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03/01/2021 | News release | Distributed by Public on 02/28/2021 16:07

Unfair preference claims and the s553C set-off: Renewed criticism of recent cases (Australia)

March 1, 2021

The debate about whether a s553C set-off is available in response to an unfair preference claim has resurfaced.

While recent cases have held that such a set-off is available, a judge of the NSW Supreme Court has issued strong criticism, likely reinvigorating those liquidators who wish to see appellate level review of this area of the law.

Key points

  • Whether a set-off under s553C is available in response to a liquidator's unfair preference claim is an ongoing controversy within the insolvency industry.
  • While recent decisions have held that such a set-off is available, this position has recently come under fresh, and strong, criticism from a judge of the NSW Supreme Court.
  • Although the law has not changed, this fresh judicial criticism is likely to re-ignite the debate and may well encourage liquidators to seek appellate court clarification on this important area of the law.

Background

Following the decision in Re Parker, a number of cases have held that a right of set-off under section 553C of the Corporations Act 2001 (Cth) is available to a party defending a liquidator's unfair preference claim. Without this set-off the party would be liable to pay to the liquidator the full amount of the unfair preference, and then seek payment of its debt in the ordinary course of the winding up (and on a pari passu basis with all other creditors).

While a number of cases have considered this area of the law, three recent cases are particularly relevant:

  • In 2011 the NSW Court of Appeal in Buzzle Operations said that s553C applied to a liquidator's 'voidable transactions' claim (i.e. a claim seeking orders under s588FF).
  • In 2016 in Hussain, Edelman J (now a High Court justice) commented that there are 'powerful … arguments … to suggest that a set-off is not available against a liquidator's claim to recover preference payments.'
  • In 2018, the Federal Court in Stone v Melrose Cranes once again held that a set-off under s553C could be used in response to an unfair preference claim.

Renewed criticism

In the relatively recent decision of In the matter of Force Corp Pty Ltd (in liq) [2020] NSWSC 1842, the liquidators sought orders for directions in relation to certain proposed payments.

In the unique factual circumstances of the case, the liquidators sought directions permitting a set-off under s553C (albeit unrelated to any voidable transaction claim). In support of their position that such a set-off was justified, the liquidators referred to cases which have held or suggested that a set-off under s553C was available in a liquidator's statutory recovery claim (e.g. insolvent trading or uncommercial transactions).

Justice Gleeson considered the cases relied on by the liquidators as 'controversial' and said that the 'creeping assumption' that a s553C set-off was available in voidable transaction claims was 'suspect'. His Honour noted that cases which allowed a s553C set-off in response to unfair preference claims were contrary to a number of cases decided between 1927 and 1982.

While not having to decide the question on the facts before him, Gleeson J indicated that, in his Honour's opinion, there was 'much force' in academic criticism of the cases that have held a set-off under s553C was available in response to an unfair preference claim.

Take away

Liquidators running unfair preference claims are no doubt already alive to the potential for a defendant to raise a set-off claim under s553C on the back of decisions such as Buzzle Operations and Stone v Melrose Cranes. The ongoing criticism of those rulings, having now been reinvigorated by Justice Gleeson, may well provide the impetus for a liquidator to seek appellate level review of this area of the law, should an appropriate (and sufficiently commercial) opportunity arise.