Game, Set, Match for set-off as a defence in liquidators’ preference claims

Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Limited [2021] FCAFC 228 (16 December 2021)

The Full Federal Court (Allsop CJ and Middleton and Derrington JJ) decided that a person cannot set-off an obligation to repay an unfair preference against a debt that the company owes them.

This case – decided on a “special case” referred to the Full Court – should put this issue beyond doubt, where earlier decisions of single judges had raised doubt.

A creditor received payments during the relation-back period of $190,000 which the liquidator attempted to recover as unfair preferences pursuant to s 588FA of the Corporations Act (the Act). The liquidator admitted the creditor’s alleged off-setting claim against the company in the sum of $194,727.23.

Section 553C(1) of the Act permits a set-off where there “have been mutual credits, mutual debts 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 liquidator conceded that s553C(2), which denies a creditor the benefit of a set-off if they relevantly had notice of the company’s insolvency, did not apply to the facts of this case.

This matter came before Derrington J in the Federal Court. His Honour decided that it was appropriate to refer to the Full Court, the following question:

Is statutory set-off, under s 553C(1) of the Act, available to the [creditor] in this proceeding against the plaintiff’s claim as liquidator for the recovery of an unfair preference under s 588FA of the Act?

The Full Court answered this question, “no”.

Allsop CJ (Middleton and Derrington JJ agreeing) delivered lengthy reasons which reviewed the legislative history of s 553C, but his Honour concluded that ultimately, the task is one of statutory construction.

His Honour said at [155]:

The words of s 553C cannot be read as requiring that the debt owed by the company and the possible future liability of a creditor to pay the company under an order pursuant to s 588FF are mutual debts or mutual credits or what is due from one party to the other in the same interest from mutual dealings

Mutuality between two debts arises when those debts are between the same person and the company.

Essentially, the obligation of a creditor to pay under s 588FF arises from an order of a Court, sought upon the application of a liquidator. That obligation doesn’t arise by reason of some right that the company has against the creditor. That means there is no mutuality between a debt that the company owes the creditor, and a creditor’s obligation to make a payment under s 588F.

On 14 January 2022 in [2022] FCAFC 1, the Full Court decided that the costs of the special case should be reserved for determination by the docket upon the resolution of all outstanding issues between the parties.