Set-Off Defence No Longer An Option In Unfair Preference Claims – High Court Puts The Debate To Rest
The decision made by the High Court of Australia on 8 February 2023 has brought an end to a long-standing debate among solicitors and insolvency professionals. For years, there has been a contentious issue regarding the use of the defence of “set-off” under section 553C(1) of the Corporations Act 2001 (Cth) against an unfair preference claim under s 588FA of the Act. The recent landmark decision unanimously decided that set-off can no longer be used as a defence against an unfair preference claim. This decision has significant implications for those in the insolvency industry, particularly in regards to the applicability of section 553C in liquidators’ claims under Part 5.7B, which has been a widely debated topic.
As a senior associate at Ramsden Lawyer Litigation, Lachlan Boyle is well-versed in the complexities of insolvency law and has closely followed the debates surrounding the use of set-off against unfair preference claims. With the recent decision by the High Court, Boyle is eager to share his insights on the matter and what it means for those in the industry. This article will explore the history of the debate, the arguments for and against the use of set-off, and the implications of the High Court’s decision. Additionally, Boyle will examine how this decision may impact future cases and if it will have a broader impact on voidable transactions in insolvency law. With his expertise in the field and a clear understanding of the recent decision, Boyle’s analysis will provide valuable insights for anyone working in the insolvency industry.
Introduction – Section 553C – “Set-Off”
Under section 553C of the Act, an account is to be taken of what is owed to one party and another where there have been mutual credits, mutual debts or any other mutual dealing with a company that is being wound up and a creditor who wishes to have their claim in the winding up. The sum due from the one party is to be set off against the sum due from the other party. Under subsection 2 of the provision, a person will not be entitled to the benefit of a set-off claim if the person had notice that the company was insolvent.
History of Issue:
The insolvency process can be incredibly difficult and complex for any business or individual. The prospect of having to liquidate assets, restructure debts, and potentially face legal action is daunting, to say the least. However, one particular aspect of insolvency that has caused significant debate and controversy over the years is the use of unfair preference claims.
Unfair preference claims, as defined by the Corporations Act 2001 (Cth), allow liquidators to recover payments made to creditors within six months prior to a company entering liquidation. These payments are considered “unfair” because they give certain creditors an advantage over others and are often made in an attempt to repay debts to friends or family members or to protect certain assets from being seized by creditors.
While the intent behind unfair preference claims may be to ensure fairness and equity in the distribution of assets among creditors, they can have significant negative impacts on businesses and individuals who may have received payments during the six-month period. For one, these claims can lead to significant financial losses for creditors who were trying to collect on outstanding debts. In addition, defending against an unfair preference claim can be incredibly time-consuming, costly, and damaging to a company’s reputation.
Furthermore, the use of unfair preference claims has been criticized for being too broad in its scope and for not considering each case’s unique circumstances. For example, a creditor who received a payment may have done so in good faith, believing that the company was not insolvent. Additionally, the six-month time frame for recovery can be problematic, as it may need to accurately reflect the financial circumstances of a company at the time of liquidation.
In conclusion, while the intention behind unfair preference claims may be to ensure equity and fairness in the distribution of assets among creditors, they can have significant negative impacts on businesses and individuals who may have received payments during the six-month period. As such, it is important for insolvency professionals and lawmakers to carefully consider the potential consequences of such claims before implementing them.
Implications of this decision
The decision has significant implications for those working in the insolvency industry, as the applicability of section 553C in liquidators’ claims under Part 5.7B has been widely debated for some time. The controversy surrounding the issue was further heightened by conflicting opinions in various cases, including Re Parker and In the matter of Force Corp Pty Ltd. However, it is now clear that the question has been answered, and the decision in Gavin Morton As Liquidator Of MJ Woodman Electrical Contractors Pty Ltd & Anor v Metal Manufacturers Pty Limited provides much-needed clarity on the issue.
Metal Manufactures Grounds of Appeal:
Metal Manufacturers argued in their appeal that they were entitled to set off any potential liabilities that arose under section 588FF(1)(a) of the Act, based on mutual dealings with MJ Woodman. However, the High Court dismissed the appeal, stating that the statutory right of set-off under section 553C(1) of the Act requires that the mutual credits, mutual debts or other mutual dealings be credits, debts or dealings arising from circumstances that subsisted before the commencement of the winding up. Since there is no liability to expel an unfair preference payment before the commencement of the winding up, the right of a liquidator to sue for an order under section 588FF gave rise to a contingent liability that did not exist before the commencement of the winding up.The High Court dismissed the appeal for the following reasons:
- The statutory right of set-off under section 553C(1) of the Act requires that the mutual credits, mutual debts or other mutual dealings be credits, debts or dealings arising from circumstances that subsisted before the commencement of the winding up.
- There is no liability, contingent or otherwise, to expel an unfair preference payment before the commencement of the winding up.
- The right of a liquidator to sue for an order under section 588FF gave rise to a contingent liability, but one that did not exist before the commencement of the winding up.
- The requirement of mutuality was incapable of being satisfied because there was no dealing between the same persons (i.e. the right to sue to recover an unfair preference is a right that only the liquidator has), and there was no mutuality of interest.
In effect, the decision will render previous decisions such as Hall v Poolman and stone v Melrose Cranes, Re Parker, Buzzle Apple and Buzzle v Apple as wrongly decided.
Where to now?
The decision of the High Court puts an end to the debate on whether the defence of set-off can be used against an unfair preference claim, and the minds of both liquidators and unsecured creditors can now be put at ease. However, the decision will likely have broader implications for various voidable transactions, not just unfair preferences. It will be interesting to see how the decision is applied in future cases and whether it will further impact insolvency law.
If you have any questions about this article or any concerns about how this might affect you and your business, do not hesitate to contact us.