Further consideration of the High Court decision of Metal Manufacturers Pty Limited and Gavin Morton as liquidator of MJ Woodman Electrical Contractors Pty Ltd (in liquidation)

In our previous publication, “Update for Creditors regarding Unfair Preference Claims: High Court of Australia confirms no Set-Off and rejects Peak Indebtedness Rule” we discussed what an unfair preference is and commented on the then recent High Court decision Metal Manufacturers Pty Limited and Gavin Morton as liquidator of MJ Woodman Electrical Contractors Pty Ltd (in liquidation) & Anor [2023] HCA 1.  The High Court upheld the decision of the full Federal Court of Australia in Gavin Morton As Liquidator Of MJ Woodman Electrical Contractors Pty Ltd (In Liquidation) & Anor v Metal Manufacturers Pty Limited (MJ Woodman) [2021] FCAFC 288.

The High Court affirmed the findings of the Full Federal Court that a creditor could not seek to use the set-off provisions under section 553C of the Corporations Act 2001 (Cth) (the Corporations Act) to set off a liquidator’s claim against the creditor for an unfair preference payment, and in doing so overturned numerous prior case authorities where the set-off had been so applied.  The High Court’s reasons for decision in Metal Manufacturers,  also clearly extents the rule against the application of the s 553C set-off to other voidable transaction claims under Part 5.7B of the Act.

This publication further examines the reasoning of the High Court in Metal Manufacturers, including the broader implications of the decision to other voidable transaction claims.

Both creditors and liquidators considering the application of the set off provisions in s 553C and its relationship to voidable transaction claims in Part 5.7B of the Act, will likely be interested in considering the implications of the Metal Manufacturers decision as discussed in this article.

What were the facts?

The appellant, Metal Manufacturers Pty Ltd (Metal Manufacturers) had received payments totalling $190,000.00 from MJ Woodman Electrical Contractors Pty Ltd (MJ Woodman) during the relation-back period (as discussed in our previous publication) reducing a debt owed to it by MJ Woodman. However, MJ Woodman had received a further $194,727.23 worth of goods from Metal Manufacturers, creating additional debt owed to Metal Manufacturers.

Metal Manufacturers sought to set-off the liquidator’s $190,000.00 unfair preference claim against the $194,727.23 debt owed by MJ Woodman to Metal Manufacturers.

What were the principles involved?

Regulatory Regimes in Div 6 of Part 5.6 and Div 2 of Part 5.7B of the Corporations Act

The High Court considered the nature of the following regulatory regimes under the Corporations Act:

1. The regime in Div 6 of Part 5.6 of the Corporations Act for the proof and ranking of claims to ensure equality in the making of distributions to the same class of creditors (Pari Passu regime); and
2. The regime in Div 2 of Part 5.7B of the Corporations Act (Voidable Transactions regime), which provides a scheme for the recovery of ‘preferential payments’ to the asset pool of the company for distribution to creditors. These ‘preference payments’ include unfair preferences, uncommercial transactions, related party transactions and creditor defeating transactions (which are also insolvent transactions), unfair loans and unreasonable director-related transactions.

The Voidable Transactions regime operates, in the words of the High Court, as a corollary to the Pari Passu regime, to allow liquidators (as officers of the Court) to maximise the distributable pool of assets to be divided among creditors.

Section 553C sits within the Pari Passu regime and addresses only debts and claims against the company arising from circumstances occurring, or subsisting in some way, before the winding up of the company.

The High Court found that a voidable transaction claim is a new claim, arising only after and as a result of the winding up of the company which cannot, therefore, vary the rights of the parties before the winding up and therefore be available for a set-off under s 553C.

Mutuality

The original decision of the Federal Court in Metal Manufacturers, and the decision of the High Court, are heavily based on this concept of mutuality, which itself has a long history in the law of bankruptcy and company liquidations.  To properly understand the implications of the decisions, it is important to also understand the principles mutuality.

