Key takeaway set off
In Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 the Full Federal Court (Allsop CJ, Middleton J agreeing at [220], Derrington J agreeing at [221]) held that a creditor who receives an unfair preference has no right to set off its liability to repay the preference against a debt which an insolvent company owes to it.[1] This decision does not affect other defences available to creditors such as good faith or perhaps peak indebtedness running account.
On 12 May 2022, the High Court of Australia granted the respondent special leave to appeal the Full Federal Court decision. The High Court of Australia heard the appeal on 12 October 2022 but has not yet issued judgment.
The case
MJ Woodman Electrical Contractors Pty Ltd (the company) owed two debts to Metal Manufactures Pty Ltd (the creditor) for the supply of goods on credit, one of which debts amounted to the sum of $194,727.23. The company proceeded to pay the creditor the sum of $190,000 during the relation back period.
The liquidator sought to recover the payment of $190,000 as a preference. The creditor defended the transaction, saying that it was entitled to set off its liability to repay the preference against the debt which the company owed to it. The first instance judge (Derrington J) referred the question to the Full Federal Court.
Statutory context
Section 553C(1) of the Corporations Act 2001 (Cth) imposes a form of accounting part of the ascertainment of the proof of debt by way of set off for genuine[2] mutual dealings.[3] Section 588FA and related sections[4] make a preference––that is a transaction which, objectively assessed,[5] effects a dislocation to pari passu distribution[6]––voidable against a liquidator. And section 588FF grants to the court various remedial discretions to avoid a preference exercisable on the application of the liquidator.[7] The conceptions of mutual set off and pari passu distribution are both founded in equity and its concern for substantive fairness particularly.[8] The object of the former is to prevent the injustice to the creditor of not netting off mutual dealings between the creditor and the debtor in working out their respective obligations, whereas the latter reflects the equitable maxim ‘equity is equality’[9] by paying the moneys disgorged to all creditors of equal rank, after any priority creditors are paid and the costs of the administration provided for.[10]
Result
The Full Court observed that, properly construed,[11] section 553C(1) required reciprocal mutuality in the sense that the dealing gave rise to credits, debts or claims between the same persons in the same equitable or beneficial interests before the relevant date.[12] Thus section 553C(1) was not engaged in the present case because there was no reciprocal mutuality between the indebtedness of the company to the creditor and the liability of the creditor to repay the preference to the company at the suit of the liquidator.[13]
That was because the liability to disgorge and replenish a preference arises, not from any absolute or contingent right or equity in the company before the relevant date,[14] but from a court order to repay the preference to the company in an action which only the liquidator in its own right can bring.[15] For unless the liquidator brings a successful action the preference remains a good discharge of the debt owed by the company. In the result therefore the creditor had to repay the preference and prove its debts in the normal way so as to participate in the pari passu distribution of remaining company assets.
[1] Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 [4]–[5].
[2] Genuineness is not a question of form but of substance: Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 [50], [76].
[3] Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 [26].
[4] Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 [110]–[111], [115]–[116], [135].
[5] Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 [27], [113].
[6] Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 [31], [65], [152], [154], [156].
[7] Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 [118], [127], [136].
[8] Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 [28], [109], [141].
[9] Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 [28], [30].
[10] Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 [8], [29], [77].
[11] Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 [8]–[10], [13], [15], [21], [55].
[12] Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 [59].
[13] Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 [7]–[8], [77].
[14] The parties cannot contract out of the repayment of a preference by causing a right to set off to vest in the event of insolvency: Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 [73], quoting Lister v Hooson [1908] 1 KB 174, 182–3 (Buckley LJ).
[15] Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Ltd [2021] FCAFC 228 [7], [56]–[60], [78], [118], [127], [136], [137]–[139], [143]–[144], [152], [154].