Court permits a set-off against a liquidator’s unfair preference claim for unpaid debt

In a significant win for creditors, the District Court of Queensland recently applied a set off for unpaid debts owed to a creditor against a liquidator’s claim to recover sums as unfair preference payments.

This is the first time that an Australian court has permitted a set-off against an claim for an unfair preference.  It has the prospect of changing the landscape regarding unfair preference claims.

Click here for the judgment of Searles DCJ in Morton v Rexel Electrical Supplies Pty Ltd.

The facts

At the time of the liquidator’s appointment, the creditor was owed $92,323.88 from the company.

The creditor claimed, amongst other things, that it was entitled to set-off the sum of $92,323.88 against the sum sought by the liquidator of approximately $197,000.

Ultimately, the court upheld the creditor’s claim to an set-off but only for the amount of $64,658.15, being the debt which remained outstanding as at the date of liquidation in respect of supplies by the creditor prior to it obtaining actual knowledge of the company’s insolvency.

Important take away points

It remains to be seen if superior courts and courts of other jurisdictions, follow this District Court of Queensland decision.

If this principle is applied consistently:

  1. creditors should raise a set off for unpaid debts against liquidator’s unfair preference claims (to the extent that the creditor was not aware that the company was insolvent); and
  2. liquidators face serious risks that unfair preference actions (including claims already pending in the courts) will not yield a recovery after taking account of the potential set off.

The decision is the subject of a pending appeal.

Creditors and liquidators should seek legal advice regarding the application of this decision to their claims. Results Legal specialises in legal recovery, insolvency law and commercial disputes.

If you wish to discuss the impact of this decision, or require any insolvency law advice, please contact our expert team.

If you have received a demand from a liquidator please contact us on 1300 757 534 to discuss your options.