Voidable preferences and set-off: Mr Morton and déjà vu: clarity finally from the Full Federal Court

Taylor David Lawyers ©

The history – Mr Morton’s role

On 5 March 2015, a judgment was handed down in which:

  1. Gavin Morton as the appointed liquidator had sued a defendant company to recover a voidable preference pursuant to s 588FA of the Corporations Act 2001 (Cth) (Act).
  2. The defendant was the supplier of electrical equipment.
  3. The defendant claimed as part of its defence, set-off pursuant to s 553C of the Act.
  4. The decision was the first Australian reported case where, as part of the ratio, statutory set-off under s 553C(1) was allowed as a valid defence to the liquidator’s  preference claim.

On 16 December 2021, another judgment was handed down in which:

  1. Gavin Morton as the appointed liquidator had again sued a defendant company to recover a voidable preference pursuant to s 588FA of the Act.
  2. The defendant was again, coincidentally, the supplier of electrical equipment.
  3. The defendant again claimed as part of its defence, set-off pursuant to s 553C(1) of the Act.
  4. The decision was the first Australian reported case where, as part of the ratio, statutory set-off under s 553C(1) was, in this case, denied as a defence to the liquidator’s preference claim.

The first case was Morton v Rexel.[1] The second was Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufacturers Pty Limited.[2]

In the 6 years between those two decisions, significant judicial and academic controversy ensued as to whether a defendant could use statutory set-off as a “defence” to a liquidator’s claim for a voidable preference.

During that period also, there existed within the Australian insolvency profession, an air of expectation – even inevitability – that a court, at an appropriate appellate level, would eventually and authoritatively determine, that statutory set-off could not be used as a defence to a liquidator’s preference claim.

The position now – Morton v Metal Manufactures

The decision of the Full Federal Court is now being, and will no doubt continue to be  examined in detail elsewhere and accordingly, that exercise is not undertaken here. However, at a high level it may be observed that the decision has resulted in three important outcomes

First, it has clarified the position as regards the relationship between ss 588FA and 553C of the Act, respectively with regards to voidable preferences and statutory set-off

Secondly, it explains the statutory purpose and function of the voidable preference regime which has a long history designed to produce equality amongst creditors in accordance with the pari passu principle.

Finally, and perhaps most significantly, it has, to the great relief of the insolvency profession in this country, restored the world order to this important area of law.

Taylor David Lawyers acted for the successful plaintiff liquidator, Mr Morton, in the 2021 Court of Appeal proceedings in addition to the 2015 Queensland District Court proceedings.

More to come…

Scott D. Taylor – Partner | e: [email protected]

Dr Garry J. Hamilton – Senior Legal Consultant | e: [email protected]

[1] [2015] QDC 49, Searles DCJ.

[2] [2021] FCAFC 228, Allsop CJ, Middleton and Derrington JJ.

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