Setting off on the wrong foot: creditors are now unable to rely on statutory set-off to defend an unfair preference claim by a liquidator

In a special question reserved for consideration, the Full Federal Court considered whether statutory set-off under s 553C(1) of the Corporations Act 2001 (Cth) (the Act) was available to defend against a liquidator’s claim to recover an unfair preference under s 588FA of the Act.

The unanimous and somewhat emphatic answer to this question delivered through the principal judgment of Chief Justice Allsop was no – reliance on statutory set-off in these circumstances is precluded. This is because of the lack of mutuality between the indebtedness of a company to the creditor on the one hand, and the liability of the creditor to pay the funds back to the company, upon action brought by the liquidator.

Statutory set-off allows for claims to be set off against one another when there is mutuality between the claims – i.e. they are between the same parties, and both parties hold those claims for their own benefit and interest.

In Woodman[1], the liquidator sought t-o enforce a Court order under s 588FF of the Act to recover unfair preference payments received by the creditor totalling $190,000. The quantum of the creditor’s alleged set-off was $194,727.23, arising from business dealings between the company and the creditor.

To rely on statutory set-off under s 553C(1) of the Act, the creditor had to establish that there was sufficient mutuality between the unfair preference payments received during the relation back period and the debts owed to the creditor by the company.

Chief Justice Allsop undertook a thorough consideration of the history and legislative intent behind the relevant provisions of the Act. His Honour ultimately found that the debts could not be mutual. One debt was owed by the company (in its own right) to the creditor due to historical business dealings. The other was payable by the creditor to the company not as a pre-existing creditor, but pursuant to an order of the Court obtained by the liquidator.

In seeking to establish mutuality, the creditor submitted that the company in liquidation was the beneficial owner of the proceeds of a recovery action under s 588FF. Chief Justice Allsop disagreed, stating that this was to take one description of the rights of ownership of the company and use it mechanically for another purpose. The money was received by the company to the benefit of all those entitled in the liquidation. His Honour also considered that beneficial ownership did not detract from the proper characterisation of the action, being an action by the liquidator pursuant to statutory rights and in fulfilment of a duty to augment the estate for the benefit of all creditors.

The intention of s 553C was to create the proposition that if a payment or release of liability is given to a creditor when a company is insolvent, it is not an unfair preference if there was a countervailing payment or release of liability by the creditor – in effect, having a net-zero effect. Here however, the creditor was owed multiple debts by the company prior to it entering insolvency. During the relation back period, the company then made a payment of one of those debts. There was no reciprocal contractual, legal, equitable or statutory right of any kind in the company to call for payment. The right to apply for an order can only be made by the liquidator.

Key Takeaway

This judgment is sure to be well-received in the insolvency industry. It brings a great deal of clarity to the operation of unfair preferences. Liquidators can pursue unfair preference claims with the certainty that a creditor cannot use statutory set-off to receive a greater return in the liquidation than they otherwise would have.

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Authored by:

Scott Couper, Partner
Cameron Jones, Graduate

[1] Woodman Electrical Contractors Pty Ltd v Metal Manufacturers Pty Limited [2021] FCAFC 228.