The High Court Decision on Set-off in the Morton Case: Some Different Perspectives
(2023) 13 Insol LJ page 47.
Introduction
There has been much commentary on the recent High Court decision in Metal Manufactures Pty Ltd v Morton.[1] That case confirmed that set-off could not be used as a defence to a liquidator’s preference claim. The purpose of this note is to add the writer’s l perspective on the lead-up to the High Court decision, and to offer several observations about the decision itself which do not appear to have been addressed elsewhere to date.[2]
Where It All Started: Morton v Rexel
As a consultant at Minter Ellison, the writer recalls reading, in 2015, the decision of the Queensland District Court in Morton v Rexel Electrical Supplies Pty Ltd (Morton v Rexel).[3] In that case, Searles DCJ, relying on an obiter comment in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (Buzzle)[4] and the decision in Re Parker,[5] allowed a set-off in answer to a liquidator’s preference claim. While neither of those cases concerned an unfair preference his Honour nevertheless felt compelled to follow the reasoning in them.[6]
After reading the decision, the writer telephoned the solicitors acting for the liquidator and urged those solicitors to appeal the decision as it was, in the writer’s view “plainly wrong”. The solicitors were of the same view; however, unfortunately the liquidator was without funds to institute an appeal.
An Opportunity to Remedy the Position
As events transpired, some six years later the writer was engaged as a consultant with that same firm of solicitors. There, the writer had assumed the conduct of a file involving a preference claim where, coincidentally, the firm acted for the same liquidator as in the Morton v Rexel case and where set-off had again been raised as a defence.
The Original Submissions
For some five months before filing the originating application in that matter,[7] the writer set about drafting an extensive, 10,000-word submission explaining why set-off was not and never should be considered a “defence” to a liquidator’s preference claim.
The originating application was subsequently filed, and the matter shortly thereafter came before Derrington J at the first case management hearing on 10 March 2021. At that hearing, his Honour’s opening remarks were to the effect that due to the relatively small amount of the claim ($190,000), the matter was best settled; however, his Honour said that he was nevertheless prepared to deal with it.
When making submissions as to directions, the writer mentioned those cases on set-off where the courts found that the disentitling subsection (s 553C(2)) applied, with the consequence that the applicability of s 553C(1) as a defence to a preference claim did not need to be addressed. The writer mentioned that he had prepared an extensive submission addressing the reason why set-off should not be allowed as a defence available to the creditor and suggested that his Honour might refer that issue as a preliminary question for determination to the Full Court of the Federal Court under s 25(6) of the Federal Court of Australia Act 1976 (Cth).
Concessions Made to Facilitate a Referral to the Full Court
To facilitate that referral, the writer had sought and received, and informed his Honour that he had received instructions from the client liquidator, Mr Morton, to:
(1) concede the inapplicability of s 553C(2);[8] and
(2) concede the quantum of the creditor’s alleged set-off at $194,000 (the liquidator’s claim being $190,000).[9]
These concessions were major ones. They were necessary however to provide his Honour with a factually “clean” case for referral as a preliminary question for determination, namely one that was unaffected by factual disputes. This was a somewhat calculated “gamble”, but it was made on specific instructions and with the confidence that the issue would ultimately be dealt with by the Full Court in a manner favourable to the liquidator.
The Issue Was Resolved, and Order Restored to the Insolvency Profession!
As events transpired, the Full Court heard the referral on 26 August 2021. The precise question for consideration was:
Is statutory set-off, under s 553C(1) of the Act, available to the defendant in this proceeding against the plaintiff’s claim as liquidator for the recovery of an unfair preference under s 588FA of the Act?
In a detailed and comprehensive judgment delivered on 16 December 2021, the Full Court held, emphatically and unanimously, that the answer to that question was “No”.[10] The leading judgment was delivered by Allsop CJ who perhaps unsurprisingly formed the view that the key basis for the decision of the Full Court was the somewhat obvious absence of mutuality, an essential feature of any set-off:
There is a lack of mutuality between the indebtedness of the company to the creditor and the liability of the creditor pursuant to court order to pay the company at the suit of the liquidator. The lack of mutuality arises from the different interest in which the company owes money to the creditor and in which the company receives money pursuant to the liability to repay not as a creditor of the preferred creditor, but as a payee pursuant to court order in an action brought by the liquidator in the execution of her or his duty to gather in the estate of the insolvent company for the benefit of all unsecured creditors and the administration of the estate. The lack of mutuality also arises from the absence at the relevant date of any right or equity (vested or contingent) in the company or duty or obligation (vested or contingent) in the creditor to recover or to repay the preference, respectively. Thus, the essential requirements of s 553C are absent.[11]
In other words, the Full Court held that mutuality was absent for two reasons: first, because of the “different interests” involved, and second, because the temporal element concerning the relevant date was not satisfied.
