Insolvency Law Update - Morton as liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Limited [2021] FCAFC 228

The Full Court of the Federal Court has confirmed that a statutory set-off under s 553C(1) of the Corporations Act 2001 (Cth) is not available against a liquidator’s claim for the recovery of an unfair preference under s 588FA of the Act.

Background

Generally, s 553C(1) of the Corporations Act 2001 (Cth) (Act) provides for a set off where there have been mutual credits, debts or other dealings between an insolvent company being wound up and a person who wants to have a debt or claim admitted against the company. It involves an account being taken of what is due from one party to the other in respect of those mutual dealings, with the sum due from one party to be set off against any sum due from the other.

Morton as liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Limited [2021] FCAFC 228 concerned the right of a creditor who had received an unfair preference under s 588FA of the Act to avail itself of the statutory set-off in s 553C. The creditor claimed to be entitled to set off its obligation to repay the preference received not against the underlying debt, but against another debt owed by the company in liquidation to it. This case was heard shortly after Badenoch Integrated Logging Pty Ltd v Bryant, Gunnts Ltd (in liq) [2021] FCAFC 64 in which the Full Court considered it was unnecessary to decide the question of whether set-off under s 553C is available in unfair preference claims.

No set off available

Allsop CJ (with whom Middleton and Derrington JJ agreed) held that a set-off is not available to a creditor under s 553C(1) against a liquidator’s claim for the recovery of an unfair preference. Being a matter of statutory construction, the Court undertook a detailed review of the text of s 553C set against the relevant parts of the Act and the historical legal context, having regard to the purposes of the set-off provision and unfair preference provisions.

The Court considered that the words of s 553C are to be read in the context of the Act as a whole in a way that conforms with its operation, set in the context of an orderly administration, built on the foundation of genuine mutuality, recognising the importance of the vindication for the general body of creditors of remedies to cure efficaciously the effect of a preferential transaction, of equality of distribution and of the statutory regime of administration.

The Court held that the essential requirements of s 533C were absent due to a lack of mutuality between the indebtedness of the company to the creditor and the liability of the creditor pursuant to court order to pay the company at the suit of the liquidator.

The Court summarised the lack of mutuality arising from:

1. the different interest in which the company owes money to the creditor and in which the company receives money pursuant to the liability to repay not as a creditor of the preferred creditor, but as payee pursuant to court order in an action brought by the liquidator in the execution of her or his duty to gather in the estate of the insolvent company for the benefit of all unsecured creditors and administration of the estate; and
2. the absence at the relevant date of any right or equity (vested or contingent) in the company or duty or obligation (vested or contingent) in the creditor to recover or to repay the preference, respectively.

The Full Court’s construction reflects the underlying purposes of both the law of set-off in insolvency and the law of preferences by:

1. justly protecting creditors where genuinely reciprocal or mutual debts, credits or mutual dealings exist by netting such off in working out what is owed by and to the insolvent estate; and
2. ensuring that past preferential transactions are unwound to put the estate in the position in which it would have been had the preferential transaction not occurred, so that thereafter all creditors (including the erstwhile preferred creditor) may share equally in an estate unaffected by earlier preferential transactions.

Conclusion

This decision confirms that set-off is no longer a defence to an unfair preference claim. Accordingly, other defences available to creditors may become more important and liquidators may be able to pursue unfair preference claims with greater certainty.