To set-off, or not to set-off?

High Court of Australia rules on Set Off Defence To set-off, or not to set-off? That is the aged old question which has been plaguing the insolvency law space for years. To the delight of insolvency practitioners around Australia, and to the disadvantage of creditors, the High Court of Australia has recently determined that the set-off defence is not available as a defence to creditors of an unfair preference claim. The High Court in Metal Manufactures Pty Ltd v Gavin Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd (in liquidation) & Anor[1] dismissed an appeal instructed by the Metal Manufactures Pty Ltd from the Full Federal Court concerning the set-off defence found under 553C(1) of the Corporations Act 2001 (Cth) (Act). Background The company, Metal Manufactures Pty Ltd (Metal Manufactures) received two payments totalling $190,000.00 (Payments) by MJ Woodman Electrical Contractors Pty Ltd (in liquidation)(MJ Woodman) in the six months prior to MJ Woodman going into liquidation (the relation-back period). MJ Woodman also owed Metal Manufactures a debt of $194,727.23 arising from goods purchased from Metal Manufactures (the Debt). The liquidator of MJ Woodman (Gavin Morton of Morton and Lee Insolvency)(Liquidator) sought to recover the Payments on the basis that they were unfair preferences pursuant to section 588FA of the Act. Metal Manufactures sought to set-off the alleged unfair preference Payments in reduction of its potential liability owed to the Liquidator against the Debt, leaving a balance of $4,727.23 owed to Metal Manufactures. What is an unfair preference claim? Put simply, an unfair preference claim, is a voidable transaction, where an unsecured creditor receives a payment from a company in the relation back period (usually in the 6 month period prior to the date of insolvency). If that unsecured creditor has received an advantage over other unsecured creditors (received more than it would have if it had to prove its debt in the winding up), and the company was insolvent at the time of the payment, then the liquidator will likely claw back the payment as it is deemed to be an unfair preference payment pursuant to section 588FA of the Act. What is a set-off ? A set-off is as simple as, you owe me $1, I owe you $1, so let’s call it even. Section 553C of the Act provides that where there have been mutual credits and mutual debts between a company being wound up and a creditor, the amounts can be set off against each amount. Whatever the balance is, a creditor is able to claim by way of proof of debt in the winding up of the company. Prior to the High Court’s decision, this meant that a creditor could set-off an amount equivalent to that received as an unfair preference, against another debt which the creditor could prove in the winding up of a company. High Court Decision The High Court dismissed Metal Manufactures’ appeal and held that the Payments which were deemed to be unfair preference payments were not eligible to be [...]