No Section 553C offset allowed in preference claims!

• Published date: 06 February 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Worrells Solvency & Forensic Accountants
• Author: Mr Paul Nogueira

Lack of mutuality becomes distinct in Federal Court case law.

For some time, there has been a question whether Section 553C (Insolvent companies-mutual credit and set-off) of the Corporations Act 2001 could be used as a defence against a liquidator's preference claim.

For those unfamiliar, preferences are payments or asset transfers that give a creditor an advantage over other creditors.

Any payments or transfers made to a creditor within a certain period before a company is placed into liquidation, may in certain circumstances, be recovered by a liquidator. Preferences are usually payments of money, although a variety of transactions could be deemed 'preferential' such as transfers of physical assets (e.g. stock, equipment, or motor vehicles).

A liquidator must successfully prove a preference claim by establishing the following (section 588FA of the Corporations Act):

• The company (in liquidation) and the creditor were parties to the transaction.
• The creditor is an unsecured creditor.
• The...