Federal Court Confirms Stance on Setting Off Unfair Preferences

Despite concerns raised by liquidators and experts locally and abroad, the Federal court has confirmed its view that a set-off under section 553C of the Corporations Act can be utilised in an unfair preference claim. 

On 19 April 2018 in Stone v Melrose Cranes & Rigging Pty Ltd, in the matter of Cardinal Project Services Pty Ltd (in liq) (CPS)(No 2) [2018] FCA 530 the Federal Court rejected the liquidators’ submission that a set-off under section 553C is not available to creditors in the context of a preference claim.

The liquidator’s sought orders including that payments made to Melrose Cranes totalling $308,544.58 constituted unfair preferences.   Melrose Cranes unsuccessfully raised defences including ‘good faith’, the doctrine of ultimate effect and the ‘running account’ defence.

Melrose Cranes also claimed, pursuant to section 553C, an entitlement to set-off the amount of $80,774.23 being the amount in which CPS was indebted to it as at the date of the appointment of the administrators (who were later appointed the liquidators).

The liquidators’ invited the Court not to follow the line of cases in favour of the view that set-off may be available in the context of preference claims, on the basis that the cases are “plainly wrong”.   

The liquidators did not make detailed submissions in relation to the set-off, however the evidence established that Melrose Cranes had the requisite degree of notice of the company’s insolvency pursuant to section 553C(2).   Accordingly, the Court found that Melrose Cranes was not entitled to the set-off as section 553C(2) expressly prohibits a set-off where a person has notice of the fact that the company was insolvent.

Although the existing line of case authorities in Australia support the availability of a set-off in statutory insolvency claims, including at appellate level, there are compelling experts who regard the view as “plainly wrong” particularly as a matter of principle and contrary to the statutory purpose behind Part 5.7B of the Act.   There is, of course, an inherent difficulty with striking a balance between recoveries for the benefit of unsecured creditors and protecting those who engage in mutual dealings with insolvent companies.

So far, the Courts in Australia have not been prepared to depart from the leading judgment in Re Parker (1997) 80 FCR 1 in which a set-off under section 553C was applied in the context of an insolvent trading claim.  That said, the High Court has not yet had to determine the issue.

 

References

Stone v Melrose Cranes & Rigging Pty Ltd, in the matter of Cardinal Project Services Pty Ltd (in liq) (CPS)(No 2) [2018] FCA 530

Re Parker (1997) 80 FCR 1

Derham R, Derham on the Law of Set-off (4th edition, Oxford University Press, Oxford, 2010).


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