s553C Set-Offs – Liquidators Be Aware
In a recent case funded by Pretium Funding, the Federal Court has re-affirmed its view that set-offs under s553C of the Corporations Act 2001 (Cth) (Act) can be used in certain circumstances to minimise unfair preference claims.
Section 553C of the Act enables an insolvent company and a creditor to set-off their mutual debts against each other in relation to unfair preference claims.
In practice, this means that a creditor who has received preferential payments may seek to offset any pre-liquidation debt they are owed against the amount of the preferential payments. From an insolvency practitioner’s perspective, this could significantly reduce or nullify the quantum of any unfair preference claim it may have against a creditor.
In Stone v Melrose Cranes & Rigging Pty Ltd, in the matter of Cardinal Project Services Pty Ltd (in liq) (CPS)(No 2)  FCA 530 (“Stone v Melrose”) Markovic J followed the decisions in Re Parker and Smith v Bone in acknowledging the applicability of set off as per section 553C of the Corporations Act 2001 (Cth) to voidable transactions.
However, the judge then went on to say that the set-off was not applicable in this particular case because the liquidators were able to establish that the Respondent had the requisite degree of notice of the company’s insolvency to prevent them from seeking to claim a set off under s553C.
In her judgment Markovic J stated:
- In other words, what is required is that Melrose Cranes had actual notice of facts which disclosed that CPS lacked the ability to pay its debts when they fell due within the meaning of s 95A of the Act. I accept the Liquidators’ submission that the evidence establishes that at all material times Mr Melrose and thus Melrose Cranes had the requisite degree of notice.
- As was the case in Jetaway, here there were multiple promises of payment that were not met despite persistent follow up. Further, while CPS (unlike the company in Jetaway) did not admit that it did not have, and had no prospect of having, any funds to pay the accrued debt, its imposition on
Melrose Cranes of a payment plan by which it incrementally paid back amounts that were not referable to any tax invoices implied the same. Mr Melrose admitted that this was what he believed and as summarised at  above, the circumstances indicate that Melrose Cranes was well aware that CPS was unable to pay its debts as and when they fell due. On that basis, it is not entitled to a set-off under s 553C of the Act.
S553C set-offs continue to be a source of incongruity between the existing line of case authorities in Australia that supports the availability of a set-off in statutory insolvency claims, and experts who regard the view as “plainly wrong” particularly as a matter of principle and contrary to the statutory purpose behind Part 5.7B of the Act. Such a view was expressed by Counsel acting for the liquidators.
Liquidators need take heed of s553C implications and work to shore up sufficient evidence as to the creditor’s notice of insolvency.
Pretium Funding was proud to work with the liquidators of Cardinal Project Services (In Liquidation) across all 20 claims including Supreme Court and Federal Court hearings, a Full Court of the Supreme Court Appeal, and 5 days of Public Examinations.