Update on unfair preferences and statutory set-off

One of a liquidator’s most powerful tools is the ability to seek to recover unfair preferences from creditors for the purposes of increasing the pool of assets available to creditors generally.

Proceedings to recover unfair preferences can be costly and it is imperative that a liquidator assess not only the evidence available to prove the elements of the liquidator’s claim but also the potential defences available to a creditor prior to the issue of proceedings. This will also prove crucial to pre-proceeding negotiations with creditors which may result in a recovery without significant expense.

There are various ways in which a creditor can resist a liquidator’s claim that the creditor has received an unfair preference. This article will consider the operation of section 553C of the Corporations Act 2001 (Cth) (the Act) as a defence to a claim to recover an unfair preference.

Re Parker

For over 20 years, Australian Courts have recognised section 533C set-off as a defence available in the context of insolvent trading.^[1]

Morton v Rexel

In 2015, a decision of the District Court of Queensland found that statutory set-off as set out in section 533C of the Act was available to creditors in defence of an unfair preference claim.^[2]

This appears to have been the first time the Court has applied the decision in Re Parker in relation to unfair preferences. Various commentators and experts considered Morton v Rexel on its own was not sufficient to change the law and that it was inconsistent with the objects of Part 5.7B of the Act, the primary purpose of which is to promote equal distribution of unfair preference amounts amongst creditors.

Hussain v CSR Building Projects Pty Ltd

On 13 May 2016, Justice Edelman, sitting in the Federal Court (before his appointment to the High Court in January 2017) made some obiter comments about the use of section 553C to defend unfair preference claims.^[3]

His Honour expressed the view that there are “powerful contrary arguments that might have been made to suggest that a set-off is not available against a liquidator’s claim to recover preference payments”.[4] His Honour says “[m]any of these arguments are made in Dr Derham’s book: Derham R, Derham on the Law of Set-off (4th ed, Oxford University Press 2010) 537-547”.[5]

Ultimately, it was unnecessary for His Honour to consider the issue in the matter.

Hambleton v Finn

In a matter before District Court Justice McGill, a director successfully defended an unfair preference claim to the extent of a loan made by her to the company using section 553C.^[6]

This was because the Court found that the evidence did not show that the company was insolvent at the relevant time and determined that it necessarily followed that the director could not have had notice of any facts or circumstances which would lead her or a reasonable person to conclude the company was insolvent.

Stone v Melrose Cranes

Earlier this year, the Federal Court confirmed that section 553C set-off is available to creditors in respect of a preference claim.^[7]

The liquidators sought to recover over $300,000 in unfair preferences alleged to have been received by Melrose Cranes. The liquidators submitted to the Court that the cases which suggested that set-off could be used to defend an unfair preference claim were “plainly wrong”.^[8]

Melrose Cranes claimed to be entitled to a set-off amount of more than $80,000.

The Court found that whilst section 553C set-off was available to Melrose Cranes as a creditor defending an unfair preference, it was not available to Melrose Cranes in this particular case on the basis that Melrose Cranes had notice of the company’s insolvency.

The Court accepted that the evidence demonstrated that Melrose Cranes was aware that the company was unable to pay its debts as and when they fell due.

Mr Melrose was the controlling mind of Melrose Cranes and was heavily involved in the day to day running of the business and arrangements with creditors. The Court found that Mr Melrose was “involved in the maintaining and following up of outstanding payments”.[9]

Mr Melrose suspended the company’s credit account “pending an agreement outcome”; accepted the company regularly tried to buy itself more time to pay debts due and recorded his concerns in his diary. Mr Melrose threatened the issue of a statutory demand if an agreement could not be reached within days.  Melrose Cranes’ solicitors drafted a deed which provided for payments by instalments and set out what would occur “if the payment made were unfair preferences and included director guarantees”.

Key takeaway

We continue to watch this space for further developments and ideally welcome guidance will be forthcoming from the High Court in due course.

^[1] Re ACN 007 537 000 Pty Ltd (in liq); Ex parte Parker (1997) 150 ALR 92.

^[2] Morton & Anor v Rexel Electrical Supplies Pty Ltd [2015] QDC 49.

^[3] Hussain v CSR Building Products Limited, in the matter of FPJ Group Pty Ltd (in liq) [2016] FCA 392.

[4] Ibid at para [235].

[5] Ibid at para [235].

^[6]Hambleton. & Anor v Finn [2017] QDC 61.

^[7] Stone v Melrose Cranes Rigging Pty Ltd, in the matter of Cardinal Project Services Pty Ltd (in liq) (CPS)(No 2) [2018] FCA 530.

^[8] Ibid at para [281].

[9] Ibid at para [276].

Authored by:
Scott Couper, Partner
Judith Hishon, Senior Associate