Somewhat ambitiously however, the creditor appealed the Full Court’s decision to the High Court. Perhaps unsurprisingly again, lack of mutuality was a central plank of the unanimous decision of the High Court.[12] The High Court held that there were “two key features of set-off”,[13] being those which had been identified by the Full Court.[14]
The Liquidator as “an Officer of the Court”?
The plurality of the High Court[15] emphasised that an application under s 588FF is made by a liquidator, not as agent of the company, but as an officer of the court. Thus, it was said:
When deciding to institute proceedings pursuant to s 588FF, the liquidator acts as an officer of the court charged with the duties and responsibilities created by the statutory scheme of liquidation. It follows that whilst the liquidator might in other situations be characterised as an agent of the company, for the purposes of s 588FF no reason exists to characterise the liquidator as acting in such a capacity.[16]
And later in the judgment:
The liability created by s 588FF(1)(a), whilst owed to the company (which will receive it beneficially), is nonetheless one that arises upon the application of the liquidator, who, for the reasons given above, does not do so as an agent of the company but rather in his or her own right as an officer of the court.[17]
The difficulty with this analysis is that it does not accommodate the common situation where the liquidation is voluntary in nature, arising either as a consequence of a special resolution under s 491, or the operation of the statutory provisions by which a company under administration or subject to a deed of company arrangement transitions to a creditors’ voluntary winding up.[18]
As Austin J observed in Clutha v Millar (No 5):[19]
The distinctions in the modern statute reflect the history of the law of company liquidation: see A Keay, McPhersons Law of Company Liquidation, 4th ed, LBC Information Services, Sydney, 1999, p 25; and note Gibbons v Liberty One Ltd (in liq) (2022) 41 ACSR 442 at [53]–[59]. They reflect the fundamental proposition that in a winding up by court order, it is the court that conducts the winding up, and the official liquidator acts as an officer of the court on its behalf: Cmr for Corporate Affairs v Harvey [1980] VR 669 at 695; (1979) 4 ACLR 259 at 285; Cresvale at [22]. That is not the case in a voluntary winding up, which is purely a statutory process. The liquidator in a voluntary winding up is not regarded as an officer of the court carrying out tasks under the supervision of the court, notwithstanding the substantial statutory and general law duties imposed on such a liquidator and the court’s statutory power to review some aspects of the performance of the administration.[20]
The leading judgment of Allsop CJ in the Full Court did not encounter the same problem as it made a general reference only to a liquidator’s agency:
Beneficial ownership may be one characterisation for a purpose in question; an answer as to beneficial ownership does not detract from the proper characterisation of the action not as that of the company but as that of the liquidator, not as agent of the company vindicating any vested or contingent right of the company, but in his or her own right vindicating his or her own statutory rights and duty to augment the estate for the benefit of all creditors.[21]
It seems improbable that the High Court intended to deliberately exclude voluntary liquidations from the gravamen of its reasoning. Perhaps the reference to the liquidator being an officer of the court was made to distinguish a liquidator’s position when litigating preference recoveries from the liquidator’s agency when exercising other functions and powers, for example in carrying on the company’s business with a view to its beneficial disposal or winding up.[22]
Distinguish Voidable Preferences from Other Forms of Voidable Transaction and Insolvent Trading?
Unfair preferences are distinguishable from other forms of voidable transaction such as uncommercial transactions (s 588FB) and from insolvent trading claims (s 588W and s 588M). Those other claims were the subject of consideration, respectively in Buzzle,[23] Re Parker[24] and Hall v Poolman.[25]
There are certain features which distinguish preferences from other types of voidable transactions and insolvent trading claims. First, until codified by the insertion of s 588FI into the Act in 1993,[26] the practice of the Australian courts in respect of preferences in corporate insolvency, as confirmed by the High Court,[27] was to prevent a creditor who had received a preference from proving in the liquidation until the preference had been repaid in full. This position is peculiar to voidable preferences. It has no application to any of the other types of voidable transaction, including uncommercial transactions[28] or to insolvent trading claims. Stated conversely, there is no statutory equivalent to s 588FI in respect of any other form of voidable transaction or an insolvent trading claim.
