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‘Set-off is dead in the water as a defence to a preference claim’ following High Court ruling
A recent judgment handed down by the High Court has confirmed that a set-off cannot be used by a creditor as a defence to a liquidator’s preference recovery claim. A partner acting on the case, and several other insolvency partners, have weighed in on the implications.
Jess Feyder
Last week (8 February), the High Court of Australia handed down a consequential decision in Metal Manufacturers Pty Limited v Morton.
The answer from the Full Court was “no” and, in the appeal, the High Court agreed and upheld the decision.
Scott Taylor, partner at Taylor David Lawyers, acted for the respondents on the case. Speaking to Lawyers Weekly about the implications of the judgment, he said that the decision confirms the orthodox view that a set-off cannot be used by a creditor as a defence to a liquidator’s preference recovery claim under section 553C of the Corporations Act 2001.
“That claim arises where the creditor was unfairly preferred over other creditors, by a payment or payments made to it during the six-month period leading up to the liquidation of the company.
“The set-off arises in those cases where the insolvent company still owes the creditor money when the company is wound up,” he explained.
“The orthodox view has applied in respect of personal insolvency (bankruptcy) for well over 100 years, and until a decision of a single judge of the Federal Court in 1997 (Re Parker), was thought to apply also to corporate insolvency (liquidation).
“Following that decision, however, there were several other decisions which cast some doubt as to whether the set-off defence continued to apply in corporate insolvency,” explained Mr Taylor.
“The High Court’s decision has clarified the position by holding that set-off cannot be used by a creditor as a defence to a liquidator’s claim for the recovery of a preference.
“The ‘defence’ which in more recent years has been increasingly used to frustrate a liquidator’s preference recovery is no longer available to a preferred creditor.”
Nicholas Edwards, insolvency partner at Hamilton Locke, weighed in: “The High Court decision provided clarification on a vexed and uncertain area of law in the insolvency landscape.”
“It is now clear ‘set-off’ is dead in the water as a defence to a preference claim,” Mr Edwards told Lawyers Weekly.
“The decision was a win for liquidators, with respect to set-off and unfair preferences.
“This takes away a potential defence many creditors may elect to run when confronted with a claim by a liquidator. Often this is done spuriously and often in bad faith,” he stated.
“[The decision] provides certainty around an area of law that created at times unnecessary issues and often resulted in stalemates in relation to potential recoveries.
“These stalemates could impact the return to creditors as there were often unnecessary costs incurred (often by lawyers, I hate to say) as claims were dragged out,” he said.
Trevor Withane, partner at Ironbridge Legal, affirmed the position: “Set-off is now firmly gone as a way to reduce liability against an unfair preference claim.
“There must exist a subsisting right or obligation prior to the winding up of the company in order to even contemplate a set-off.”
What does this mean for restructuring and insolvency lawyers?
“The decision will benefit insolvency practitioners by removing a possible defence to a liquidator’s successful recovery of preferential payments made to a creditor,” Mr Taylor highlighted.
Mr Edwards commented: “For lawyers in this space, it means the position is settled, and this should flow through to the advice given not only to liquidators on prospects but also in relation to any claim by a liquidator if acting for a creditor.”
“It will also allow administrators to identify with more certainty potential claims and prospects of recoverability ideally when preparing the report to creditors,” he continued. “Critically, these recoveries may be viewed in light of a DOCA proposal, and the ultimate return achievable," Mr Edwards highlighted.
Mr Withane weighed in: “This case is an example of the textualist approach of putting primacy to the statutory text endorsed by the High Court.
“The moral of the story: do not go to the High Court if you do not have an argument that is firmly rooted in the statutory text.”
“The High Court also has displayed a continued penchant for objective, multifactorial tests — questions of fact must be objectively ascertained through a combination of factual states of affair, rather than any bright-line rule,” added Mr Withane.
