Set-off Defence Gains Ground in Unfair Preference Claims

Is Morton v Rexel Electrical Supplies Pty Ltd [2015] QDC 49 (Rexel) gaining ground across Australia? In 2015, Queensland District Court Judge Searles held that Section 553C of the Corporations Act 2001 (Cth) (the Act) may apply in situations to reduce a liquidator’s unfair preference claim, by allowing the amount still owing to a creditor to be set-off against the liquidator’s claim. This may only occur in situations where the creditor being sued by a liquidator is owed money by the company in liquidation beyond the amount owed to them in the unfair preference claim.

Rexel applied and followed the matter of Re ACN 007 537 000 Pty Ltd (in liq); Ex Parte Parker (1997) 150 ALR 92 (Re Parker). In short, Re Parker concerned a holding company being sued in its capacity as de facto director for insolvent trading by the liquidator of its subsidiary company under Section 588V of the Act. It was found that Section 553C of the Act could apply to set-off debts owed by the subsidiary to the holding company. The effect of Rexel, picking up the language in Re Parker, is that creditors are in a position to defend unfair preference claims with a defence of set-off. Up until recently, reliance upon Rexel was approached with great caution and criticism.

However, in Stone v Melrose Cranes & Rigging Pty Ltd, in the matter of Cardinal Project Services Pty Ltd (in Liq) (No 2) [2018] FCA 530 (Stone), a creditor relied upon Section 553C of the Act in defending an unfair preference claim. Whilst the creditor did not succeed, the Court did find that the authorities supported a set-off in circumstances where voidable transactions are in dispute, including unfair preference claims.[1] Whilst Stone did not rely upon Rexel, it has followed similar reasoning in Rexel and applied Re Parker.

The reason why the creditor was unsuccessful in Stone was not for the sake of the principle being in dispute, but that the Court held a set-off is not available in circumstances where it can be established the creditor had notice of the company’s insolvency. Notice under Section 553C(2) of the Act requires more than ‘reasonable grounds for suspecting’; what is required is proof of facts known to the creditor, which would warrant the conclusion of insolvency.[2] Notice requires an analysis of the facts and consideration of the transaction at hand, and each case is contingent on its own circumstances.

As long as the facts establish that a creditor did not have notice of a company’s insolvency and is still owed money by the company in liquidation, Section 553C of the Act is available to those creditors to reduce the alleged unfair preference claim.


[1] See generally, Re ACN 007 537 000 Pty Ltd (in liq); Ex Parte Parker (1997) 150 ALR 92; Duncan v Vinidex Tubemakers Pty Limited [1999] SASC 157; and, Hall v Poolman (2007) 215 FLR 243; Buzzle Operations Pty Ltd (in liq) v Apple Computers Australia (2011) 81 NSWLR 47.

[2] Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation [2009] VSCA 319 at [22].

For more information, please contact:
Mark Gowans

Mark Gowans
Director
p.  +61 8 8124 1953
e.  Email me

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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