Insolvency practitioners have now received the court's ruling as to reliance on section 553(c) of the Corporations Act 2001 (Cth) ("the Act") set off as a defence to an unfair preference claim. In the delivery of its judgment on 8 February 2023, the High Court of Australia dismissed an appeal of Metal Manufactures Pty Limited v Liquidator of MJ Woodman Electrical Contractors Pty Ltd, whereby Metal Manufactures Pty Ltd appealed on the question of whether a creditor is entitled to set off an amount received as an unfair preference against another debt in the ordinary course of business when faced with a claim by a liquidator for an unfair preference payment.
The appellant was paid $50,000 and $140,000 by MJ Woodman Electrical Contractors Pty Ltd ("MJ Woodman") prior to its winding up. The liquidator of MJ Woodman sought to recover these payments as unfair preferences under s 588FF(1)(a) of the Act. The appellant sought to rely on the defence of set-off under section 553(c) of the Act in reduction of its potential liability to repay the alleged unfair preferences against a separate debt owed to it by MJ Woodman that off-setting debt being submitted as a debt in the liquidation of MJ Woodman.
The Full Court answered the question posed by the primary judge: is a statutory set-off, under s 553C(1) of the Act, available to the appellant in this proceeding against the first respondent's claim as liquidator for the recovery of an unfair preference under s 588FA of the Act? In its decision, the Full Court determined the answer to this question should be no.
The appellant argued that it was entitled to set off its potential liability under s 588FF(1)(a) against amounts owing to it by MJ Woodman, due to the mutual dealing between the two companies.
The High Court held that any liability arising from an order under s 588FF(1)(a) was not eligible to be set off against the debt owed to the appellant. The High Court, in the delivery of its judgment, stated that this judgment renders any inconsistency now found in the precedents set by Re Parker, Buzzle Operations v Apple Computer Australia, Shirlaw v Lewis, Hall v Poolman, and Stone v Melrose Cranesi as "wrongly decided" (per [56]).
According to the High Court, s 553C(1) requires that the mutual credits, debts, or dealings be credits, debts, or dealings that subsisted in some way or form before the commencement of the winding up. The High Court considered that mutuality between credit and debt, in that regard, must arise out of the same "equitable or beneficial interests" (per [69]). In this case, immediately before the winding up, there was nothing to set off as the company owed money to the appellant, but the appellant owed nothing to the company. Additionally, there was no mutual dealing within the meaning of s 553C(1), as there is no mutuality of interest between the preference claimed by the Liquidator under section 588FF(1)(a) of the Act, and the debt incurred by the company that was provable by Metal Manufactures in the liquidation (per [74]).
The High Court upheld the Full Court's decision and ruled that the appellant was not entitled to set off its potential liability under s 588FF(1)(a) against amounts owed to it by MJ Woodman. This case serves as a reminder of the limitations of set-off in the context of the winding up of a company and the recovery of unfair preferences.
A copy of the judgment can be found here.
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