Set-Off Denied: Court Rules on Creditor's Claim in Metal Manufactures Pty Limited v Morton [2023] HCA 1
In a recent landmark case, Metal Manufactures Pty Limited v Morton [2023] HCA 1, the High Court of Australia issued a significant ruling regarding the ability of creditors to set off their debts against claims under unfair preference provisions during a company's liquidation. This decision clarifies the crucial distinction between mutual dealings and contingent liabilities, shedding light on the complexities of creditor rights in insolvency proceeding.
- A creditor owed money in a liquidation is not entitled to set off that debt against any amount it is found to owe to the company under unfair preference provisions (and arguably other amounts payable to a company in liquidation which are recoverable pursuant to a liquidator’s statutory powers).
- Metal Manufactures was owed $384,000 by MJ Woodman Electrical contractors (the company). In the 6 months prior to the company going into liquidation, the company made two payments to Metal Manufactures, one of $50,000 and the second $140,000. After these payments were made, the company still owed Metal Manufactures around $194,000.
- The company went into liquidation and the liquidator made a claim against Metal Manufactures to recover the two payments as ‘unfair preferences’ pursuant to section 588FF of the Corporations Act 2001 (Cth) (the Act). There was no dispute that the payments to Metal Manufactures met the criteria of unfair preferences.
- Metal Manufactures refused to repay the payments, claiming that, as it was owed money by the company, it was entitled to ‘set off’ its potential liability under unfair preference provisions, against the debt owed to it. If it were successful in this argument, the debt owed to Metal Manufactures would entirely cancel out the claim made by the liquidator.
- The Act1 does provide that where there have been mutual credits, debts or other dealings between an insolvent company being wound up and a person who wants to have a debt or claim admitted against the company, there can be an account of what is due from one party to the other with respect to those mutual dealings and a set off can occur. The balance can be admitted to proof in the winding up, or is payable to the company, whichever is appropriate.
- However, the key component to a successful set off claim is establishing that the debts are ‘mutual’ in that they exist and arise from the same set of circumstances that occurred before the commencement of the winding up.
- Metal Manufactures claimed that there were mutual dealings between it and the company, being the trading transactions that took place during the 6 months and the amounts paid by the company in return. Even though the liability of Metal Manufactures (being the claim of the liquidator) did not exist immediately prior to the winding up, Metal Manufactures claimed that it was sufficient that the liability existed as a contingent liability that might, in the future, mature into an actual present liability.
- The Court found that, immediately before the commencement of the liquidation, there was nothing to set off as between Metal Manufactures and the company. The company owed money to Metal Manufactures, but Metal Manufactures owed nothing to the company. Instead, the right of the liquidator to rely on its statutory power to recover an unfair preference only ‘sprang into existence’ at the moment the liquidation commenced. It was ‘wholly new’. Therefore, there was no mutual dealing and Metal Manufactures was not entitled to a set off.
- It is important when you are owed money by a company in liquidation, that you engage with the liquidator to defend or negotiate any unfair preference claim, and to properly prove for the balance of the debt owed to you in the winding up. We can assist with both.
Please get in touch if we can be of any assistance.
Ali Erskine
Principal
M 0419 884 992 | T 03 5225 5208
E aerskine@ha.legal
Tanya Cimino
Associate
T 03 5225 5232
E tcimino@ha.legal
