The High Court of Australia dismissed an appeal brought by Metal Manufacturers Pty Ltd, upholding the previous position adopted by the Federal Court.
The genesis of the case was whether a creditor is permitted to rely on s533C of the Corporations Act 2001 (Cth) to set-off an unfair preference claim. This decision provides long-awaited clarity for liquidators, as this aspect of insolvency has been marked by jurisprudence that has been contradictory.
Initially in Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufacturers Pty Ltd  HCA 1, the liquidator brought an unfair preference claim pursuant to s588FA of the Act against Metal Manufacturers for payment of $190,000. Metal Manufacturers, like many before them, attempted to set-off this liability with a separate debt of $194,727.23 pursuant to s533C of the Act. The Court considered whether Metal Manufacturers was entitled to a set-off because of a mutual dealing between the two parties.
The Court focused primarily on whether the requisite condition of mutuality was satisfied to evoke a set-off under s533C. The mutual credits, debts or dealings must have existed in some form before the initiating of winding-up proceedings. The Court determined that there were no mutual dealings between the entities prior to winding-up. Although MJ Woodman owed money to Metal Manufacturers, the condition of mutuality was not satisfied as Metal Manufacturers owed nothing in return to Morton. The Court also considered that allowing a set-off would undermine the purpose of the statutory voidable transaction regime, specifically to avoid diminishing the pool of distributable assets available to creditors. Ultimately, the High Court dismissed the appeal, providing a seminal decision for this area of law and insolvency.
Implications and Takeaways
The significance of today’s High Court decision is that it provides binding precedent and rectifies the uncertainty around unfair preference claims, set-off and the concept of mutuality. The decision has the following implications for creditors in external administrations and insolvency practitioners:
- Set-off can no longer be relied upon as a partial or full defence, limiting the remit for creditors to respond to unfair payment claims;
- Creditors and practitioners must now look to other defences (like running account and secured creditor defences); and
- It would be prudent for creditors to review their presently asserted position in current disputes, credit limits and their ability to rely on other defences.
- Liquidators now have more freedom in bringing and resolving voidable transaction claims, with creditors now unable to invoke set-off; and
- Liquidators should review current accounts and claims in light of this decision.
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