High Court holds statutory set-off is not available as a defence to an unfair preference claim

Metal Manufactures Pty Ltd v Morton (as liquidator of MJ Woodman Electrical Contractors Pty Ltd (In Liq)) [2023] HCA 1

TAKE AWAY POINTS

• In Metal Manufactures Pty Ltd v Morton (as liquidator of MJ Woodman Electrical Contractors Pty Ltd (In Liq)) [2023] HCA 1, the High Court has confirmed that set-off under s 553C of the Corporations Act 2001 (Cth) is not available as a defence to a liquidator’s claim to recover an unfair preference.
• The High Court overturned several first-instance and intermediate appellate authorities, to the extent they were inconsistent with its reasoning, such that it is now unlikely that statutory set-off can be relied upon to reduce or extinguish liability for void or other voidable transactions, nor liability of a director or holding company for insolvent trading.
• The decision will be welcomed by insolvency practitioners as it will improve the viability of voidable transaction and insolvent trading claims where prospective respondents are separately owed money by an insolvent company.

STATUTORY SET-OFF

Section 553C(1) provides that where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company an account is taken and only the balance of the account is admissible to proof against the company or is payable to the company. 

The mutuality condition requires satisfaction of the following criteria: (1) the credits, debts, or claims must be between the same persons; (2) they must lie in the same interests; (3) they must be commensurable in the sense that they ultimately sound in money: Gye v McIntyre (1991) 171 CLR 609 at [22].

Set-off is not available to a creditor who had notice of the fact the company was insolvent at the time of giving or receiving the relevant credit: s 553C(2).

BACKGROUND

Gavin Morton (Liquidator) was appointed as liquidator of MJ Woodman Electrical Contractors Pty Ltd (Company).  Metal Manufactures Pty Ltd received payments during the relation-back period totalling $190,000 from the Company.  The Liquidator sought to recover these payments as unfair preferences.  Metal Manufactures was separately owed $194,727 by the Company, which it sought to set-off against any liability for the alleged preference.

The parties agreed that Metal Manufactures did not have notice that the Company was insolvent on the date it gave the relevant credit to the Company and that if set-off was available, the Liquidator’s claim would fail as the quantum of the Company’s debt to Metal Manufactures exceeded that of the alleged preference.

The proceeding squarely raised the question of the availability of set-off as a defence to an unfair preference claim.  Against a background of conflicting authorities, Derrington J reserved the following question for consideration by the Full Court: “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?”

FULL COURT DECISION

In Morton v Metal Manufactures Pty Limited (2021) 289 FCR 556, the Full Court answered the reserved question “no”.  Allsop CJ (with whom Middleton and Derrington JJ agreed) held there was a lack of mutuality, which arose from (at [7]):

1. The different interest in which the Company owed money to Metal Manufacturers and in which the Company received money pursuant to the liability to repay, not as a creditor of the preferred creditor, but as a payee pursuant to court order in an action brought by the Liquidator for the recovery of the preference; and 
2. The absence at the relevant date of any right or equity in the Company or duty or obligation in Metal Manufactures to recover or to repay the preference, respectively.  

HIGH COURT DECISION

Metal Manufactures appealed. 

The High Court held that the reserved question was correctly answered “no” by the Full Court.

The plurality (Kiefel CJ, Gordon, Edelman and Steward JJ) held there was no mutuality as:

1. Section 553C, when read with s 553, applies to debts and claims, whether “present or future, certain or contingent, ascertained or sounding only in damages”, arising from “circumstances” that had occurred before the commencement of the winding-up: [45].
2. Immediately before the commencement of the winding-up of the Company there was nothing to set off between Metal Manufactures and the Company; the Company owed money to Metal Manufactures, but Metal Manufactures did not owe money to the Company.  The inchoate or contingent capacity of the Liquidator to sue under s 588FF could not exist before then: [46]-[50].
3. There was no correspondence of interest as any preference recovery could not be characterised as wholly for the benefit of the Company, as those proceeds must be applied to make payments to creditors in accordance with the statutory order of priorities: [53]-[55].
4. There was no mutuality of dealings.  Metal Manufactures’ claim was against the Company, whereas the claim to recover the preference was brought in the Liquidator’s own right as an officer of the Court (not as agent for the Company): [52].

The plurality also held that the authorities which had held that s 553C was available as a defence to void dispositions of property, preference claims, uncommercial transaction claims, and insolvent trading claims were wrongly decided to the extent they were inconsistent with its analysis.  It is thus now unlikely that statutory set-off can be relied upon in these contexts.

In a separate judgment, Gageler J explained that to confine the meaning of “interests” in s 553C to equitable interests would divorce the statutory inquiry into mutuality from the statutory object of avoiding substantial injustice: [71].  His Honour went on to hold that mutuality was not present as the right of the Liquidator to apply for an order under s 588FF(1)(a) to recover a preference was a statutory right given for the benefit of creditors, not the Company: [72]-[74].

The decision will be welcomed by insolvency practitioners as it will improve the viability of voidable transaction and insolvent trading claims where prospective respondents are separately owed money by an insolvent company.