Full Federal Court clarifies once and for all that statutory set-off is not available to answer an unfair preference claim

On 16 December 2021, the Full Court of the Federal Court of Australia handed down its judgment in Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufacturers Pty Limited [2021] FCAFC 228, by which it clarified that set-off under section 553C of the Corporations Act 2001 (Cth) (the Act) is not available to answer an unfair preference claim brought by a company’s liquidator.

Background

Metal Manufacturers Pty Limited (Metal Manufacturers), creditor of MJ Woodman Electrical Contractors Pty Ltd (In Liquidation) (the Company), received payments from the Company in the sum of $190,000 during the relation back period. The Company’s liquidator sought to recover that amount as an unfair preference, however Metal Manufacturers purported to set-off the alleged preference pursuant to section 553C of the Act against a separate debt owed to it by the Company. The separate debt totalled $194,727.23, meaning that if Metal Manufacturers’ set-off argument succeeded, the quantum of the liquidator’s preference claim would be nil. Indeed, it was conceded by the liquidator that if set-off was available, the action to recover the unfair preference must be dismissed.

Issue

The issue in dispute reserved for the Full Court’s consideration was “Is statutory set-off, under s 553C(1) of the Act, available to the defendant in this proceeding against the plaintiff’s claim as liquidator for the recovery of an unfair preference under s 588FA of the Act?”. This question was helpfully answered with a simple “No”.

The Full Court explained that the parties’ debts were not, and could not be, mutual. One debt was owed by the Company in its own right to Metal Manufacturers arising out of historical events in the ordinary course of business dealings. The other was payable by Metal Manufacturers to the Company, not as its pre-existing creditor, but in accordance with an order of the Court obtained by the liquidator pursuant to his rights and the exercise of his statutory duties to gather in the estate of the Company for the benefit of all unsecured creditors and the administration of the estate. There was a further lack of mutuality as at the relevant date, given the absence of any right in the Company or obligation of Metal Manufacturers to recover or repay the preference respectively. Accordingly, the necessary elements of section 553C were not present.

Implications

This decision has once and for all settled the position that set-off is not available in relation to unfair preference claims.

It provides certainty for liquidators in pursuing preferences in liquidation that they will not be required to contend with assertions of set-off, and is likely to result in greater returns for creditors.

It also emphasises the need for businesses dealing with companies in financial difficulty to proceed with caution, as payments that are received within 6 months prior to liquidation risk clawback by a liquidator, with now no ability to rely upon the remaining indebtedness to reduce any amount payable to the liquidator.

The author would like to thank associate Annabel Nettle for her assistance with this article.

This article provides general commentary only. It is not legal advice. Before acting on the basis of any material contained in this article, seek professional advice.