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Insolvency Law Update - statutory set-off cannot be used as a defence to an unfair preference claim

Wednesday February 22, 2023

Insolvency Law Update - statutory set-off cannot be used as a defence to an unfair preference claim

On 8 February 2023, the High Court upheld the decision of the Full Federal Court and confirmed that statutory set-off cannot be used as a defence to an unfair preference claim. This has brought greater certainty for insolvency practitioners and all those involved in insolvency.


Metal Manufacturers Pty Limited v Morton as liquidator of MJ Woodman Electrical Contractors (in liquidation) [2023]
HCA 1

In June 2022, Ali Dogan (Special Counsel) and Dejan Vangev (Lawyer) of our office published an article reviewing the decision made by the Full Court of the Federal Court of Australia of Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufacturers Pty Limited [2021] FCAFC 228, and whether a creditor could rely on set-off as a defence against an unfair preference claim brought by a liquidator. The Full Court of the Federal Court unanimously held that it could not.

Since then, the creditor applied for special leave to appeal the decision of the Federal Court to the High Court of Australia. Whilst special leave to appeal to the High Court was granted on 12 May 2022 and the merits of the creditor’s appeal were considered, on 8 February 2023 the creditor’s appeal was ultimately dismissed by the High Court (Metal Manufacturers Pty Limited v Morton as liquidator of MJ Woodman Electrical Contractors (in liquidation) [2023] HCA 1).

The creditor argued that it was entitled to set off its potential liability under section 588FF(1)(a) of the Corporations Act 2001 (Cth) against amounts owing to it by MJ Woodman, due to the mutual dealing between the two companies.

The High Court held, in summary:

  1. Any liability arising from an order under s 588FF(1)(a) was not eligible to be set off against the debt owed to the creditor;
  2. The concept of mutuality requires that the debt and the benefit of the credit must lie in the same “equitable or beneficial interest” (paragraph [69]);
  3. Whilst the company owed money to the creditor prior to the wind up, the creditor did not owe anything until the liquidator brought its preference claim against the creditor, which was insufficient to satisfy the requirement of mutuality.

Accordingly, the High Court upheld the decision of the Full Federal Court. 

If you would like to find out more, please contact our Commercial Litigation and Insolvency team Ali Dogan, Special Counsel or Dejan Vangev, Lawyer on 03 9629 7411.


Author:
Dejan Vangev