The Queensland District Court in Morton & Anor v Rexel Electrical Supplies Pty Ltd [2015] QDC 49 (Morton) has expanded the set off provisions found in section 553C of the Corporations Act 2001 (Cth) (the Act). It may now be possible for a creditor to set off any alleged preferential payments they have received against any pre-liquidation debt that they are owed.  This is a significant departure from the understood practice and if the reasoning adopted by the Court in Morton is followed in courts of higher authority this could greatly affect the quantum of any unfair preference claims able to be recovered by insolvency practitioners.

Section 553C of the Act provides that an insolvent company and a creditor are able to set-off their mutual debts against each other. The Court in Morton has now extended the operation of this provision to encompass unfair preference claims. Rather than a creditor and a debtor offsetting mutually existing debts the Court has allowed a creditor to offset the preferential payments they received against the pre-liquidation debt that was still owing to them.

The court in Morton relied upon the decision of Buzzle operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109 (Buzzle) which addressed set off provisions and their applicability to uncommercial transactions. Whilst the Buzzle decision was not binding the Court noted that there was no identifiable reason to distinguish uncommercial transactions from unfair preferences and upheld the principle.

The plaintiff’s in Morton addressed a number of objections to applying the set off provisions to unfair preferences. The main argument being that an ability to rely upon set-off provisions in a case such as the present would frustrate the purpose of the unfair preference provisions. Further to this it was argued that allowing the set off provisions to apply in this way would produce a peculiar result. A creditor paid the entirety of their debt would be obliged to disgorge the total amount and would be significantly disadvantaged in comparison to a creditor who was paid only part of their debt by preference payments. In the instance that a creditor was paid $50,000 in preference payments and a further $50,000 remained unpaid, the creditor would be entitled to set off the amount paid with the amount owing and reach a perfect equilibrium without having to disgorge any of the preference payment.

The court in acknowledging these arguments noted that the possibility of unsatisfactory outcomes resulting from the application of the set off provisions to the present case did not justify disregarding the plain language of s553C.

This decision, despite being of a lower court is useful to keep in mind when assessing the possibility of instigating unfair preference proceedings against a creditor.

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