Ian Innes Maria O'Brien Peter M. Lucarelli May 3 2022 So long set-off in unfair preference claims! So what's next? Baker McKenzie | Litigation - Australia Ian Innes, Maria O'Brien, Peter M. Lucarelli Litigation IntroductionDecisionCommentIntroductionThe long-contentious point of whether unpaid pre-appointment debt can be set-off against an unfair preference claim has been decided (for now) in favour of the liquidators: it cannot.(1)But what are the wider implications of that conclusion? The Full Court of the Federal Court carefully avoided answering that question, but at the same time offered reasoning to suggest set-off may still have a role in defending some liquidator claims.There are at least three other contexts in which the set-off question could be raised, but which the Court did not have to consider. The Court did not definitively decide whether set-off could be claimed against the following liquidator claims in those contexts. Its reasoning, though, does tease the possible answers set out below.The other voidable transaction provisions under division 2 of part 5.7B of the Corporations Act 2001 (Cth) (including uncommercial transactions) appear to have a substantially similar underlying policy to that of unfair preferences. All are related to a fairer distribution of pre-appointment assets. Like unfair preferences, the challenged transactions are merely voidable until set aside by a later court order. Both these points were key aspects of the Court's reasoning in rejecting set-off as a defence. This could make it difficult to argue that the set-off defence could nevertheless apply to other voidable transaction provisions.With regard to the exposure of a holding company for the insolvent trading debts of a subsidiary company, and director liability for debts incurred when the company engages in insolvent trading, the Court has left open the potential for set-off against such claims. It gave reasons that potentially distinguish them from unfair preferences (while studiously avoiding answering whether the set-off defence does survive).DecisionThe Court rejected the ability of a creditor to rely on the statutory set-off defence (section 533 of the Corporations Act) against a liquidator's unfair preference claim. A liquidator may seek court orders against an unsecured creditor to recover payments made at a time when the company was insolvent in the six months before the commencement of the winding up. It is no defence for a creditor to say it is owed yet more money.The Court provided multi-layered reasons as to why set-off could not be claimed against an unfair preference claim, reaching the answer as a matter of statutory interpretation and by reference to legislative purpose. A claim for an unfair preference focuses on the fair and equal distribution of assets between competing creditors. So do other voidable transaction rights. In giving that explanation, the Court has made it difficult to argue a pre-appointment debt could be set-off against an uncommercial transaction (or against claims under any of the other voidable transaction provisions). Though the point was not considered or decided, it appears unlikely that the defence would be available in respect of those provisions.The Court did raise the question of the setting-off of debt owed to a holding company (which has common directors or an ability to control its subsidiary's affairs) against its potential statutory liability for debts incurred by its insolvent subsidiary (sections 588V and 588W of the Corporations Act). It also raised the availability of set-off against a director's liability for insolvent trading (sections 588G and 588M of the Corporations Act). It emphasised there is a different statutory purpose for these specific provisions – the righting of the wrong of allowing insolvent trading (a "contravention"). As a matter of timing, that liability might be considered to arise out of conduct prior to the start of the liquidation, rather than being a statutory claim necessarily only arising in the winding up. Both these points could support a critical finding of "mutuality" between the statutory claim and a pre-appointment debt to allow set-off. However, in explaining these points of difference, the Court expressly did not decide the correctness of prior case law that had allowed companies to set off debt against an insolvent trading liability.The Court also considered transactions rendered void because they take place after the deemed commencement of a winding up. It did not rule out set-off in this scenario, but in tying its analysis to an earlier judgment on very specific and unusual facts, it is more difficult to draw a general principle from its reasoning.CommentOverall the Court has provided guidance but not answers to these difficult questions. Liquidators, directors and holding companies will need to wait further before the point is absolutely settled.For further information on this topic please contact Ian Innes, Maria O'Brien or Peter Lucarelli at Baker McKenzie by telephone (+61 2 9225 0200) or email ([email protected], maria.o'[email protected] or [email protected]). The Baker McKenzie website can be accessed at www.bakermckenzie.com.Endnotes(1) Morton as liquidator of MJ Woodman Electrical Contractors v Metal Manufacturers  FCAFC 228. The creditor has applied for special leave to appeal to the High Court.