Insolvency: 23 March 2019
In the case of Morton & Anor v Rexel Electrical Supplies Pty Ltd  QDC 49 (Morton v Rexel),theQueensland District Court considered whether set-off under section 553C of the Corporations Act (the Act)could be used as a defence to a liquidator's claim that payments made by a company in liquidation to a creditor were unfair preference payments.
The Court found that in the circumstances before it, the debt owed to the defendant, which arose by way of mutual dealings between the companies, could be set off against amounts it had received as unfair preference payments, which the Court ordered the defendant to repay.
On 31 January 2012, the defendant invoiced the Company for $215,421.80 (January Invoice). Records of the trading relationship between the Company and the defendant were said to be "sparse€, and the Company's internal accountant said that previous payment terms between the entities prior to March 2012 was "mainly on 30 or 60 day accounts€.Despite this, within two weeks of rendering an invoice, the defendant's director had contacted the Company to ascertain when the account would be paid. Over the course of the following weeks, a payment arrangement was negotiated and entered between the parties.On the basis of the payment arrangement, the defendant lifted a stop credit temporarily and continued to supply materials to the Company.
Between 26 March 2012 and 6 June 2012, the defendant received seven payments totalling $197,469.16. After the defendant's January Invoice, between 20 February 2012 and 24 April 2012, the defendant rendered invoices to the Company to a total value of $31,302.12.
The liquidator alleged that the payments totalling $197,469.16 received by the defendant were unfair preferences, and thus voidable under section 588FE of the Act. In turn the defendant argued it had three defences to the liquidator's claim, namely:
The defendant's argument (pursuant to s 588FG of the Act) that it entered the transaction in good faith failed because the Court found in accordance with section 588FG(1)(b), that at the time it received the first payment on 26 March 2012, the defendant, or a reasonable person in the position of the defendant, had reasonable grounds to suspect that the Company was insolvent. The defendant's running balance arguments also failed.
In respect of the defendant's arguments over section 553C of the Act, the Court found that the provision relied upon a narrow definition of what constituted 'notice of insolvency', and that this did not include 'constructive knowledge'. Furthermore, the relevant time for consideration was 'the time for giving of credit', which in this case was 31 January 2012. Put simply it was a threshold that was more readily met by the defendant than the test applicable in the 'good faith' defence.
The principle of set-off was examined in the decision of the Court of Appeal of the Supreme Court of Victoria in the case of Jetaway Logistics Pty Ltd & Ors v The Deputy Commissioner of Taxation  VSCA 319. In that case, it was found that "the test that the Liquidators have to establish is that the Commissioner had notice of facts that would have indicated to a reasonable person the fact that Jetaway was insolvent€. Ultimately, the Deputy Commissioner of Taxation had not prevailed in that case.
The defendant also referred the Court to the decision in Re Parker (1997) 150 ALR 92, which was considered in Buzzle Operations Pty Ltd v Apple Computers Australia (2011) 81 NSWLR 47, which the defendant cited as authorities for the proposition that "section 553C of the Act permitted the setting off of pre-liquidation debts against the post liquidation claim for insolvent trading€. In his judgment, Searles DCJ found arguments persuasive, stating that he "should not depart from€¦ (the reasoning of Mansfield J in Re Parker) unless it is 'plainly wrong'€.
The plaintiff submitted that if the defendant succeeded in its arguments regarding set-off, this would frustrate the purpose of the unfair preference provisions of the Act "because the starting point for its set-off amount is the preference payments€. It was further submitted that a creditor who was paid in full would be at a disadvantage if a creditor like the defendant who received partial payment, was entitled to set-off the unpaid portion.
Searles DCJ found that the payments were unfair preferences and ordered that the defendant repay the monies to the company in liquidation, however whilst the defendant did not succeed on the first two defences, the Court found that it partially succeeded on its third ground. Whilst it was not entitled to set off the full amount claimed (being $92,323.88) as it was found to have notice of the Company's insolvency from the date that the defendant began contacting the Company seeking payment of its January Invoice (which occurred in mid-February), the defendant was entitled to set-off the unpaid portion of its January Invoice (in the amount of $64,658.15) against the payments voided as unfair preferences. In dollar terms, the order reduced the amount that the defendant had to repay to the plaintiff from $197,469.16 to $132,811.01.
 Morton v Rexel at , citing the Liquidator's report to creditors.
 Potentially a counterproductive argument, in view of the presumption of insolvency in section 588E(4) of the Act.
 ibid at .
 Ibid at .
 Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation  VSCA 319 at .
 Morton v Rexel at .
 ibid at .
 Ibid at .