Court Rules Against Setting-Off Unfair Preference Claim

In the recent case of Stone v Melrose Cranes & Rigging Pty Ltd, in the matter of Cardinal Project Services Pty Ltd (in liq) (No 2) the Federal Court was required to determine whether a set-off was available to Melrose Cranes, pursuant to s 553C of the Corporations Act 2001 (Cth).

Here, the liquidators of CPS submitted that $308 544.58 worth of payments made to Melrose Cranes constituted unfair preferences.

In defending the claim, Melrose Cranes unsuccessfully raised the defence of ‘good faith’, the doctrine of ultimate effect and the ‘running account’ defence, before asserting an entitlement to set off $80 774.23, pursuant to s553C of the Act. In supporting this claim, Melrose Cranes maintained that this figure represented the amount CPS was indebted to it at the date of the appointment of the administrators.

The liquidators urged the Court not to adopt this view, arguing that setting-off should not be available in the context of preference claims. In doing so, they contended that the application of existing case law including Re Parker was ‘plainly wrong’ in this context as it related to setting-off voidable transaction claims and not preference claims. Ultimately, they argued that applying such cases here would be contrary to the statutory purpose of the Act.

However, the court upheld the finding of Re Parker, contending that a set-off in section 553C applies to voidable transaction claims, including unfair preference claims.

The liquidators subsequently relied on s553C(2) to argue that setting-off is expressly prohibited where a person has notice of a company’s insolvency, and thus was not available to Melrose Cranes. The Court agreed, concluding that Melrose Cranes had notice of the company’s insolvency at the time it gave credit in respect of the outstanding indebtedness.

In reaching this conclusion, the court submitted that a person will have notice of a company’s insolvency if, pursuant to s95, the person has actual notice of the facts that indicate the company lacks the ability to pay its debts when they fall due.

Accordingly, Markovic J rejected Melrose Cranes’ application to have the proposed sum set-off on the basis that it was “clear that a reasonable person in Melrose Cranes’ circumstances would have had grounds for suspecting insolvency at the time of each of the transactions.”

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