In brief

The long-contentious point of whether unpaid pre-appointment debt can be set-off against an unfair preference claim has been decided (for now) in favour of the liquidators.1 It cannot.

But what are the wider implications of that conclusion? The Full Court of the Federal Court has carefully avoided answering that question, but at the same time has offered reasoning to suggest set-off may still have a role in defending some liquidator claims.

Key Takeaways

There are at least three other contexts in which the set-off question could be raised, but which the Full Court did not have to consider. The Court did not definitively decide if set-off could be claimed against the following liquidator claims in those contexts. Its reasoning though does tease these possible answers.

  • The other voidable transaction provisions under division 2 of part 5.7B of the Corporations Act 2001 (Cth) (including uncommercial transactions).
  • These provisions appear to have a substantially similar underlying policy to that of unfair preferences. All are related to a fairer distribution of pre-appointment assets. Like unfair preferences, the challenged transactions are merely voidable until set aside by later court order. Both these points were key aspects of the Full Court’s reasoning in rejecting set-off as a defence. This could make it difficult to argue that the set-off defence could nevertheless apply to other voidable transaction provisions.
  • The exposure of a holding company for the insolvent trading debts of a subsidiary company, and director liability for debts incurred when the company engages in insolvent trading.

The Full Court has left open the potential for set-off against these claims, giving reasons which potentially distinguish them from unfair preferences (whilst studiously avoiding answering if the set-off defence does survive).

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