The Bulletin August 2018

DEBT
Is a right of set-off available in
answer to a liquidator’s action
under the Corporations Act?
BRENDON ROBERTS SC AND ENZO BELPERIO, BAR CHAMBERS
Recent authorities 1 have indicated that
a creditor is entitled, pursuant to s
553C of the Corporations Act, to set off
monies claimed by a liquidator under Part
5.7B of the Corporations Act (for example,
unfair preferences) against monies that the
insolvent company owes to the creditor.
The genesis of this is said to be the
judgment of Re ACN 007 537 000 Pty Ltd
(in liq), Ex parte Parker (1997) 80 FCR 1
(Parker).
The authors of this article contend that
Parker was wrongly decided and that the
recent authorities holding that a set off is
available ought not be followed. 2
The arbitrary operation of the set-off can
be shown with the following illustration. If
the recent authorities are correct, then:
• if Creditor A is owed $20,000 by a
company, and during the relation back
period is not paid anything by the
company, then Creditor A can lodge
a proof of debt in the amount of
$20,000;
• if Creditor B is owed $20,000 by the
company, and during the relation back
period is paid the full $20,000, then
Creditor B has received a preference of
$20,000 and must repay the full $20,000,
and can then lodge a proof of debt in
the amount of $20,000. Creditor B is in
the same position as Creditor A; and
• if Creditor C is owed $20,000 by a
company, and during the relation back
period is paid $10,000, then Creditor
C has received a preference of $10,000
but is entitled to set that off against the
$10,000 it is still owed. It therefore does
not need to pay back the $10,000 to the
company.
In circumstances where no dividend is
to be received by the creditors from the
insolvent company, Creditor C is in the
position where it has received half of the
money it was owed as a preference but,
for no principled reason, is allowed to
retain that as opposed to Creditors A and
B who must prove for their full $20,000
and will not recover any of it (by reason
that no dividend will be paid). This result
circumvents the purpose of the unfair
preference regime, which is to ensure that
the unsecured creditors of a company are
treated on a pari passu basis.
PARKER WAS WRONGLY DECIDED
The line of authority suggesting that a
right of set-off may be available in answer
to a liquidator’s action under Part 5.7B of
the Act began in Parker, where Mansfield J
allowed a set-off under s 553C to a claim
for recovery of a payment from a holding
company under s 588W, which was based
on insolvent trading under s 588V.
Mansfield J relied upon the wording of
s 588W in finding that the requisite
mutuality existed for the exercise of a
statutory right of set-off, notwithstanding
that the claim for insolvent trading was a
claim of the liquidator whereas the debt
sought to be set off was a claim owing
by the company. At 411E, Mansfield J
reasoned as follows:
I do not think that the fact that the claim
against Amber Ceramics must be brought by
the applicant in his own name, rather than in
the name of Barossa Ceramics, means that
there is no mutuality between the claims. As a
matter of substance, the claim under s 588W
is the claim of Barossa Ceramics. Section
588W(1) explicitly says that the amount of
any claim arising by reason of contravention
of s 588V is recoverable “as a debt due to
the company”. The fact that the claim may be
enforced by the liquidator is but the procedural
device for enforcing what is clearly a claim of
the company.
The authors respectfully contend that
Mansfield J was wrong to so hold.
The voidable transaction provisions
do not create any right of action in the
company. Nor do they allow the liquidator
to recover. They enable the liquidator,
as the official charged with the task of
collecting and administering the insolvent
estate, to seek the assistance of the court
in augmenting that estate for the benefit
of creditors by countering the effects of
pre-liquidation transactions of certain
kinds. 3 Thus, there is no mutuality for the
purpose of s 553C of the Act.
Historically, it was always accepted that
a payment which is void as a preference
cannot be set off under s 82 of the
Bankruptcy Act. 4 That was accepted to be
the law in Australia. 5
Likewise, that principle was adopted
in respect of the companies legislation,
which picked up the voidable preference
regime under the Bankruptcy Act. In re
Yagerphone, Ltd. [1935] 1 Ch. 392 at 396
Bennett J explained:
The right to recover a sum of money from a
creditor who has been preferred is conferred for
the purpose of benefiting the general body of
creditors, and I think Mr. Montgomery White
was right when he said that the sum of money,
when recovered by the liquidators by virtue
of s. 265 of the Companies Act, 1929,
and s. 44 of the Bankruptcy Act, 1914,
did not become part of the general assets of
Yagerphone, Ltd., but was a sum of money
received by the liquidators impressed in their
hands with a trust for those creditors amongst
whom they had to distribute the assets of the
company.
In consequence, in relation to the regime
applying prior to the 1993 amendments
to the (then) Corporations Law, which
introduced for the first time the remedy
provisions at ss 588FF and 588W, it was
authoritatively determined that a secured
creditor has no right to enforce for his
benefit the remedy which is given to a
trustee in bankruptcy or the liquidator
of the company of avoiding a payment
of setting aside a transaction made or
entered into with a view to preferring a
creditor of the bankrupt or a company in
liquidation. 6
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THE BULLETIN August 2018