Unfair preference claims: the ongoing controversy regarding a section 553C set-off to reduce liability

Unfair preference claims: the ongoing controversy regarding a section 553C set-off to reduce liability

08 June 2020 Authored by: Graham Roberts, Oliver Caine   |   Topics: Insolvency and restructuring, Litigation and dispute resolution

It is unresolved whether a creditor can rely upon a section 553C set-off under the Corporations Act 2001 (Cth) to reduce an unfair preference claim. Until the controversy is resolved by a binding court decision, liquidators and creditors will continue to adopt opposing positions.

However, even if it is determined that a section 553C set-off is available as a defence to an unfair preference claim, a creditor will not be able to rely on the set-off if it had notice of the company’s insolvency when granting the credit in respect of the outstanding indebtedness. The point of time at which the credit was granted will depend on the nature of the transaction and the facts.

The decisions in Gunns Limited

On 27 May 2020, the Federal Court of Australia delivered judgment in three proceedings brought by the liquidators of Gunns Limited. In each of the proceedings, the liquidators successfully argued that payments made by the company to the creditor constituted unfair preferences and were voidable as an insolvent transaction.

In two of the proceedings, the creditors relying on section 553C sought to set-off other debts owed by the company against the amount of the unfair preferences.

Although the Court did not decide whether section 553C could be relied upon as a set-off to reduce the amount of an unfair preference:

  • it held that, on the facts, the creditors would not be entitled to set-off the other debts due by the company because they had notice of the company’s insolvency at the time of their invoices relating to the outstanding debt
  • it did make several comments, while not binding, that appeared to suggest that, had it been required to decide the issue, it would have found that the set-off under section 553C was not available.

However, as we discussed in our previous bulletin, there are other court decisions that support the position that a right of set-off is available.

When is the relevant time for assessing notice of insolvency?

Although the Court in Gunns Limited found that the creditors had notice of the company’s insolvency before they issued the invoices, it did not explicitly consider the issue of whether the creditors had notice of the company’s insolvency at the time they gave credit to the company.

Pursuant to section 553C(2), a set-off is unavailable where ’at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent‘.

It appears implicit in Gunns Limited that the Court treated the issuing of the invoices as the relevant time when the creditors gave credit to the company.

However, it is important to note that the issuing of an invoice will not always constitute the giving or receiving of credit.

For instance, in Shirlaw v Lewis (1993) 10 ACSR 288, and in JLF Bakeries Pty Ltd (in liq) v Baker’s Delight Holdings Ltd (2007) 64 ACSR 633, it was held that credit was given when the agreement was executed. The type of transaction and dealings will be relevant in determining when credit was given or received.

It is also noted that what constitutes notice of insolvency for the disqualification under section 553C(2) to apply is different to having grounds for suspecting insolvency.

Comments

It is not uncommon for liquidators and creditors to reach a commercial settlement in relation to a disputed unfair preference claim. In addition to relying upon other defences that may be available, creditors will seek to rely upon the section 553C set-off where there is an outstanding indebtedness owed by the company, at least until there is binding authority that may decide that the set-off is not available.

Given the divergent views expressed by different courts, the availability of a set-off under section 553C may be impacted by the jurisdiction in which the court proceedings are brought.

If you would like more information regarding these issues, please contact Graham Roberts on +61 7 3231 2404 or another member of our litigation and dispute resolution team.

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This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please let us know.