Ability to set-off insolvent trading or unfair preference debts under section 553C of the Corporations Act: recent decisions

Background

Section 553C of the Corporations Act 2001 (Cth) (Act) permits a person to set-off:

• amounts owed to it by the insolvent corporation as a debtor; as against
• amounts it owes to the insolvent corporation as a creditor.

The leading decision on the operation of section 553C of the Act in the context of insolvent trading is Re Parker.¹

In Re Parker, the liquidators of a subsidiary company were contemplating suing the subsidiary’s holding company for liabilities which arose when the subsidiary incurred debts whilst insolvent pursuant to section 588V of the Corporations Law (equivalent to section 588V of the Act).

The liquidators sought directions from the Court as to whether (among other things) the holding company could “set-off” the amount it had to pay the subsidiary for contravention of section 588V of the Act, as against debts owed to it by the subsidiary.

Justice Mansfield held that the two amounts could be set-off under section 553C of the Act and said that:

• the holding company’s post-liquidation liability under section 588V of the Act could be set-off against the debt owed to it by the subsidiary company;
• although the claim for liability under section 588V of the Act did not arise from any “dealings” between the holding company and subsidiary company, it could qualify for set-off; and
• statutory debts could be subject to set-off.

Recent decisions

Two recent authorities have affirmed Justice Mansfield’s decision in Re Parker, notwithstanding that the decision has been subject to some negative extra-judicial commentary.²

Smith and Bone³

• This case was heard in the Federal Court of Australia.
• Smith in his capacity as liquidator brought an action against Mr Bone, a former director of the insolvent corporation, for insolvent trading.
• Relevantly, the Court had to consider whether the director (Mr Bone) was able to set-off debts owed to him by the insolvent company as against his liability for insolvent trading.

The Court held:

• That the approach of Justice Mansfield in Re Parker should be adopted.
• That a set-off was prima facie open to Mr Bone.

However, because Mr Bone had notice of the fact that the company was insolvent at the time he loaned the money, he was precluded on relying on the set-off pursuant to section 533C(2) of the Act.

Morton and Rexel⁴

• The liquidator brought an unfair preference claim against Rexel Electrical Supplies Pty Ltd (Rexel).
• The questions for determination by the Court were:

• whether the payments made by the company, Aran Management Pty Ltd (Aran), to Rexel, were preferential; and
• if so, was Rexel entitled to claim a set-off in respect of amounts which remained outstanding from Aran to Rexel.

Judge Searles in the Queensland District Court found that a set-off was open to Rexel, save and except for the last of the preferential payments made from Aran to Rexel, because by that time Rexel had notice of facts which would have indicated that Aran was insolvent. On that basis, a set-off could not be claimed in respect of the last preferential payment due to section 553C(2) of the Act.

Lavan Legal comment

The decision in Re Parker is still the starting point for insolvency practitioners in assessing whether a party has a right to set-off its indebtedness (by reason of insolvent trading) to the insolvent corporation against amounts owed to it by the insolvent corporation.

For now, caution should be exercised in respect of the decision in Morton and Rexel given that it is:

• the first time the decision in Re Parker has been extended beyond insolvent trading claims to unfair preferences;
• a decision of the Queensland District Court; and
• has not yet been applied or affirmed by another Court.

Lavan Legal continues to watch this space.

¹ Re ACN 007 537 000 Pty Ltd (in liq); Ex parte Parker (1997) 150 ALR 92.
² See eg Rory Derham, The Law of Set-Off (Oxford University Press, 3rd ed, 2003), [13.20]; See also Rory Derham, ‘Set-off against statutory avoidance and insolvent trading claims in company liquidation’ (2015) 89 Australian Law Journal 249.
³ Smith v Bone, in the matter of ACN 002 864 002 Pty Ltd (in liq) [2015] FCA 319.
⁴ Morton & Anor v Rexel Electrical Supplies Pty Ltd [2015] QDC 49.