It is a requirement under section 553C of the Corporations Act that there are, “mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company” for statutory set-off to apply, and “only the balance of the account is admissible to proof against the company, or is payable to the company, as the case maybe”. This is commonly known as mutuality.

At paragraph [19] of the High Court’s decision in Metal Manufacturers, the Court endorsed its own findings in Gye v McIntyre (1991) 171 CLR 609, there addressed in the context of bankruptcy, in outlining three aspects to a “mutual dealing” :

“The first is that the credits, the debts, or the claims arising from other dealings be between the same persons. The second is that the benefit or burden of them lie in the same interests. In determining whether credits, debts or claims arising from other dealings are between the same persons and in the same interests, it is the equitable or beneficial interests of the parties which must be considered: see, eg, Hiley. The third requirement of mutuality is that the credits, debts, or claims arising from other dealings must be commensurable for the purposes of set-off under the section. That means that they must ultimately sound in money.”

For mutuality to be satisfied, there must therefore be:

1. mutuality of parties: the debts and credits must be between the same parties;
2. mutuality in interest: the parties must be acting in the same capacity in respect of the debts and credits sought to be set off; and
3. mutuality of credits, debts or claims, which are commensurable, i.e. the amounts must each be quantifiable in money.

What did the High Court Decide?

The High Court affirmed the decision of the full Federal Court that the s 553C set-off was not available to Metal Manufacturers and held that:

1. The preference claim to which the set-off was sought, did not arise from circumstances before the company was wound up. The right of the Liquidator to sue under section 588FF of the Corporations Act did not exist before the winding up, and hence, it was not eligible to be set-off against the pre-existing amount that MJ Woodman owed to Metal Manufacturers;
2. There was no mutuality of parties as the unfair preference claim was made by the liquidator who is an officer of the Court, not an agent of the company.
3. There is no mutuality of interest. The right of a liquidator to apply for an order under section 588FF of the Corporations Act is a statutory right given to the liquidator for the benefit of the general body of creditors. It is not akin to a trading debt which might be set off as against a payment to a preferred creditor.  The detailed statutory scheme of liquidation under which the unfair preference claim brought by a liquidator arises, denies the mutuality of interest.

In its concluding remarks, the majority of High Court commented that:

“[t]o the extent that the cases as of Re Parker, Buzzle Operations Pty Ltd (In liq) v Apple Computer Australia Pty Ltd, Shirlaw v Lewis, Hall v Poolman and Stone v Melrose Cranes & Rigging Pty Ltd [No 2] are inconsistent with the above analysis, they should now be considered to be wrongly decided”.

Their Honours further observed that:

“Permitting a preferred creditor to set off its liability under s 588FF(1)(a) with the liability owed to it by the company would undermine a purpose of the recovery of unfair preferences, revealed by this section, which is to restore to the pool of distributable assets those payments made under voidable transactions.”

What are the implications?

The High Court’s decision settles the operation of statutory set-off in regard to unfair preferences, giving clarity and certainty to both liquidators and creditors on their rights when commencing or receiving a claim for unfair preferences.

In doing so, the High Court’s decision provides a detailed examination of the principles of mutuality, and how mutual credits, mutual debts and other mutual dealings and elucidates the purposes sought to be achieved by Pari Passu regime in Div 6 of Part 5.6 of the Corporations Act for the proof and ranking of claims and Voidable Transactions regime in Div 2 of Part 5.7B.

It appears that the High Court intends its decision in Metal Manufacturers to apply equally to other voidable transaction claims in excluding the application of s 553C set-offs, overturning  numerous significant case authorities.   It would, in our view, be a brave claimant who wished to argue otherwise in a court of law.

PGC Legal has a number of insolvency experts, with experience in dealing with unfair preferences and other voidable transaction claims, both from the point of view of liquidators and creditors, and are happy to assist our clients in walking through the process.

If you require legal advice regarding statutory set-off, unfair preferences, or other voidable transactions an insolvency matter, please contact Peter Charatsis, Brenton Priestley, Jennifer Hills or Jonathan Khoury for more information.

The above is general in nature and is not intended to, and does not, constitute professional advice.