To set-off or not to set-off in unfair preference claims?

Last year’s Queensland District Court decision in Morton v Rexel Electrical Supplies Pty Ltd [2015] QDC 49 (Rexel) caused quite a stir in insolvency circles.  In Rexel, Searles DCJ (a former partner of McCullough Robertson) found that section 553C of the Corporations Act 2001 (Cth) (Act) could apply to reduce an unfair preference claim brought by a liquidator, by allowing the amount still owing by the company to be set-off against the liquidator’s claim.

Section 553C of the Act requires a creditor or debtor and a company in liquidation who owe each other debts to set them off against each other, so that only the net balance is either owed or owing.  However, a set-off cannot be claimed if, at the time of giving or receiving credit from the company in liquidation, the person had notice of the fact that the company was insolvent.

Since Rexel we have raised the set-off defence to our client’s advantage when defending and settling a number of unfair preference claims.  However, the decision has raised questions which we and others have grappled with.  How does the set-off defence interact with other defences advanced?  Should set-off be denied in cases where a running account is advanced, to ensure only the ‘ultimate effect’ of the transaction is considered?   Should set-off be allowed if a company is found to have had reasonable grounds to suspect insolvency (and thus the good faith defence has no application), so long as the higher threshold of actual notice of insolvency is not met?

In Rexel, it was held that the time of ‘giving credit’ to the company in liquidation for the purposes of section 553C was the dates when each unpaid invoice was rendered.  In a recent matter we acted in, our client issued an invoice on the day after administrators were appointed, but before they were aware of the appointment.  Arguably, at the time of rendering the invoice our client had no notice of the fact that the company was insolvent.  Should the fact that, as at the relation-back day (i.e. the date of appointment of the administrators) the company had not yet ‘given credit’ to the company by rendering its latest invoice, deny the company the entitlement to a set-off for that amount?

An interesting article by Matt Hudson of SV Partners in Queensland as to whether set-off against unfair preference claims should be allowed at all was recently published in the ARITA journal.  You can read Matt’s full article here.

At the very least, whilst it remains good law, Rexel has added another avenue for creditors to defend preference claims and given them added leverage to settle claims.  Until the courts clarify this issue, the insolvency profession will continue to ponder - to set-off, or not to set-off?  That is the question.

Amanda Walker