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30 Sep 2015

Set-off and liquidator's preference claims


5 min

Is it really a defence?

In March 2015, the decision of Morton v Rexel Electrical Supplies Pty Ltd [2015] QDC 49 was delivered by the Queensland District Court.

The judgment received considerable attention given its potential impact on liquidator's preference claims.

It was held, apparently for the first time, that a defendant to a liquidator’s preference claim could rely on section 553C of the Corporations Act 2001 to set-off a pre-appointment debt owed by a company (in liquidation) against the liquidator’s claim—at least, for debts incurred before they had notice of the company’s insolvency.

In other words, the liquidator’s preference claim was reduced by the debt still owing to the creditor by the company in liquidation.

The decision in Morton appears to have been made by applying principles developed in the earlier cases of ACN 007 537 000 Pty Ltd; Parker [1997] FCA 1264 and Buzzle Operations Pty Ltd v Apple Computer Australia Pty Ltd [2011] NSWCA 109.

In Parker, the issue of set-off was first considered in the context of a liquidator’s insolvent trading claim.

Liquidators often bring claims against company directors for their breach of duty under section 588G to prevent insolvent trading by a company.

This duty also applies, under section 588V, to holding companies if their subsidiary trades while insolvent. This was the case in Parker, but the holding company was owed a loan account debt by the subsidiary and sought to set-off any insolvent trading claim against that loan account debt.

Mansfield J considered the common law principles needed for a valid set-off, particularly the requirement for mutuality, which requires all of the following three tests to be met:

  1. That the credits, debts, or claims arise from the dealings between the same persons.
  2. That the benefit or burden of them lies in the same interests.
  3. That the credits, debts, or claims arising from the dealings must be commensurable for the purposes of set-off, i.e. they must ultimately sound in money.

A liquidator’s claim for insolvent trading is brought in the liquidator’s name. Ordinarily, this would breach the first of the above tests—as the liquidator’s claim and the defendant’s pre-appointment debt do not arise from dealings between the same persons.

But the liquidator’s claim for insolvent trading is a claim for compensation (for the company’s loss, being the value of unpaid creditors). Perhaps for ease of collection, the legislation in sections 588M (a claim against a director) and in 588W (a claim against a holding company) states that the compensation may be recovered by the liquidator as a debt due to the company.

This was the primary basis for the finding that the two debts arose from dealings between the same entities and the set-off was allowed. That is, the debt owed to the company (compensation for insolvent trading) was set-off against the loan account debt owed by the company.

Parker was a decision of a single Judge of The Federal Court of Australia. Parker was also decided without a contradictor. That is, the parties in the matter sought a declaration that their proposed set-off was valid, without the usual competing submissions of parties in dispute.

Nonetheless, the finding of a valid set-off against an insolvent trading claim has been followed in Buzzle and more recently in Smith v Boné [2015] FCA 319.

But Morton followed the reasoning of Buzzle, which was an unusual case involving both an uncommercial transaction claim and an insolvent trading claim (for breach of director’s duty).

Buzzle is a Superior Court decision of the New South Wales Court of Appeal. In Buzzle, criticisms of Parker were noted, as was Parker’s departure from leading preference cases where set-offs against preference claims were denied, to the finding of a permitted set-off against an insolvent trading claim. However, Parker was followed in Buzzle and the set-off in respect of the liquidator’s insolvent trading claim was allowed by the Court.

But Buzzle gave no indication that such a set-off would have been allowed in respect of the uncommercial transaction claim, or indeed in respect of a preference claim—both of which are claims that are recoverable by the liquidator personally and are not legislated to be recoverable as debts due to the company (unlike an insolvent trading claim). That is, they are claims of different persons and lack the requisite ‘mutually’ for a valid set-off.

The decision in Morton ignores the crucial distinction that an insolvent trading claim is recoverable as a debt due to the company but a preference claim is not.

Ultimately, the issue of set-off and preference claims may have to be resolved when next considered by a Superior Court.

As a result we consider that caution should be taken before relying on the Morton decision as a new “defence” to a preference claim. Set-off has not been allowed by a Superior Court against a liquidator’s preference claim.

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