Under the Corporations Act 2001 section 553C(1) allows for set offs to be made when there have been mutual credits, debts or dealings between an insolvent company that is being wound up and a person who seeks to have a claim or debt admitted against the company.
A consideration of this has recently come to light in respect of an unfair preference claim. In the case of Jetaway Logistics Pty Ltd (Recs and Mgrs Apptd) (in LIQ) v The DCT  VSC 397, Justice Robson of the Supreme Court of Victoria had to decide whether or not setting off fuel entitlements to a tax debt was an unfair preference and if it was not, whether or not 553C(2) applied, meaning that the DCT could not have the fuel set offs because they had notice that Jetaway was insolvent.
Jetaway was a trucking company, owing the tax office for outstanding GST, PAYG tax and fringe benefits tax. In 2003, these accounts fell into arrears and the debts section of the ATO chased them up to enter into a payment arrangement.
Because Jetaway was a trucking company they were entitled to diesel fuel grants from the Commonwealth, the scheme for which is administered by the ATO. They agreed with the ATO to offset their entitlement to the fuel grant against their tax debt.
Jetaway starting applying their fuel entitlements to their tax debts for the next 4-5 months. They then went into voluntary administration in September 2004.
The liquidators of Jetaway asserted that the company was insolvent as of February 2004 and that every time Jetaway set off their fuel entitlements to their tax debt, the DCT was getting an unfair preference. In short, that the DCT was getting more money by having the fuel set offs than if they were a creditor of Jetaway once they had gone into liquidation and therefore it was an unfair preference. The DCT argued against this, saying that in a winding up they would have been entitled to it anyway and section 553C applied.
The liquidators then tried to say that section didn’t apply because the DCT had notice of the insolvency, and if they had notice then they couldn’t rely on the set off provisions.
So there were three issues to decide on:
1. Whether the set off provisions were available;
2. Who bore the onus of proof of whether the Commissioner had notice;
3. Was there knowledge of the insolvency?
1. Set off provisions
Justice Robson held that the DCT could rely on the set of provisions and the fuel entitlements being applied to the tax debt didn’t give Jetaway an unfair advantage because in the winding up the set offs would have been given effect to. He also dismissed any arguments by the liquidators that the only defence provisions for an unfair preference claim lie in section 588FG.
He did clarify that 553C is not a defence per se, but that the DCT could be compared to the position they would have been in had they waited for the winding up of Jetaway.
2. Who bears the onus of proof?
The liquidators tried to argue that it was for the DCT to prove that they didn’t know that Jetaway were insolvent when engaging in the transactions.
His Honour Robson J decided that because the liquidators had alleged that the DCT had notice of the insolvency if 553C(1) were permitted, it was their onus to prove that the DCT had notice of Jetaway’s insolvency.
3. Was there knowledge of the insolvency?
Robson J had to decide on the meaning of ‘notice’ for the purposes of 553C.
He accepted arguments from the DCT that 553C required actual notice not just a mere suspicion that Jetaway was insolvent. This has to be compared with the position under, say 588FG, which requires mere suspicion of insolvency.
To have had notice, the DCT argued they would have had to have known of at least one of the provisions set out in 459C(2) of the Corporations Act and they did not.
His Honour relied on the case of Farrah Constructions v Say-Dee Pty Ltd (2007) 230 CLR 89 which held that negligent failure to make inquiries did not constitute actual knowledge.
Various facts proved that the DCT had a suspicion of insolvency and the evidence they did have only pointed to a temporary lack of cash flow. Consequently, there was insufficient knowledge by the DCT to constitute actual notice that Jetaway was insolvent. Robson J agreed with the DCT’s submissions and held that there was insufficient evidence that the DCT did have notice that Jetaway couldn’t pay its debts when they were due.
The application was dismissed with costs.
The case does, to an extent, turn on its facts, but the following can be taken from it:
1 The onus of establishing notice under section 553C(2) lies on the person alleging it;
2 “Notice” under section 553C(2) is actual notice and mere suspicion of insolvency is insufficient to disentitle a party to that set-off.
We thank Warren Jiear from Quinn & Scattini for allowing us to reproduce his article.