Legal
The changing landscape of unfair preferences: What should creditors be aware of in 2022? The Full Court of the Federal Court has determined that the set off defence under s 553C of the Corporations Act will not be available to creditors with respect to unfair preference claims. By Anna Taylor MICM*
Anna Taylor MICM
Introduction In the recent decision of Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufacturers Pty Limited [2021] FCAFC 228 (MJ Woodman), the Full Court of the Federal Court reviewed a conflicting line of case authority to confirm that the set off provision under s 553 of the Corporations Act 2000 (Cth) (the Act) is not available to creditors as a defence to an unfair preference claim. This decision removes a major strategy from the defensive arsenal of creditors subject to unfair preference claims and should prompt creditors to review their current understanding of their rights and obligations in relation to unfair preference claims moving into 2022.
creditor and an insolvent company will be set off, in order to simplify the liquidation process. Prior to the recent decision in MJ Woodman, creditors facing unfair preference claims would raise the set off provision contained in s 553C of the Act as a defence, effectively allowing the creditor to set off the amount claimed as an unfair preference payment with any debts still owed to it by the company in liquidation. While this defence was extremely controversial, unpopular with insolvency practitioners, and widely considered to be bad law, the case law was sufficiently unsettled to allow a creditor to use this strategy, and often succeed in negotiating a better outcome (without a trial on the issue).
Section 553C set off
MJ Woodman
Section 553C of the Act generally operates as an automatic set off provision whereby any mutual credits, debts or dealings between a
In MJ Woodman, the Federal Court was tasked with determining whether a creditor could rely on s 553C of the Act to set off against a
30 CREDIT MANAGEMENT IN AUSTRALIA • January 2022