Second, both Mansfield J in Re Parker [29] and Palmer J in Hall v Poolman[30] thought it significant that the sections they were considering (respectively, s 588W and s 588M), both provided that the liquidator could recover the claim “as a debt due to the company”. As for voidable preferences however, there has never been any suggestion that a preference is recoverable by a liquidator “as a debt due to the company”.[31]
The High Court Decision: Are All Voidable Transactions and Insolvent Trading Claims Covered by It?
Despite these distinguishing features between unfair preferences and other types of voidable transaction, it is likely that the reasoning of the High Court applies to all types of voidable transactions under Div 2 of Pt 5.7B of the Act. So much seems clear from the following comment:
It follows that under the statutory scheme of liquidation, any liability arising from the making of an order by a court under s 588FF(1)(a) cannot form part of the process for the identification of provable debts and claims for the purposes of s 553, and thus cannot be the subject of a valid set-off against pre-existing amounts owed by the company to the preferred creditor for the purposes of s 553C.[32]
Whether that proposition extends to insolvent trading under Div 3 of Pt 5.7B of the Act however is less clear. In that context, one will recall the observation by Allsop CJ in the Full Court that the approach to insolvent trading claims may differ from that relating to voidable preferences. That was because the Court considered that the former can constitute a beach of the legislation and that the insolvent trading provisions serve a statutory purpose different to that of unfair preferences:
Implicit in the above is the nature and purpose of the provisions in question to which I have referred. Sections 588V and 588W have the statutory purpose evident from their terms of protecting the subsidiary and its creditors from conduct of the holding company that is a contravention of the Act. This is the basis for the view (if it be valid) that within this statutory context and to vindicate the statutory purpose the action can be seen as the subsidiary’s in statutory substance. This can be contrasted with the different statutory context and purpose of the unfair preference provision and the recovery for it under s 588FF. The purpose there is to protect the estate from the effects of an otherwise valid inter partes transaction that has the effect of dislocating the order of distribution. The right of action in form and statutory purpose is of the liquidator (not the company) in right and interest and for the benefit of the due administration of the estate for all creditors, including priority creditors.[33]
The Chief Justice was however careful to emphasise that the proceeding was one involving an unfair preference and that the court’s comments “should not be seen as expressing final views about the operation of other sections not the subject of the question before the Court.”[34]
In addition, the High Court did not attempt to deconstruct any of the cases which it said could be considered contrary to its reasoning but in respect of those cases made the following global comment:
To the extent that the cases of Re Parker, Buzzle Operations Pty Ltd (In liq) v Apple Computer Australia Pty Ltd, Shirlaw v Lewis, Hall v Poolman, and Stone v Melrose Cranes & Rigging Pty Ltd (No 2) are inconsistent with the above analysis, they should now be considered to be wrongly decided.[35]
The only case mentioned here that involved an unfair preference was Stone v Melrose Cranes & Rigging Pty Ltd, and that decision has therefore been overruled. Buzzle was an uncommercial transaction case and so the relevant part of that decision, albeit obiter, must also to taken to have been “wrongly decided”. The other three decisions however were insolvent trading cases[36] where no “liability arising from the making of an order by a court under s 588FF(1)(a)” can exist, as the proceeding is not instituted, and no order is made, under that section.
Nevertheless, the inability to use set-off in defence of an insolvent trading claim is most likely the correct position. That is supported by Dr Derham[37] who has written an intellectually rigorous and compelling analysis of the topic and has concluded, in respect of insolvent trading, that set-off also does not apply in that case.[38]
* Taylor David Lawyers, Brisbane, Adjunct Professor, Law School, The University of Queensland, Solicitor. This contribution draws on submissions made by the author in the case.
[1] Metal Manufactures Pty Ltd v Morton (2023) 97 ALJR 69; [2023] HCA 1.
[2] The hearing of the special case referral to the Full Court of the Federal Court, and the successful defence of the liquidator’s position in the High Court on appeal, was due to the support of Scott Taylor of Taylor David Lawyers, and Henry Carr, chief executive of the Government’s Fair Entitlement Guarantee scheme who was ably assisted by Rebecca Dalais.
[3] Morton v Rexel Electrical Supplies Pty Ltd [2015] QDC 49.
[4] Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47; [2011] NSWCA 109.
[5] Re Parker (1997) 80 FCR 1.
[6] The Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47; [2011] NSWCA 109 decision was an uncommercial transaction case and Re Parker (1997) 80 FCR 1 an insolvent trading case. The significant differences between unfair preferences on the one hand and other types of voidable transaction and insolvent trading on the other, are set out later in this note.
[7] QUD 31/2021, Originating Application filed 9 February 2021.
[8] But at the same time reserving specifically the right to contest any asserted defence under s 588FG (good faith/no reason to suspect insolvency).
