Unfair preferences: no set-off against liquidator’s recovery claim

By Mark Petrucco, James Pinkerton and Natalia Di Stefano

The High Court of Australia has recently upheld a decision of the Full Federal Court in Metal Manufacturers Pty Limited and Gavin Morton as liquidator of MJ Woodman Electrical Contractors Pty Ltd (in liquidation) & Anor^[1], which confirmed that statutory set-off is not available to be offset against a liquidator’s claim for the recovery of an unfair preference.

Based on the High Court’s reasoning, in our view it may also follow that set-off would not be available to creditors against any other voidable transaction claims that liquidators may pursue.

Background: challenge to liquidator’s attempt to recover payments

Metal Manufacturers Pty Limited (Metal Manufacturers) was a creditor of MJ Woodman Electrical Contractors Pty Ltd (in Liquidation) (the Company) and received payments from the Company during the relation-back period. Those payments were in the amounts of $50,000 and $140,000.

The Company’s liquidator sought to recover the payments from Metal Manufactures on the basis that they were an unfair preference under s 588FA of the Corporations Act 2001 (Cth) (the Act). Metal Manufacturers alleged that it had a right to set-off its potential liability pursuant to s 553C of the Act in relation to a separate and distinct debt, meaning it could use that debt to reduce or extinguish its liability to the liquidator.

Appeal

The question on appeal was whether section 553C of the Act entitles a creditor to set-off an amount equivalent to that received as an unfair preference in the repayment of a debt which the creditor is ordered to repay to a company in liquidation.

The Court analysed section 553C and considered whether there had been mutual credits, mutual debts or other mutual dealings between Metal Manufacturers and the Company. There are three key aspects to a mutual dealing as described by the High Court’s 1991 decision in Gye v McIntyre (Gye)^[2], namely:

• the credits, the debts, or the claims arising from other dealings are between the same persons;
• the benefit or burden of the credits, debts, or claims lie in the same interests; and
• the credits, debts, or claims arising from other dealings are commensurable for the purposes of set-off under section 553C, meaning they must sound in money.

The High Court also said in Gye that the relevant interests are the equitable or beneficial interests of the parties.

In the Court’s earlier decision in Hiley v Peoples Prudential Assurance Co Ltd^[3]of 1938, Justice Dixon indicated that the relevant time for determining whether there had been mutual debts, mutual creditors or mutual dealings was the commencement (or immediately before the commencement) of the winding up.

Outcome

The High Court dismissed Metal Manufacturer’s appeal, as the plurality (Chief Justice Kiefel and Justices Gordon, Edelman and Steward) held that the statutory provisions of the Act do not permit a creditor to set-off amounts against an unfair preference claim brought by a liquidator. Justice Gageler provided separate (but similar) reasons and came to the same conclusion.

As to mutuality, the High Court held that there was an absence of dealings between the same persons and mutuality of interest because the unfair preference payments recovered under section 588FF(1)(a) of the Act are recovered by the liquidator as an officer of the Court for distribution among all creditors according to the statutory scheme of liquidation (rather than as agent of the Company, or for the liquidator’s own benefit).

Further, the Court found that – as at the date of the commencement of the winding up – the liquidator’s unfair preference claim was not capable of forming part of a mutual dealing, because any Court order to repay an unfair preference pursuant to s 588FF(1)(a) was subject to the liquidator’s decision to sue and the Court’s satisfaction that the elements of section 588FE(2) had been satisfied. There was therefore only a ‘mere possibility’ of a dealing from the liquidator, which was not sufficient to satisfy the requirement for a mutual dealing as at the date of the commencement of the winding up.

In addition to the concept of mutuality, also relevant to the decision of both the plurality and Justice Gageler was public policy. The High Court considered that allowing set-off for an unfair preference would be to diminish the pool of assets to pay creditors, while permitting the creditor who received the preference to set-off each dollar it owes against each dollar of the unfair preference. This would mean that the creditor who received the unfair preference may receive more than its entitlement to a proportionate distribution as an unsecured creditor.

Implications

The key takeaways from this decision are that:

• set-off is not available to a creditor to offset a liquidator’s claim to claw back an unfair preference; and
• set-off may not be available to creditors against other voidable transaction claims brought by a liquidator (including against an insolvent trading claim by a liquidator as approved in Hall v Poolman (2007) 65 ACSR 123) because:
• they are also claims made by the liquidator as an officer of the court for the benefit of the general body of creditors; and
• the voidable transaction claim will only be a mere possibility as at the date of the commencement of the winding up.

[1] Metal Manufacturers Pty Limited and Gavin Morton as liquidator of MJ Woodman Electrical Contractors Pty Ltd (in liquidation) & Anor [2023] HCA 1.
[2] Gye v McIntyre (1991) 171 CLR 609 at 623 (per Chief Justice Mason and Justices Brennan, Deane, Dawson, Toohey, Gaudron and McHugh).
[3] Hiley v Peoples Prudential Assurance Co Ltd (1938) 60 CLR 468 at 496.