC 228 (“Morton“), the Full Court of the Federal Court has delivered a resounding “No” to the question of whether set-off is available to a creditor required to disgorge an unfair preference payment.
The decision resolves a long line of diverging authorities and commentary on the subject, providing welcome clarity for liquidators.
Section 553C(1) of the Corporations Act 2001 (Cth)(“Act”) provides, in effect, that a person seeking to have a debt or claim admitted against a company in liquidation is entitled to the benefit of set-off where there have been mutual credits, mutual debts or other mutual dealings between the parties.
Section 553C(1) requires ‘mutuality’ of the claims being set-off, which essentially means between the same parties and in respect of the same interests. Academics and practitioners alike have been critical of the application of this provision to unfair preference claims and there has been a range of commentary and opinion as to why a set-off is not available in those circumstances.
The judgments typically relied on by proponents of set-off include those handed down in insolvent trading cases, such as Re Parker (1997) 80 FCR 1 (“Re Parker“) and Buzzle Operations Pty Ltd v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47 (“Buzzle“) and some first instance unfair preference decisions.
In Morton, the liquidator brought an unfair preference claim against the defendant creditor for payments received totalling $190,000. The defendant creditor sought to set-off a separate debt of $194,727.23 owing by the company to the defendant creditor against the liquidator’s claim.
After hearing the matter at first instance, Derrington J referred the question of whether set off was available to the defendant creditor to the Full Court of the Federal Court .
In his leading judgment, Chief Justice Allsop held that the question was ultimately one of statutory construction.
After considering the relevant statutory provisions, the Full Court of the Federal Court was unanimous in holding that set-off under section 553C(1) of the Act was not available to the defendant creditor, because the requisite element of mutuality was not satisfied.
In particular the debt of $194,727.23 which the creditor sought to have set off arose from “historical events in the ordinary course of business dealings” (i.e. the supply of goods by the creditor to the company). Conversely, the creditor’s obligation to disgorge the unfair preference payment arose pursuant to court order obtained by the liquidator in the exercise of his statutory duties, which occurred after the “relevant date.”
What now for Re Parker and Buzzle?
The Full Court of the Federal Court distinguished the past decisions in Re Parker and Buzzle, having regard to the difference between the legislative purposes of unfair preference versus insolvent trading provisions (sections 588V and 588W).
The Court ultimately left the question of correctness of the Re Parker and Buzzle decisions undecided. Therefore, these decisions can still be relied on in relation to insolvent trading claims.
Morton is a seminal decision, which resolves with finality the long running controversy of whether statutory set-off is available in the context of unfair preference claims. In summary:-
- Set-off under section 553C is no longer available as a defence to an unfair preference claim brought by a liquidator.
- Set-off may be available in respect of other voidable transaction claims brought by a liquidator and also insolvent trading proceedings.
~ with Alexandra Culshaw, Lawyer