Case notes on unfair preferences: offset of preference claims
Metal Manufacturers v Morton as Liquidator of MJ Woodman Electrical Contractors (in liquidation) & Anor [2023] HCA 1 regarding the defence of set off;
Metal Manufacturers Pty Ltd (Metal Manufacturers) was paid approximately $190,000 by MJ Woodman Electrical Contractors Pty Ltd (MJ Woodman), a company in liquidation, within the relevant statutory preference period. Metal Manufacturers sought to rely on section 553C(1) of the Corporations Act 2001 (Cth) (Act) to offset the liability against other debts owed to it by MJ Woodman.
The primary judge reserved that question for determination by the Full Federal Court, which then determined Metal Manufacturers could not rely on s 553C(1) of the Act to offset the preference claim. Metal Manufacturers appealed.
The High Court affirmed the decision of the Full Court, finding:
Section 553C(1) only applies to mutual credits, mutual debts or other mutual dealings that existed before the commencement of winding up.[1]
With unfair preference claims, there is nothing to “set off” immediately before winding up, as there was nothing owed by Metal Manufacturers. Put another way, prior to the winding up, the liquidator had no capacity to sue for unfair preferences, such that Metal Manufacturers could not have had a liability to pay.[2]
No mutuality of interest existed because the interest of Metal Manufacturers being paid by MJ Woodman is different to the interest of the liquidator in recovering the unfair preference payment. A liquidator’s right of recovery is a unique statutory mechanism to recover proceeds for the benefit of creditors, and is therefore distinct to the interest arising from a transaction between commercial parties.[3]
This case will provide comfort to insolvency practitioners that unfair preference claims cannot be dwindled down by set-offs claimed under s 553C(1).
