The recent Victorian Supreme Court case of Grapecorp Management Pty Ltd (in liq) v Grape Exchange Management Euston Pty Ltd provided an interesting analysis of when set-off, pursuant to section 553C(1) of the Corporations Act 2001, may be claimed.
When can a set-off be claimed against debts owed to an insolvent company?
Where there have been mutual credits, mutual debts or other dealings between an insolvent company being wound up and a person who wants a debt or claim admitted against the company, section 553C(1) of the Corporations Act 2001 provides a procedure whereby the sum due from one party may be set off against any sum due from the other party.
However, set-off may not be claimed if at the time of extending credit or receiving credit from the insolvent company the person had notice of the fact that the company was insolvent: section 553C(2).
Grapecorp Management Pty Ltd (in liq) v Grape Exchange Management Euston Pty Ltd  VSC 112
The subject case concerned services rendered by the defendant, Grape Exchange Management Euston Pty Ltd (‘Grape Exchange’) during the period of February to December 2009 in relation to the vines and grapes on the Bella Vista Vineyard. The services were performed in accordance with a management agreement Grape Exchange entered into with the plaintiff, Grapecorp Management Pty Ltd (in liq) (‘Grapecorp Management’) in January 2008.
Grape Exchange collected monies, in the vicinity of $3 million, in the sale of the grapes from the vineyard. These monies were retained by Grape Exchange, with only a portion being paid to Grapecorp Management. Grape Exchange was therefore sued for the retained monies.
Despite the fact that the services in question were for the most part rendered after Grapecorp Management entered into liquidation, Grape Exchange claimed its right to set-off the expenditure incurred in rendering the services against the monies it collected in the sale of grapes.
When can post-liquidation expenses be set off?
In claiming its right to set-off, Grape Exchange submitted that:
- set-off pursuant to section 553C(1) is automatic;
- the date of winding up is the relevant date set-off takes effect; and
- set-off extends to debts which are contingent at the date of winding up but have the ability to mature into pecuniary demands.
In referring to numerous case authorities, Justice Sidfris found that post-liquidation receipts and debts may be susceptible to set-off if they existed as contingent claims at the time of winding up and have the ability to mature into pecuniary demands.
His Honour stated that a contingent right or debt exists where there is an existing obligation from which, on the happening of a contingency, an obligation to pay will arise.
His Honour ultimately found in favour of the defendant and held that at the date of winding up, obligations existed on both sides to “provide a proper foundation for set off in relation to the amounts that subsequently matured and crystallised and indeed ended in monetary claims”.1 In his Honour’s opinion, the management agreement was still effective post-liquidation.
Knowledge of insolvency
Grapecorp Management’s main argument was that Grape Exchange was not entitled to claim set-off because it was aware of Grapecorp Management’s insolvency when the debts it claimed became owing.
Conversely, Grape Exchange argued that the extending of credit to Grapecorp Management should be taken to have been effected when the management agreement was entered into as opposed to when the services were rendered.
In referring to case authorities, Justice Sidfris again found in favour of Grape Exchange by concluding that any notice of Grapecorp Management’s insolvency is to be considered at the date the management agreement was executed. Given that Grapecorp Management gave no notice of insolvency in 2008, his Honour found that set-off could not be precluded pursuant to section 553(2).