High Court decisions of Bryant v Badenoch Integrated Logging Pty Ltd and Metal Manufactures Pty Limited v Morton

• Published date: 15 February 2023
• Law Firm: Piper Alderman
• Author: Ms Angelina Kozary and Stephanie Dimovski

The first High Court decisions in 2023; Metal Manufactures Pty Limited v Morton Metal Manufactures Pty Limited v Morton [2023] HCA 1 ('Metal Manufactures') and Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2 ('Bryant') have provided the final word on preference claims, establishing once and for all that:

1. set-off under s 553C of the Corporations Act 2001 (Cth) ('the Act') does not apply to unfair transactions; and

2. the peak indebtedness rule does not apply.

Metal Manufactures and Statutory Set-Off

Background and Summary

3. Metal Manufactures Pty Limited received payments of $190,000 during the relation back period from MJ Woodman Electrical Contractors Pty Limited. Before going into liquidation MJ Woodman purchased and obtained additional goods from Metal Manufactures in the amount of $194,727.23.

4. The liquidator of MJ Woodman claimed that the payment of $190,000 was an unfair preference under s 588FA of the Act and was to be recovered. Metal Manufactures claimed the benefit of a set-off in the amount of the subsequent debt of $194,727.23 was available.

5. The Full Federal Court, had determined that statutory set-off, under s 553C(1) of the Act, was not available as a defence to a claim for the recovery of an unfair preference, under s 588FA of the Act. Metal Manufactures sought and was granted leave to appeal to the High Court.

6. In a joint judgment Chief Justice Kiefel and Justices Gordon, Edelman and Steward dismissed the appeal and affirmed the decision of the Full Federal Court. Justice Gageler agreed with the conclusion of the plurality of the court, however his Honour dealt with the issue of mutuality differently.

Statutory Set-Off and Mutuality

7. Set-off, under s 553C of the Act functions as a form of statutorily imposed accounting applied in the determination of proofs of debt. The main object of the section is to prevent injustice and to do substantial justice where "a debt is really due from the bankrupt to the debtor to his estate".¹ The provision is to be given "the widest possible scope"², as long as it is recognised that the width and justice is confined within the limits of genuine mutuality as a matter of substance.³

8. The joint judgment of the High Court notes two key features of the set-off provision:

8.1 s 553C has a temporal element⁴; and

(a) For the purposes of assessing mutuality, the rights of the parties are to be taken and ascertained as at the time of the winding up⁵; however, the important factor is whether...