High Court confirms 'set off' is not a defence against a Liquidator's claim for an unfair preference

On 8 February 2023, the High Court of Australia agreed with the Full Court of the Federal Court of Australia's decision that a statutory set-off under section 553C(1) of the' Corporations Act' 2001' (Cth) (the Act) was not available to a defendant against a liquidator's claim for the recovery of an unfair preference under section 588FA of the Act.

Background

In the 6-months prior to its liquidation, MJ Woodman Electrical Contractors Pty Ltd (Woodman Electrical Contractors) paid to Metal Manufactures Pty Ltd (Metal Manufactures) amounts of $50,000.00 and $140,000.00. Woodman Electrical Contractors is separately indebted to Metal Manufactures in the amount of $194,727.23. The liquidator of Woodman Electrical Contractors sought to recover the payments made to Metal Manufacturers on the basis that each payment was an unfair preference under section 588FA of the Act. Metal Manufactures contended that it had, pursuant to section 553C of the Act, a right to set off its potential liability to repay the alleged unfair preferences against the separate debt owed to it. In December 2021, the Full Court of the Federal Court of Australia ordered that the statutory set-off under section 553C of the Act was not available to Metal Manufactures as defence.'  In May 2022, Metal Manufactures appealed the decision to the High Court.

Decision

The High Court agreed with the Full Court's joint reasons for judgment and dismissed the appeal. It held that there is "no mutuality of interest between an amount of an unfair preference which a creditor is ordered under s 588FF(1)(a) of the Act to repay to a company in liquidation and a debt incurred by the company provable by the creditor in the winding up of the company" [74], finding that:

• immediately prior to the commencement of the liquidation, the liquidator of Woodman Electrical Contractors and Woodman Electrical Contractors had no claim against Metal Manufacturers which could be set off: and
• one dealing was between Metal Manufacturers and the Woodman Electrical Contractors. and the other was between Metal Manufacturers and the liquidator of Woodman Electrical Contractors.

What does this mean for insolvency professionals?

This decision provides clarity to insolvency professionals and removes a possible defence to a liquidator's claim for recovery of an unfair preference.'  We anticipate that it will speed up recovery for a liquidator as creditors will not be able to prolong a claim by seeking to rely upon a set-off, and will likely also benefit general creditors with potential returns in the liquidation being higher.   Metal Manufactures Pty Ltd v Gavin Morton as liquidator of MJ Woodman Electrical Contractors Pty Ltd (in liquidation) & Anor [2023] HCA 1. Article by Matt Gauci (Partner), Jessica Egger (Associate), Stephanie Luong (Lawyer) and Lisa Liu (Graduate at law).