The ability of creditors to rely upon the statutory set-off provision in section 553C of the Corporations Act to reduce or eliminate their exposure to unfair preference claims has been a matter of contention in a number of recent cases1. The recent Federal Court decision in Cardinal Project Services2 (‘Cardinal’) again recognises this tension but also gives hope to liquidators by re-affirming that there may be an opportunity, in the appropriate case, for a liquidator to disturb the current position, which is that the set-off provision in s 553C is available to reduce or eliminate a defendant creditor’s exposure to an unfair preference claim.

The decision

In Cardinal, the liquidators of Cardinal Project Services Pty Ltd (in liq) (‘the Company’) brought an unfair preference claim proceeding against Melrose Cranes & Rigging Pty Ltd (‘the Creditor’). The Creditor asserted that it was entitled to rely upon the section 553C set-off provision.

After finding that the Creditor had or ought to have had knowledge or suspicion of the Company’s insolvency (thereby extinguishing the Creditor’s “good faith” defence under s 588FG), Justice Markovic considered whether the Creditor could rely on section 553C.

Section 553C allows the sum due from a creditor to be set off against any sum due by the insolvent company where:

  1. there are mutual credits, mutual debts or other mutual dealings between an insolvent company and a creditor;
  2. the creditor wants to have a debt or claim admitted against the company; and
  3. the creditor did not have notice of the fact that the company was insolvent.

By virtue of the Court’s finding in relation to the Creditor’s knowledge or suspicion of the Company’s insolvency, the Creditor was found to be unable to rely on s 553C. However, before making this finding, Justice Markovic addressed the liquidators’ argument that s 553C should not be available in the context of unfair preference claims at all.

The liquidators submitted that cases such as Re Parker3 were plainly wrong in allowing s 553C to be available to defendants in unfair preference claims. Although not elaborated upon, the liquidator’s submission was based, at least in part, on a view that the availability of the set-off provisions in unfair preference claims is wrong as a matter of principle, having regard to the nature of proceedings brought pursuant to Part 5.7B of the Corporations Act. However, Justice Markovic held that without detailed submissions being made by the liquidators, the Court was not convinced that Re Parker was plainly wrong and was bound to follow that authority, leaving section 553C available to provide a set-off in favour of defendants against an unfair preference claim.

Key takeaways

Justice Markovic’s finding echoes that of Justice Edelman in Hussain v CSR Building Products Pty Ltd4, where his Honour stated that despite “powerful contrary arguments that might have been made to suggest that a set-off is not available against a liquidator’s claim to recover preference payments”, the liquidators in that case did not make submissions utilising those arguments.

Consequently, until detailed and cogent submissions are put to the Court in an appropriate case by a sufficiently motivated liquidator, section 553C will remain available as a means by which defendants to unfair preference claims can reduce or eliminate their exposure.