The High Court has confirmed unanimously that there is no right pursuant to s 553C of the Corporations Act 2001 (Cth) (Act) for a creditor of a company in liquidation to set off a pre-existing debt owed by the company to the creditor against a potential liability of the creditor to repay an unfair preference under s 588FF(1)(a) of the Act. In so doing, the Court explained that since a liquidator’s right to recover a payment under s 588FF(1) (a) of the Act arises after the commencement of the winding-up, there is no ‘mutual dealing’ able to be set-off under s 553C.

Background

Metal Manufactures (the appellant) was paid $50,000 and $140,000 by MJ Woodman Electrical Contractors Pty Ltd, a company now in liquidation, within the six-month period prior to the winding up of MJ Woodman. The liquidator of MJ Woodman (the first respondent) sought to recover both payments from the appellant under s 588FF(1)(a) of the Act on the basis each was an unfair preference under s 588FA of the Act. MJ Woodman owed the appellant $194,727.23, that being a separate and distinct debt from the liability that was said to arise under s 588FF(1)(a) of the Act.

The appellant contended that it had a right pursuant to s 553C of the Act to set off its potential liability to repay the asserted unfair preference against the separate debt owed to it. Section 553C(1) provides, relevantly, as follows: … where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company: (a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and (b) the sum due from the one party is to be set off against any sum due from the other party; and (c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.

By an Amended Special Case, Derrington J reserved for consideration by the Full Court of the Federal Court the question of whether a set-off under s 553C(1) was available to the appellant. The Full Court said that the question posed should be answered ‘No’ and that set-off under s 553C did not arise. The High Court agreed and dismissed the appellant’s appeal.

High Court’s reasoning

Before proceeding to determine the question reserved by Derrington J, the Court made a number of observations. First, the Court (Kiefel CJ, Gordon, Edelman and Steward JJ; Gageler J agreeing in a separate judgment) observed that a company in liquidation remains the beneficial owner of all the property gathered in and controlled by the liquidator in accordance with Div 2 of Pt 5.4B of Ch 5 of the Act (at [6]), such that it is also the beneficial owner of all payments received by it during the course of the winding-up (at [9]). However, this is different from a liability created by the liquidator’s right to seek recovery pursuant to s 588FF of an unfair preference which is recoverable by a liquidator as an officer of the court, and not as agent of the company. Amounts recovered under s 588FF are then to be dealt with according to the statutory scheme of liquidation (at [24]).

The Court also observed that s 553 of the Act created a cut-off date to determine what debts and claims were provable in the winding-up; in this case the relevant date was when the winding up of the company was taken to have begun (at [12]). The Court stated that ‘[c]ritically, … no debt or claim arising from circumstances arising after the commencement of the winding up of the company is admissible to proof against the company in liquidation’ (at [13]), subject to the exception in s 588FI of the Act that a creditor who receives an unfair preference cannot prove in the winding up of a company until it has repaid the amount preferentially paid to it in full (discussed at [29]). The Court then emphasised five keyfeatures of the statutory scheme (at [30]-[31]):

1. The liquidator must identify and gather in the assets of the company for distribution to creditors and contributories.

2. The liquidator is also obliged to distribute those assets by the making of priority payments and then on a pari passu basis (see also [16]).

3. A bright line is drawn to enable the liquidator to determine what debts are payable by the company and what claims must be met against it (see also [18]).

4. The liquidator may recover preference payments as a debt owed to the company.

5. A set-off must take place between what is due as between the company and another person arising from ‘mutual credits, mutual debts or other mutual dealings’ (see also [19], referring to the three aspects to a ‘mutual dealing’ explained in Gye v McIntyre (1991) 171 CLR 609 at 623). Having made the above observations, the Court turned to the appellant’s claim. In rejecting the appellant’s claim, the Court held that set-off under s 553C(1) of the Act only related to mutual credits, debts or other dealings arising from circumstances that subsisted before the commencement of the winding-up (at [45]). In this case, immediately prior to the commencement of the winding-up, MJ Woodman owed the appellant money but the appellant owed nothing to MJ Woodman; the contingent capacity of the liquidator to seek recovery pursuant to s 588FF of an unfair preference did not exist before the winding-up (at [46]).

That right of the liquidator under s 588FF only arose following the commencement of the winding-up and, therefore, was a ‘new’ claim which ‘sprang into existence as a specific statutory right held by the liquidator for the purposes of recovering preference payments to secure the equitable distribution of assets amongst [sic] creditors’ (at [46]). Accordingly, it was not a relevant mutual dealing for the purposes of s 553C(1) and set-off was not possible under that provision (at [47]).

Further, there had been no dealing between the same persons because the liability created by s 588FF(1)(a) arose on application by the liquidator as an officer of the court (at [52]), and there was no mutuality of interest because it could not be said that the amount which the liquidator would recover under s 588FF(1)(a) was for the liquidator’s own benefit or for the benefit of MJ Woodman (at [53]-[54]).

In a separate decision Gageler J agreed with the joint judgment, observing that the consequence of the appellant being entitled to set off the two amounts would be at odds with the scheme in Pt 5.6 of the Act because an unfairly preferred creditor would be entitled to rely on the unfair preference to improve that creditor’s position in relation to other creditors (at [64]-[65]). His Honour also made a number of observations about the concept of ‘mutuality’ within the statutory context of s 553C of the Act, noting that there is no mutuality of interest between an amount of an unfair preference ordered to be repaid under s 588FF(1)(a) of the Act and a debt incurred by the company provable by the creditor (at [68]-[74]). BN