Set-off no longer available for unfair preference claims

Unfair preference payments and set off are complex issues in insolvency law that can have significant implications for creditors and debtors. The recent High Court of Australia judgment in Metal Manufacturers Pty Ltd v Morton [2023] HCA 1 provides important guidance on the relationship between these two concepts. This article will explore the key points of the judgment and its implications for the treatment of unfair preference payments and set off in insolvency law.

In 2017, the Liquidator of Metal Manufacturers Pty Ltd (Metal) commenced proceedings against Morton, a former director of the company, seeking to recover $286,828.74 in unfair preference payments made to Morton in the lead up to the company’s insolvency. Morton defended the claim on the basis that he was entitled to set off the amount of the preference payments against amounts owed to him by Metal for unpaid wages and superannuation.

The trial judge found in favour of the Liquidator, holding that Morton was not entitled to set off the preference payments against his own debts. However, the Full Court of the Federal Court later overturned this decision, finding that Morton was entitled to set off the preference payments against his own debts.

The High Court’s Decision

The High Court unanimously overturned the Full Court’s decision, finding that Morton was not entitled to set off the preference payments against his own debts. The court held that the set-off provisions in the Corporations Act 2001 (Cth) did not allow for a set off of unfair preference payments against debts owed to the preference recipient.

The court held that the purpose of the unfair preference provisions was to prevent a creditor from receiving a preference over other creditors in the lead up to insolvency. Allowing the preference recipient to set off the preference payments against their own debts would defeat this purpose and undermine the pari passu principle that all creditors should be treated equally.

The court also rejected Morton’s argument that the set-off provisions in the Corporations Act should be interpreted broadly in favour of allowing set off. The court held that the specific provisions dealing with unfair preference payments must be interpreted in light of their purpose and the broader framework of insolvency law.

Implications for Insolvency Law

The High Court’s decision in Metal Manufacturers v Morton provides important guidance on the treatment of unfair preference payments and set off in insolvency law. It confirms that the purpose of the unfair preference provisions is to prevent a preference recipient from gaining an advantage over other creditors and that set off provisions do not allow for the set off of preference payments against debts owed to the preference recipient.

The decision also highlights the importance of interpreting insolvency legislation in light of its purpose and the broader framework of insolvency law. This means that specific provisions must be interpreted in a way that promotes the underlying goals of insolvency law, such as ensuring that all creditors are treated equally and that the assets of an insolvent company are distributed fairly.

The High Court’s decision in Metal Manufacturers v Morton provides important guidance on the relationship between unfair preference payments and set off in insolvency law. It confirms that the purpose of the unfair preference provisions is to prevent a preference recipient from gaining an advantage over other creditors and that set off provisions do not allow for the set off of preference payments against debts owed to the preference recipient. The decision highlights the importance of interpreting insolvency legislation in light of its purpose and the broader framework of insolvency law.