The Set-Off Defence to Voidable Transactions
Background
A set-off defence may be available to creditors faced with unfair preference claims; s 553C(1) of the Corporations Act 2001 (Cth) (“the Act”). However, this area of the law continues to generate controversy.
It is likely that invitations from Judges to make detailed submissions on why the earlier authorities are wrong will be taken up in future litigation. Alternatively, we may see law reform (see below).
The Statutory Provision
Section 553C(1) of the Act sets out:
Subject to subsection (2), 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:
(a) An account is to be taken of what is due from the one party to the other party in respect of those mutual dealings; and
(b) The sum due from the one party is to be set off against any sum due from the other party; and
(c) 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 Mutuality Test
The provision applies where there have been mutual credits, mutual debts or other mutual dealings.
The controversy has focussed on the fact that:
1. Save for assignment, an unfair preference claim is brought by a liquidator personally (Albeit the remedy is to have the amount paid to the company – s 588FF of the Act);
2. Any right to relief to a liquidator in an unfair preference claim is discretionary; s 588FF of the Act;
3. Any such unfair preference claim arises post-liquidation, whereas the creditor’s debt arose pre-liquidation;
4. A set-off defence may outflank the statutory running account in s 588FA(3) of the Act in some circumstances.
The Case Law
In Re Parker(1997) 80 FCR 1 [an insolvent trading case], Mansfield J referred to the High Court decision in Gye v McIntyre (1991) 171 CLR 609 [a bankruptcy case] where it was held at [623] and at [630]:
..”the notion [is] of reciprocity rather than that of correspondence. It does not mean “identical” or “the same”. So understood, there are three aspects of the section’s requirement of mutuality. The first is that the credits, the debts or the claims arising from other dealings be between the same persons. The second is that the benefit or burden of them lie in the same interests. In determining whether credits, debts or claims arising from other dealings are between the same persons and in the same interests, it is the equitable or beneficial interests of the parties which must be considered: see e.g., Hiley (1938) 60 C.L.R, at p. 497. The third requirement of mutuality is that the credits, debts, or claims arising from other dealings must be commensurable for the purposes of set-off under the section. That means that they must ultimately sound in money”.
“The requirement that the credits, the debts or the claims arising from other dealings be commensurable does not mean they must be vested, liquidated or enforceable at the decisive date…… Provided they exist as contingent at that date and are of a kind which will ultimately mature into pecuniary demands capable of set off, the requirement of the section may be satisfied in relation to them”.
Re Parker was considered by the NSW Court of Appeal in Buzzle Operations Pty Ltd (in liq) v Apple Computers Australia Pty Ltd [2011] NSWCA 109. In that case, Young JA (with whom Hodgson and Whealy JJA agreed) made comment at [279], in obiter, extending set off to voidable transactions arising under ss 588FA – 588FF of the Act.
In Morton & Anor v Rexel Electrical Supplies Pty Ltd [2015] QDC 49, [an unfair preference case], Searles DCJ held at [78]:
“….the unanimous NSW Court of Appeal in Buzzle adopted the reasoning of Mansfield J in Re Parker, and I should not depart from it unless it is ‘plainly wrong’. I see no good reason justifying such a course. I consider the set–off provision in s 533C operates to provide a set-off in the present circumstances”.
In Hussain v CSR Building Products Limited [2016] FCA 392, [another unfair preference case], Edelman J at [216 – 248] declined to consider whether or not the line of authority required revisiting. However, he clearly sent out an invitation to future litigants (should they wish to properly test the case law). One of the main issues that he said he was not properly addressed on was the “outflanking of a running account” question. At [239] he commented in obiter:
“As s 588FA(3) was a provision intended to codify the principles of a running account, there may be questions whether a set-off claim could be made where the debts that are sought to be set-off are those that might otherwise have fallen within a running account”.
Finally, in Stone v Melrose Cranes & Rigging Pty Ltd (No 2) [2018] FCA 530, Markovic J, again inviting future litigants to make proper submissions on the case law, held at [283]:
“As was the case before Gleeson J in Smith v Bone [an insolvent trading case], detailed submissions were not made before me in relation to the question of the applicability of s 553C of the Act in the present circumstances…In those circumstances I…. would, as Gleeson J did, follow the decision in Re Parker and other authorities where it has been held that the set-off in s 553C of the Act can be utilised in voidable transaction claims and, subject to the Liquidators’ reliance on s 553C(2) discussed below, may be available to Melrose Cranes”.
Time to Apply Test
Set-off is automatic when there are mutual credits, mutual debts or other mutual dealings as a result of the prescriptive words used in s 553(1).[1] The relevant date is the day on which the winding up is taken, because of Division 1A of Part 5.6 of the Act, to have begun.[2]
Exception to the Rule
A set-off will not be available if the party seeking to claim it had notice of the fact that the company was insolvent (s 553C(2) of the Act).
The level of notice required is “actual” notice as opposed to constructive notice. This is difficult to prove in practice.
The Rule applies to the benefit of Liquidators too!
Make no doubt, if a creditor lodges a proof of debt and you, as the liquidator, assert a set-off against the creditor in respect to, inter alia, an unfair preference claim, you can adjudge the proof of debt accordingly. That is, a set-off defence does not only apply against liquidators.
Conclusion
The law is likely to continue to develop in this area. Stay tuned for further case law and our articles on point.
Gavin Parsons and Associates can assist you with any questions you may have regarding insolvency law. Contact Gavin Parsons and Associates on (02) 9262 4471 for a free no obligation consultation today.
[1] Re Parker (1997) 80 FCR 1.
[2] Re Parker (1997) 80 FCR 1, 15; see also JLF Bakeries Pty Ltd v Baker’s Delight Holdings Ltd (2007) 64 ACSR 633,17; [2007] NSWSC 894.