Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufacturers Pty Limited  FCAFC 228.
Section 553C of the Corporations Act provides an automatic set-off for 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.
This is subject to subsection (2), which provides that set-off is not available where the person claiming the benefit of the set-off had notice of the fact that the company was insolvent at the time of giving credit to, or receiving credit from, the company.
Historically, authorities have held that the right of set-off under s 553C is not available in unfair preference claims.
Over the past decade, however, a competing line of authorities has developed suggesting otherwise. For example, Young JA in Buzzle Operations Pty Ltd v Apple Computer Australia Pty Ltd (NSWCA, 2011) suggested that a s553C set-off may be available in connection with the repayment of uncommercial transactions under s 588FE(3) (though his Honour ultimately did not need to decide the point).
By contrast, Justice Edelman’s remarks in the Federal Court judgment Hussain v CSR Building Products Ltd (2016) contemplated a return to the historic approach. The factual circumstances of Hussain are not relevant, save that Edelman J, in considering whether a set-off under s 553C could apply in the context of a s 588FA unfair preference claim, noted that there were “powerful contrary arguments that might have been made to suggest that a set-off is not available against a liquidator’s claim to recover preference payments”.
His Honour ultimately did not have to consider the issue due to the lack of proof of insolvency and a finding that the relevant debts were secured.
Johnson Winter & Slattery acted for the liquidators of Gunns Limited (in liquidation) against Bluewood and Badenoch who submitted that they had a right to set-off amounts still owing from Gunns against any sum that the Court found them liable to pay the liquidators as an unfair preference.
The liquidators made detailed submissions in contending that set-off was not available against a liability arising by reason of an order under s 588FF, but in the event that it was, then s 553C(2) prevented the creditors claiming set-off as they had notice of Gunns’ insolvency at the time credit was given.
In both Bluewood and Badenoch, Davies J held it was unnecessary to decide whether set-off applied, as s 553C(2) operated to prevent s 553C from being available in any event. Relevantly, her Honour held that in each instance where a debt arose that the creditors sought to set-off, they had notice of facts that were more than sufficient to disclose that Gunns lacked the ability to pay its debts as and when they fell due. Accordingly, the creditors were not entitled to a set-off.
As to resolving the set-off issue, her Honour remarked that if she were to deal with the issue, she would have called for further submissions from the creditors to address the liquidators’ arguments.
On appeal by Badenoch, the Full Federal Court adopted Davies J’s approach in concluding that the question of s 553C’s potential application as a defence to an unfair preference claim did not need to be resolved, and otherwise upheld Davies J’s findings regarding the operation of s 553C(2).
Edelman J’s judgment in Hussain flagged that there were “powerful arguments” as to why set-off does not apply to preference claims. However, the position remained unanswered until the decision of Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufacturers Pty Limited.
In the liquidation of MJ Woodman Electrical Contractors Pty Ltd (In Liq), a creditor had received unfair preference payments totalling $190,000 in the relation back period. The creditor sought to rely upon s 553C of the Act to set-off its obligation under s 588FF to repay the preference, against debts totalling $194,727.20 owed by the company to the creditor. Those debts were unrelated to the debts the payment of which constituted unfair preferences.
The liquidator conceded that if set-off was available to the creditor, the unfair preference proceedings ought be dismissed.
In those circumstances, a special case was referred to the Full Federal Court on the question as to whether a statutory set-off under s 553C was available to the creditor against the liquidator’s claim for recovery of an unfair preference under s 588FA.
The Full Court’s answer was a resounding ‘no’.
In the leading judgment delivered by Chief Justice Allsop, the Court considered the interaction between unfair preference claims and found:
This case offers assurance to liquidators as it confirms the prevailing view that proceeds of unfair preference claims cannot be eroded by the application of set-off against other debts owed by the company to creditors.
 For example, Re a Debtor  1 Ch 410; Re Clements; Ex parte Trustee; Golsbrough Mort & Co Ltd (1931) 7 ABC 225; Re Smith (1933) 6 ABC 49; Calzaturuficio Zenith Pty Ltd v NSW Leather & Trading Co Pty Ltd  VR 605; Painter v Charles Whiting & Chambers Ltd (1932) 4 ABC 203; Re Buchanan Enterprises Pty Ltd (No 2) (1982) 7 ACLR 407.
 For example, Re Parker (FCA, 1997), Buzzle Operations Pty Ltd v Apple Computer Australia Pty Ltd (NSWCA, 2011), Smith v Boné (FCA, 2015), Morton v Rexel Electrical Supplies Pty Ltd (QDC, 2015).
 Hussain v CSR Building Products Ltd (2016) 246 FCR 62.
 Hussain v CSR Building Products Pty Ltd (2016) 246 FCR 62 at .
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