Creditors Claiming Set-Offs to Unfair Preference Claims by Liquidator

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On 5 March 2015 the District Court handed down its decision in the case of Morton v. Rexel Electrical Supplies Pty Ltd [2015] QDC 49 (Morton) whereby it held that a creditor who is required to pay back into the liquidation an unfair preference payment made to it pursuant to section 588FE of the Corporations Act 2001 (Cth)(the Act) may claim a set-off against debts owed to it by the liquidated company pursuant to section 553C.

The case of Morton holds very real ramifications for both creditors and liquidators alike as it has the potential to reduce the quantum of the recovery amount for unfair preference payments which have been made to creditors by insolvent companies and also effectively allows for priority of those unfair payments over secured or creditors with higher priority.

The facts of Morton involved a Plant Mixing Company (Machinery) who engaged Rexel Electrical Supplies (Rexel) to provide electrical equipment and installation. Rexel provided the goods and rendered a number of invoices totalling $242,982.86. Between 26 March 2012 and 6 June 2014 Machinery paid to Rexel approximately $197,469.16.

The liquidators of Machinery sought the repayment of the $197,469.16 by virtue that is was an unfair preference payment pursuant to 588FE of the Act. By way of a defence Rexel claimed, inter alia, that should an unfair preference payment be made out by the liquidators of Machinery, that it be entitled to a set-off in the agreed amount of $92,323.88. The Court found that Machinery was insolvent during the times that the payments were made to Rexel and consequently those payments were held to be unfair preference payments.

In considering Rexel’s set-off defence, the Court considered the meaning of section 553C of the Act which provides that where there are mutual credits, mutual debts or mutual dealings between an insolvent company and a person who wants to have a debtor claim admitted against the company, an account is taken from what is due between both parties and the balance of that account is admissible as proof against the company or is payable to the company (whatever the case may be). The set-off however is not available where at the time of giving credit to the insolvent company the creditor had notice of the fact the company was insolvent.

The Court considered Re Parker (1997) 150 ALR 92 which was later considered by Buzzle Operations Pty Ltd (in liq) v Apple Computers Australia (2011) 81 NSWLR 47 (Buzzel) which held that set-offs are available to voidable transactions under ss 588FA to 588FF of the Act (which includes unfair preference payments). The liquidators for Machinery argued that notwithstanding Buzzle and Re Parker the ability of a Defendant to rely on a set-off in relation to an unfair preference claim frustrates the purpose of unfair preference provisions.

The decision in Morton, while it somewhat settles the tumultuous history in relation to set-offs and voidable transactions, there may be still be difficulty in relying on Morton as a precedent as to the availability of set-offs by reason that it is a lower court decision and the authorities upon which it relied were not determinative and were founded on single judge decisions of the Federal Court.

Notwithstanding this, the uncertainty of Morton it leaves liquidators and creditors in a difficult position in relation to bringing (or contesting) unfair preferential payments made by insolvent companies to creditors.

While Morton was also heard on appeal the matter of set-off was not dealt with. Therefore it remains to be seen whether a superior court would uphold the principle of allowing the defence of set-off to unfair preference payments after a full consideration of the case authority which lead to its arrival.