Take Away Points
- In the Morton appeal, the High Court has confirmed that set off under s 553C of the Corporations Act 2001 (Cth) is not available as a defence to a liquidator’s claim for the recovery of an unfair preference under ss 588FA and 588FF of the Act.
- The High Court overturned several long-standing first instance and intermediate appellate authorities, to the extent they were inconsistent with its reasoning, with the consequence that it is now unlikely set off under s 553C of the Act can be relied upon to reduce or extinguish liability for other voidable transactions under Part 5.7B of the Act nor liability of a director or holding company for insolvent trading under ss 588M and 588W of the Act.
- The decision is likely to be welcomed by insolvency practitioners as it may substantially improve the viability of voidable transaction and insolvent trading claims in circumstances where prospective respondents are separately owed money by an insolvent company.
Statutory Set Off
Section 553C(1) of the Act provides that where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:
- an account is to be taken of what is due from one party to the other in respect of those mutual dealings;
- the sum due from the party is to be set off against any sum due from the other; and
- only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.
The statutory set off is not available to a creditor who had notice of the fact the company was insolvent at the time of giving or receiving credit to/from the company: Act, s 553C(2).
In Gye v McIntyre[1], the High Court interpreted the relevantly identical mutuality condition in the set off provision in s 86 of the Bankruptcy Act 1966 (Cth) to require satisfaction of each of the following criteria: (1) the credits, debts, or claims must be between the same persons; (2) the benefit or burden of credits, debts or claims must lie in the same interests (requiring consideration of the equitable or beneficial interests of the parties); (3) the credits, debts or claims must be commensurable in the sense that they ultimately sound in money.[2] The commensurability criterion does not require that the credits, debts or claims be vested, liquidated or enforceable at the relevant date; rather, it is sufficient that they are “contingent … and …will ultimately mature into pecuniary demands”.[3]
Factual Background
Gavin Morton (Liquidator) was appointed as the liquidator of MJ Woodman Electrical Contractors Pty Ltd (in liquidation) (Company). Metal Manufacturers Pty Ltd received payments during the relation-back period totalling $190,000 from the Company. The Liquidator sought to recover these payments from Metal Manufacturers as unfair preferences under section 588FA of the Act. Metal Manufacturers was separately owed $194,727 by the Company, which it sought to set off against any liability in respect of the alleged preference.
The parties agreed that Metal Manufacturers did not have notice that the Company was insolvent on the date it gave the relevant credit to the Company.[4] The Liquidator conceded that if set off was available, the recovery proceeding must fail as the quantum of the amount owing to Metal Manufacturers by the Company exceeded that of the alleged preference.[5]
The proceeding thus squarely raised the vexed question of the availability of set off under s 553C to a creditor in answer to a liquidator’s claim to recover an unfair preference. Against a background of conflicting authorities[6], Derrington J reserved the following question for consideration by the Full Court: “is statutory set-off, under s 553C(1) of the Act, available to the defendant in this proceeding against the plaintiff’s claim as liquidator for the recovery of an unfair preference under s 588FA of the Act?”
Full Federal Court Decision
On 16 December 2021, the Full Court handed down its decision on the reserved question. Allsop CJ (with whom Middleton and Derrington JJ agreed) held that the answer was “no” because:[7]
- There was a lack of mutuality between the indebtedness of the Company to Metal Manufacturers and the liability of Metal Manufacturers pursuant to court order to pay the Company at the suit of the Liquidator.
- The lack of mutuality arose from the different interest in which the Company owed money to Metal Manufacturers and in which the Company received money pursuant to the liability to repay, not as a creditor of the preferred creditor, but as a payee pursuant to court order in an action brought by the Liquidator for the recovery of the preference under s 588FF of the Act.
- The lack of mutuality also arose from the absence at the relevant date of any right or equity (vested or contingent) in the Company or duty or obligation (vested or contingent) in Metal Manufacturers to recover or to repay the preference, respectively.
- Hence, the requirements of s 553C(1) were not satisfied.
High Court Decision
Metal Manufacturers sought and obtained special leave to appeal to the High Court. Its principal grounds of appeal were that the requisite mutuality was present as:
- The claims were commensurable as, although the claim to recover the preferential payments was not vested or enforceable at the date when the winding-up commenced, it did then exist as a contingent claim. Metal Manufacturers submitted that this was so as the requirements of ss 588FA and 588FE had been satisfied at that date, subject only to the contingencies of the Liquidator electing to commence a proceeding and the Court ultimately making an order under s 588FF of the Act.
- There was a correspondence of interest between the credit given by Metal Manufacturers to the Company and the liability in respect of the preferential payments. More specifically, Metal Manufacturers submitted that whilst it was the Liquidator and not the Company who had standing to bring a proceeding to recover the preferential payments under s 588FF of the Act, the proceeding was brought by the Liquidator as agent for the Company, which was the ultimate beneficiary of any amounts recovered.