[9] However, it was arguable that the creditor’s claim was only $60,000 being the amount claimed in its formal proof of debt; the first defence filed claimed as the set-off amount the quantum of the proof of debt, $61,924.77, the second defence filed the following day claimed $194,727,23 which was the debt increased by interest calculated over many years of the debt being overdue. The interest addition was $132,802.46 which then made the quantum of the set-off slightly more than the claim.
[10] Morton v Metal Manufactures Pty Ltd (2021) 289 FCR 556; [2021] FCAFC 228.
[11] Morton v Metal Manufactures Pty Ltd (2021) 289 FCR 556, [7]; [2021] FCAFC 228.
[12] Metal Manufactures Pty Ltd v Morton (2023) 97 ALJR 69, [52], [53], [55], [74]; [2023] HCA 1.
[13] Metal Manufactures Pty Ltd v Morton (2023) 97 ALJR 69, [17]; [2023] HCA 1.
[14] Metal Manufactures Pty Ltd v Morton (2023) 97 ALJR 69, [18]–[19]; [2023] HCA 1.
[15] Metal Manufactures Pty Ltd v Morton (2023) 97 ALJR 69 (Kiefel CJ, Gordon, Edelman, and Steward JJ); [2023] HCA 1.
[16] Metal Manufactures Pty Ltd v Morton (2023) 97 ALJR 69, [24]; [2023] HCA 1.
[17] Metal Manufactures Pty Ltd v Morton (2023) 97 ALJR 69, [52]; [2023] HCA 1 (emphasis added).
[18] Corporations Act 2001 (Cth) Pt 5.3A Div 12.
[19] Clutha v Millar (No 5) (2002) 43 ACSR 295; [2002] NSWSC 833.
[20] Clutha v Millar (No 5) (2002) 43 ACSR 295, [18]; [2002] NSWSC 833; see also Shannon v JMA Accounting Pty Ltd [2005] QSC 240, [20] (Wilson J).
[21] Morton v Metal Manufactures Pty Ltd (2021) 289 FCR 556, [148]; [2021] FCAFC 228.
[22] Corporations Act 2001 (Cth) s 477(1)(a).
[23] Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47; [2011] NSWCA 109.
[24] Re Parker (1997) 80 FCR 1.
[25] Hall v Poolman (2007) 215 FLR 243; 65 ACSR 123; [2007] NSWSC 1330.
[26] This occurred with the enactment of the Corporate Law Reform Act 1992 (Cth), which commenced on 23 June 1993.
[27] NA Kratzmann Pty Ltd v Tucker, Liquidator of Reid Murray Developments (Qld) Pty Ltd [No 2] (1968) 123 CLR 295, 297.
[28] The subject of the obiter comment by Young JA in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47; [2011] NSWCA 109.
[29] Re Parker (1997) 80 FCR 1.
[30] Hall v Poolman (2007) 215 FLR 243; 65 ACSR 123; [2007] NSWSC 1330.
[31] A significance which may wrongly be attributed to the words in s 588FF permitting the court to order a “payment to the company” has been addressed elsewhere. See, eg, R Derham, “Set-off against Statutory Avoidance and Insolvent Trading Claims in Liquidation” (2015) 89 ALJ 458, 461.
[32] Metal Manufactures Pty Ltd v Morton (2023) 97 ALJR 69, [50]; [2023] HCA 1 (emphasis added).
[33] Morton v Metal Manufactures Pty Ltd (2021) 289 FCR 556, [181] (Allsop CJ); [2021] FCAFC 228.
[34] Morton v Metal Manufactures Pty Ltd (2021) 289 FCR 556, [213]; [2021] FCAFC 228.
[35] Metal Manufactures Pty Ltd v Morton (2023) 97 ALJR 69, [56]; [2023] HCA 1 (emphasis added and footnotes removed).
[36] The reference to Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47; [2011] NSWCA 109 (Buzzle) in [56] suggests that the decision would be taken to extend to uncommercial transactions. The Full Court of the Federal Court proceeded on the basis that Buzzle was concerned with insolvent trading: Morton v Metal Manufactures Pty Ltd (2021) 289 FCR 556, [185]–[186]; [2021] FCAFC 228. In fact, that would not appear to have been the case. The grounds of appeal in Buzzle concerned both insolvent trading and uncommercial transaction, and it would appear that the comments in Buzzle in relation to set-off concerned uncommercial transactions and not insolvent trading.
[37] R Derham, Derham on the Law of Set-off (OUP, 4th ed, 2010) 537–547; Derham, n 31.
[38] Derham, n 31, 484–485.