A recent case decided by the High Court of Australia, Metal Manufactures Pty Ltd v Gavin Morton As Liquidator Of MJ Woodman Electrical Contractors Pty Ltd (In Liquidation) & Anor [2023] HCA 1 (Metal Manufactures v Morton) has clarified that debts owed by a company in liquidation to a creditor cannot be set-off under s 553C of the Corporations Act 2001 (Cth) (Act) against an unfair preference claim brought against the creditor by the liquidator of the company.

It is useful to start with a timeline of this case’s factual circumstances.

1. Metal Manufactures Pty Ltd (Metal Manufactures) was paid a total of $190,000 by MJ Woodman Electrical Contractors Pty Ltd (MJ Woodman) in the six month period before MJ Woodman was wound up.
2. MJ Woodman itself owed $194,727.23 to Metal Manufactures.
3. MJ Woodman was wound up.
4. The liquidators of MJ Woodman sought to recover the $190,000 under section 588FF(1)(a) of the Act as an unfair preference .

The question before the High Court was whether Metal Manufactures was entitled under section 553C of the Act to set off the amount owed to them by MJ Woodman against the unfair preference claim by the liquidators. This question was answered in the negative for two reasons. Firstly, that the unfair preference claim did not arise while MJ Woodman was solvent and therefore does not meet the temporal requirement of s 553C. Secondly, that the debts owed were not mutual dealings.

Critically, s 553C has a temporal element and can only assist a creditor where the mutual dealings arose prior to the winding up of the company. While the payments to Metal Manufactures was made prior to the winding up, the unfair preference claim itself only arose after MJ Woodman was wound up and therefore the right to set off could not arise.

Further, the High Court held that the debts were not mutual dealings as there was no mutuality of persons or interests, which is to say that the debts in this case were owed to different persons and were in relation to different equitable or beneficial interests.

The unfair preferences claim by the liquidator was not a claim by or on behalf of MJ Woodman, but by the liquidator in their capacity as an officer of the court. The mutuality of persons criteria was therefore not met as that debt was between a different pair of persons than the debt owing by MJ Woodman to Metal Manufactures.

The mutuality of interests criteria was not met, as the interest of Metal Manufactures in being paid by MJ Woodman for a trading transaction was not the same as the liquidator making use of their right of recovery to allow those funds to be distributed to creditors of MJ Woodman.

It remains to be seen how this case will impact the right to set-off debts owed by the company to a creditor against other types of voidable transaction claims and also insolvent trading claims. The High Court did not squarely address the point and we await further commentary and case law.

For advice regarding debt recovery or other corporate and commercial legal questions, please contact John by email or 07 3220 1144.