On 8 February 2023, the High Court handed down its decision in Metal Manufacturers Pty Ltd v Morton as liquidator of MJ Woodman Electrical Contractors Pty Ltd (in liquidation) & Anor.[8] The High Court, in two separate judgments, found that the Full Court was correct to answer the reserved question “no” and dismissed Metal Manufacturers’ appeal. The plurality (Kiefel CJ, Gordon, Edelman and Steward JJ) held that there was no mutuality as:
- Section 553C of the Act, when read with s 553 of the Act, applies to debts and claims, whether "present or future, certain or contingent, ascertained or sounding only in damages", arising from "circumstances" that had occurred before the commencement of the winding up.[9]
- Immediately before the commencement of the winding up of the Company there was nothing to set off as between Metal Manufacturers and the Company; the Company owed money to Metal Manufacturers, but Metal Manufacturers did not owe money to the Company. The inchoate or contingent capacity held by the Liquidator to sue under s 588FF could not exist before then. Rather, it was a wholly new claim that sprang into existence as a specific statutory right of the Liquidator upon his appointment to the Company.[10]
- There was no mutuality of dealings as Metal Manufacturers’ claim was against the Company, whereas the Liquidator’s claim to recover the preferential payments was brought in the Liquidator’s own right as an officer of the Court (not as agent for the Company).[11]
- There was no correspondence of interest as the entire amount of the alleged preferential payments ultimately recovered by the Liquidator could not be characterised as for the benefit of the Company, as such proceeds must be applied to make payments to priority creditors and for distribution to the general body of unsecured creditors in accordance with the pari passu principle codified in s 555 of the Act.[12]
The plurality held that the following authorities, which variously held that s 553C was available as a defence to unfair preference claims, uncommercial transaction claims, and insolvent trading claims, were wrongly decided to the extent they were inconsistent with the above analysis:[13] Re Parker[14], Buzzle Operations Pty Ltd (In liq) v Apple Computer Australia Pty Ltd[15] , Shirlaw v Lewis[16], Hall v Poolman[17] and Stone v Melrose Cranes & Rigging Pty Ltd [No 2].[18] In light of this finding it is now unlikely that set off under s 553C of the Act can be relied upon to reduce or extinguish liability for other voidable transactions under Part 5.7B of the Act nor liability of a director or holding company for insolvent trading under ss 588M and 588W of the Act.
Gageler J delivered a separate judgment in which he held that to confine the meaning of “interests” for the purposes of the application s 553C to equitable interests would divorce the statutory inquiry into mutuality from the statutory object of avoiding substantial injustice.[19] That said, his Honour went on to hold that mutuality was not present as the right of the Liquidator to apply for an order under s 588FF(1)(a) to recover an unfair preference was a statutory right given for the benefit of the general body of creditors, not the Company.[20]
The decision is likely to be welcomed by insolvency practitioners as it may substantially improve the viability of voidable transaction and insolvent trading claims in circumstances where prospective respondents are separately owed money by an insolvent company. The decision may also make these recovery proceedings more attractive to third-party litigation funders moving forward.
[1] (1991) 171 CLR 609.
[2] Ibid at [21] (the Court).
[3] Ibid, [22].
[4] Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufacturers Pty Limited (2021) 289 FCR 556 (Morton FCAFC) at [3].
[5] Ibid at [3].
[6] As to which, on the one hand, the following authorities had favoured the view that set off was available as a defence to unfair preference and other voidable transaction claims: Stone v Melrose Cranes and Rigging Pty Ltd (2018) 125 ACSR 406, [283] (Markovic) (unfair preference); Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47, [278] (Young JA) (uncommercial transaction case). By contrast, the following authorities had either held that set off was not available or seriously doubted its availability in obiter dicta: Hussain v CSR Building Products Ltd, in the matter of FPJ Group Pty Ltd (in lig) (2016) 246 FCR 62 at [235] (Edelman J); Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Bluewood Industries Pty Ltd [2020] FCA 714 at [130] (Davies J); Bryant, in the matter of Gunns Limited (in lig) (receivers and managers appointed) (2020) 144 ACSR 423 at [124] (Davies J); Re Force Corp Pty Ltd (in liq) (2020) 149 ACSR 451 at [93] (Gleeson J).
[7] Morton FCAFC, [7].
[8] [2023] HCA 1 (Morton).
[9] Morton at [45].
[10] Morton at [46]-[50].
[11] Morton at [52].
[12] Morton at [53]-[54].
[13] Morton at [56].
[14] (1997) 80 FCR 1.
[15] (2011) 81 NSWLR 47 at [278] (Young JA); see also at [2] (Hodgson JA), [287] (Whealy JA).
[16] (1993) 10 ACSR 288 at (Hodgson J).
[17] (2007) 65 ACSR 123 at [415]-[431] (Palmer J).
[18] (2018) 125 ACSR 406 at [279]-[283] (Markovic J).
[19] Morton at [71].
[20] Morton at [72]-[74].