If a director can exercise a right of set-off against a
company in liquidation for a debt owed to the director or for a
liability of the company to the director (which may be
unascertained in amount or contingent), it may help to cancel out
or significantly reduce the director's liability to the company
for insolvent trading.
Section 553C(1) of the Corporations Act 2001 provides
for a set-off where there have been mutual credits, mutual debts or
other mutual dealings between an insolvent company that is being
wound up and a person who wants to have a debt or claim admitted
against the company. An account is to be taken of what is due from
one party to the other in respect of those mutual dealings.
Under Section 553C(2) of the Act, a claim for set-off is not
available under section 553C if, at the time of giving credit to
the company, or at the time of receiving credit from the company,
the person had notice of the fact that the company was
In the controversial decision of Re Parker (1997) 150
ALR 92, a holding company was liable for the insolvent trading of
its subsidiary under section 558V of the Act.
Mansfield J held that:
the holding company's post-liquidation liability for
insolvent trading could be set-off under section 553C against the
debt owed to the holding company by the subsidiary;
although the liability for insolvent trading did not arise from
any dealings between the two companies, it did not mean that the
debt may not qualify for set-off under section 553C because the two
debts were between the same companies;
there was no reason to exclude statutory debts from the compass
of provisions such as 553C;
although mutual creditors and debtors will ordinarily result
from prior dealings between the two parties, it is not necessarily
Smith & Bone
In the recent Federal Court decision of Smith (in the
capacity as liquidator) v Bone  FCA 319, a liquidator
sought compensation against a director for insolvent trading. The
director argued that he was able to set-off debts owed to him by
the company in liquidation against his liability for insolvent
The liquidator argued that a set-off was not available under
section 553C because there was a lack of mutuality, as the
insolvent trading claim was characterised as 'misfeasance
The liquidators did not make detailed submissions on the issue,
but sought to preserve their position in the event of an appeal.
The Court adopted the approach of Mansfield J for the reasons given
in Re Parker.
Recently the District Court of Queensland in Morton v Rexel
Electrical Supplies Pty Limited  QDC 49 applied Re
Parker where the liquidator was seeking the recovery of unfair
preference payments. The creditor successfully reduced the amount
of the preference payments by the amount of some of the outstanding
invoices owed to the creditor by the company in liquidation.
The position under section 553C(2) is as follows:
A set-off is not available if, at the time of giving credit to
the company in liquidation, the person had notice of the fact that
the company was insolvent.
A person will have 'notice of the fact' that a company
is insolvent if the person has actual notice of the facts that
disclose that the company lacks the ability to pay its debts when
they fall due, within the meaning of section 95 of the Act.
It is unnecessary for the liquidator to show that the person
actually formed the view that the company lacked that ability
however 'grounds for suspecting' insolvency will not
suffice. What is required is proof of facts known to the creditor
that warrant the conclusion of insolvency.
The relevant issue will be whether the person had actual notice
of the facts that would have indicated to a reasonable person in
their position that the company was unable to pay all of its debts
as and when they became due and payable.
Liquidators argue the decision in Re Parker frustrates
the statutory recovery provisions relating to unfair preferences
and insolvent trading. The counter argument is that section 553C is
a statutory directive that operates at the time the liquidation
takes effect. Its purpose is to achieve 'substantial
justice' and should be given 'the widest possible
scope'. From the liquidator's perspective, the legal
controversy regarding Re Parker awaits resolution by an
Winner – EOWA Employer of Choice for Women Citation 2009,
2010, 2011 and 2012
Winner – ALB Gold Employer of Choice 2011 and 2012
Finalist – ALB Australasian Law Awards 2008, 2010, 2011 and
2012 (Best Brisbane Firm)
Winner – BRW Client Choice Awards 2009 and 2010 - Best
Australian Law Firm (revenue less than $50m)
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
A recent NSW decision has implications for liquidators of trustee companies dealing with trust funds and priority debts.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).