The ‘dreaded’ section 553C set-off
All liquidators in Australia are likely aware of section 553C (the Section) of the Corporations Act 2001 (Cth) (Act).
The reason I say ‘dreaded’ is because where a liquidator brings a preference claim, notwithstanding that;
- the onus is on the liquidator to prove that the company paying the monies was insolvent at the time of the payments;
- if the company in liquidation is unfunded, the liquidator may be personally liable for any adverse costs order;
- the defendant has various defences available under the Act;
- the uncertainties and vagaries of commercial litigation generally can cause consternation to the liquidator;
- even if the liquidator’s claim is successful – there is always the chance the defendant will itself engage in the liquidation process, and thereby not ‘pay up’; and
- the increasing competitiveness of the insolvency professionals’ landscape and mandatory statutory compliance regime can often mean a preference claim is the only method by which a liquidator might recover his/her professional fees,the liquidator now has to contend with a somewhat novel argument under the Section to the effect that the defendant can set-off any loss to the defendant from the liquidation of the company and effectively (subject to some conditions), deduct that amount from the preference amount claimed by the liquidator.
Note that the preference claim and remaining voidable claim regimes are found in the somewhat later Division 2 of Part 5.7B of the Act, which commences at section 588FA of the Act – so the less seasoned liquidator may not even think to look at a section so early on in the Act.
It started with a District Court decision
The leading authority on the applicability of the Section to an insolvent trading claim (which is another voidable transaction claim available to a liquidator) is well known, although at the time was controversial – Re Parker[1] (Parker) – where the quantum of a liquidator’s insolvent trading claim was reduced on the basis of a set-off of debts owed by the company’s subsidiary to the holding company.
In Morton v Rexel Electrical Supplies Pty Ltd[2] (Morton) for the first time in corporations law history, a court, by way of a single District Court of Queensland Judge applied the reasoning in Parker to the liquidator’s preference claim, to the effect that the amount of the preference claim recoverable was to be reduced by the exact amount of the unpaid debts owed by the company in liquidation to Rexel at the time of the liquidation of the company.
This is the stuff that keeps liquidator’s awake at night.
Although the set-off was not ultimately ordered for other reasons, the decision in Morton has led other (and with respect, more senior) judges to look more closely into the Section.
A heavyweight enters the fray
In Hussain v CSR Building Products Limited, in the matter of FPJ Group Pty Ltd (in liq)[3] (Hussain) Edelman J, then of the Federal Court of Australia, now Justice of the High Court of Australia, in a somewhat scathing judgment of the liquidator’s attempts at a preference action, addressed in part, the Section and its availability in response to preference actions[4].
Although the above sections of Hussain have been used by some of my colleagues to infer that Justice Edelman was of the view that the Section is available to eliminate or reduce the quantum of a preference action, a closer reading of, in particular, paras [235]-[236] of Hussain provides a reference to the book[5] and Australian Law Journal article[6] (Article) of Dr R Derham which provide “powerful contrary arguments … to suggest that a set-off is not available against a liquidator’s claim to recover preference payments”.[7]
Immediately upon a review of the Article, it is clear that Dr Derham’s view is that the Section is not available for, not only preference claims, but also in relation to any voidable transaction claim.
The plot thickens
In perhaps the most recent decision regarding the Section and preference claims, and notwithstanding the position of Justice Edelman in Hussain, in Stone v Melrose Cranes & Rigging Pty Ltd, in the matter of Cardinal Project Services Pty Ltd (in liq) (No 2)[8] (Cardinal), a different single judge of the Federal Court of Australia, Markovic J, held that set-off pursuant to the Section was available in preference claims, as per Parker, but only because the liquidator did not make detailed submissions as to why the Section should not be available.
Notwithstanding the above, Markovic J went on to indicate that set-off was not available to the defendant in Cardinal as the defendant had actual notice of the insolvency of the company which fell afoul of sub-section 2 of the Section, such that set-off was ultimately unavailable.
Conclusion
It is the writer’s respectful opinion that Cardinal, and indeed, the entire line of authority to the effect that the Section is available in answer or partial answer to the voidable transaction claim regime, because no (or adequate) submissions are put to that position, are plainly wrong and are in need of appellate court consideration, so that all liquidators might have the benefit of a good night’s rest.
We recommend we be approached to consider the issue whenever a set-off argument is raised.
We at ICL Lawyers love preference claims, and indeed, all voidable transaction claims, whether for liquidators, or in defence of those claims. We suggest that it is in everyone’s interest to approach us first in relation to a preference claim or voidable transaction claim so that we might set you on the right path to begin with, in order to avoid the confusion that these highly charged topics can create.
Adam Wiederman
Principal Solicitor
ICL Lawyers
6 August 2019
[1] (1997) 150 ALR 92.
[2] [2015] QDC 49.
[3] [2016] FCA 392
[4] Hussain at [226-236]
[5] Derham R, Derham on the Law of Set-off (4th ed, Oxford University Press, 2010).
[6] Derham R, “Set-off Against Statutory Avoidance and Insolvent Trading Claims in company Liquidation” (2015) 89 Australian Law Journal 459.
[7] Hussain at [235].
[8] [2018] FCA 530.
