High Court of Australia · [2023] HCA 1
A supplier received $190,000 from a customer shortly before the customer entered liquidation.
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MJ Woodman Electrical Contractors paid Metal Manufactures $50,000 and then $140,000 within the six-month relation-back period before winding up. A liquidator can seek orders to recover payments in that period if the statutory unfair-preference requirements are met.
At the same time, MJ Woodman still owed the supplier $194,727.23. On an ordinary ledger, it may look logical to net the amounts. If set-off applied, the larger debt would absorb the entire $190,000 recovery claim.
| Amount | Legal character |
|---|---|
| $190,000 | Payments the liquidator sought to recover |
| $194,727.23 | Separate debt MJ Woodman owed the supplier |
| $0 | What the supplier said would remain after set-off |
Insolvency set-off applies to mutual credits, mutual debts or other mutual dealings between the insolvent company and a creditor. Mutuality requires the relevant rights and liabilities to be between the same parties in the same interests.
The liquidator's recovery right arose from the statutory liquidation regime. It was not a pre-existing debt owed by MJ Woodman to Metal Manufactures and did not have the required mutual character with the supplier's invoice debt. The High Court therefore agreed with the Full Federal Court that section 553C did not apply.
A supplier may have to return a payment and then prove for the unpaid debt in the liquidation, where only a fraction may be recovered. That result can feel severe, but the preference regime is designed to stop one unsecured creditor receiving more than others shortly before insolvency.
The decision makes early credit controls more important. Once a customer is already insolvent, taking payment can reduce immediate exposure but may not produce final recovery if a liquidator later challenges it.
Key points
Start before the account becomes critical. Set credit limits, obtain guarantees or security where appropriate, register security interests correctly and enforce payment terms consistently. A supplier who continues extending unsecured credit during months of arrears is relying on the customer's solvency.
If a liquidator sends a demand, preserve invoices, statements, payment communications, supply records and evidence of any running account. Do not assume the demand is correct, but do not reject it on the basis that the company owed you more. Metal Manufactures confirms that set-off answer is unavailable.
Key points
No. The case decided the separate legal question of whether set-off would be available if the liquidator established the preference claim. Other elements and defences still had to be dealt with in the proceeding.
The original debt may still be provable in the liquidation. The point is that it cannot be used as a dollar-for-dollar set-off against the liquidator's statutory recovery claim.
Yes. Depending on the facts, issues may include insolvency, the effect of the transaction, good-faith statutory defences and whether the payment formed part of a continuing business relationship. This case removes set-off, not every defence.