The “Bright Line” in MJ Woodman: High Court Upholds no Set Off for Unfair Preference Claims

Introduction

The High Court[1] has today unanimously upheld the decision of the Full Court[2] that statutory set off under section 553C of the Corporations Act 2001 (Cth) (Act) is not available against a liquidator’s unfair preference claim and, in doing so, overturned a decades-old line of authorities to the contrary.[3]

What is statutory set off?

Sections 553 and 553C of the Act provide where there have been mutual dealings before the start of a winding up between an insolvent company and a creditor seeking to prove its debt or claim, only the balance of any set off (when it favours the creditor) is admissible to proof against the company.

The High Court’s analysis

The High Court was principally concerned with the concept of mutuality, properly understood within the statutory scheme of liquidation.

Mutuality

There are three aspects to “mutual dealings”:

  1. They must be between the same persons;
  2. The benefit or burden of them must lie in the same interests;
  3. They must ultimately sound in money.[4]


     

The High Court held that the creditor’s case was fatally flawed and there were no mutual dealings that satisfied the requirements of section 553C of the Act, principally for the following reasons:

  • There was nothing to set off as between the creditor and the company before the start of the winding up. Whilst the company owed money to the creditor, the creditor owed nothing to the company because the liquidator’s ability to bring an unfair preference claim did not arise until after the start of the winding up. At most, there was a mere possibility of a money claim of some kind in the future. That is not sufficient.
  • There had been no dealing between the same persons. Whilst the unfair preferences were paid by the company to the creditor, the liability for an unfair preference, whilst owed to the company, is one that arises upon the application of the liquidator as an officer of the court.

  • There is no mutuality of interest. The interest the creditor has in being paid by the company in relation to the supply of goods or services is not the same as the interest of both the liquidator and the company in recovering an unfair preference for the benefit of the general body of creditors.

The statutory scheme

The High Court also reasoned that it would be a gross distortion of the statutory scheme of liquidation if a creditor could avoid the consequences of having received an unfair preference on the basis it was also owed money by the company. A simple hypothetical example illustrating that consequence was set out in the separate reasons of Gageler J as follows:

In the Full Court, Allsop CJ illustrated that consequence through a simple hypothetical example. The example assumes a creditor who has two debts each of $100 and who is unfairly preferred as to one in full. If the creditor is obliged by an order under s 588FF(1)(a) of the Act to repay the amount of the preferred debt in full, the property of the company available for distribution amongst all creditors is increased by $100. Upon repayment, the creditor can prove in the distribution for $200 as if the unfair preference had not occurred. If, however, s 553C of the Act entitles the creditor to set off the amount ordered to be repaid under s 588FF(1)(a), the creditor automatically receives the functional equivalent of 50 cents in the dollar. Given that s 553C is self-executing, that occurs without the creditor needing to prove in the liquidation at all.

Key takeaways

The law has been settled sensibly; creditors are not entitled to the benefit of a set off under section 553C of the Act in relation to unfair preference claims. Liquidators can now comfortably bring unfair preference claims against creditors irrespective of any amounts owed to the creditor by the insolvent company before the commencement of the winding up. 

Disappointingly, the High Court did not take the opportunity to expressly address the position in relation to other claims by liquidators. However, we consider that the Court’s analysis would apply in relation to a liquidator’s claim for insolvent trading and other potential antecedent transactions.

For a more detailed discussion of the decision or its impacts, please contact Nick EdwardsBrit Ibanez, Mark SchneiderJohn Poulsen or Emily Pendlebury.


[1] Metal Manufactures Pty Limited v Morton [2023] HCA 1 per Kiefel CJ, Gageler, Gordon, Edelman and Steward JJ.

[2] Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Limited [2021] FCAFC 228 per Allsop CJ, Middleton and Derrington JJ.

[3] See In the Matter of AC 007 537 000 Pty Ltd (in liq) & Parker (1997) 80 FCR 1, Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47, Shirlaw v Lewis (1993) 10 ACSR 288, Hall v Poolman [2007] 65 ACSR 123 and Stone v Melrose Cranes & Rigging Pty Ltd [No 2] (2018) 123 ACSR 406.

[4] Gye v McIntyre (1991) 171 CLR 609 at 623 per Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ

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