Australia: Set-off and unfair preference claims

Last Updated: 29 November 2015
Article by Adam Khan

The Queensland District Court has recently considered whether set-off is available in respect of unfair preference claims.

The decision of the Queensland District Court in Morton & Anor v Rexel Electrical Supplies Pty Ltd [2015] QDC 49("Rexel") has re-ignited debate about the scope of the set-off provisions in s.553C of the Corporations Act 2001 ("the Act"). In Rexel a set-off was said to apply in respect of unfair preferences paid to a creditor. That is a major shift in application of the set-off provisions. We look at the history of judicial application of the set-off provisions to understand how that decision was arrived at.

Rexel concerned an unfair preference claim. Relevantly, the creditor was paid money by the company during the relation back period (during which the company was insolvent).There was ultimately no return to unsecured creditors in the winding up. The payments by the company to the creditor were unfair preferences but there remained a debt due from the company to the creditor. The question for the court was - is the creditor entitled to set-off that debt, under s553C, against the liability for the unfair preference?

The Court held the creditor was entitled to a set-off.That decision is a departure from understood practice in respect of unfair preference claims and has significant ramifications for liquidators and creditors.


Historically s553C has been applied by liquidators in adjudication of proofs of debt in a company's liquidation.Of course s553C does not form part of the regime in Part 5.7B of the Act (recovery of property or compensation for the benefit of creditors of insolvent companies).Relevantly, Part 5.7B also sets out the defences available to claims that might be made under that Part.

While the general principle is to give statutory provisions their widest meaning, it might be assumed that by excluding s.553C from the regime in Part 5.7B of the Act, Parliament intended that set-off was not to apply to proceedings under that Part of the Act.

The legislation also requires mutuality. A set-off will apply 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. At first glance there is a clear objection to finding mutuality between a liquidator's claim against a person or company under Part 5.7B and a debt due by the company to that person or company. They appear to involve different dealings, transactions or parties and thus lack mutuality.


The starting point is the detailed analysis of set-off in respect of insolvent trading in Re Parker (1997) 80 FCR 1 ("Re Parker").That case concerned a claim under s588W of the Act that a holding company was liable for the insolvent trading of a subsidiary company. The holding company sought to set-off any liability against debts it was owed by the subsidiary. Section 588W(1) of the Act (as with director insolvent trading under s588M(2) of the Act) provides that a recovery by a liquidator from the holding company (or director) is "as a debt due to the company". Weight was given to that phrase to establish the necessary mutuality between the liability for insolvent trading (as a debt due to the company) and the debts that remained outstanding (debts due from the company). Importantly, it was said that the events giving rise to the insolvent trading claim arose before the liquidation and the claim was the natural outcome of those events. It was held there were mutual credits and debts. 

Those findings (and others in Re Parker) establish that set-off is available in respect of insolvent trading claims. Re Parker was considered, applied and upheld in respect of insolvent trading in Smith v Boné [2015] FCA 319. Detailed submissions about whether Re Parker was correct were preserved in the event there was an appeal. In fact there was an appeal, but it was resolved without hearing. Set-off and voidable transactions

The importance of Re Parker is that in Buzzle Operations Pty Ltd (in Liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109 ("Buzzle") the New South Wales Court of Appeal refused, for the purposes of set-off, to distinguish a claim for insolvent trading from a claim for an uncommercial transaction. The Court noted that Re Parker had been criticised ibut held that it should be followed to allow a set-off in respect of an uncommercial transaction. In fact the point was not determinative in Buzzle because the Court had already found that a good faith defence applied to the uncommercial transaction claim and didn't need to decide the set-off point. The findings in Buzzle are therefore persuasive rather than binding but do nonetheless extend the application of set-off to uncommercial transaction claims.

Counsel for the creditor in Rexel relied upon Re Parker and Buzzle to persuade the Court to extend the application of set-off to liability for unfair preference claims. In one sense the extension to unfair preference claims is an inevitable consequence of the Buzzle decision. One can understand the reasoning - there is no reason in principle why uncommercial transactions should be treated differently to unfair preferences.

That does not mean to say that the decision sits comfortably. There are a number of objections to applying the set-off provisions to unfair preferences. The most important objection is based on mutuality. Without mutuality there is no set-off under s553C of the Act. The difficulty in characterising mutuality between a creditor's debt due from the company and the liquidator's right to recover an unfair preference is that the credits and debts arise out of different transactions and obligations. On the one hand the creditor gives credit to the company. On the other the liquidator has a right to apply to Court for an order directing repayment in circumstances where an unfair preference is found. There is no mutual credit, debt or dealing between the creditor and the liquidator.

There is another difficulty in characterising mutuality. Although, the Court might order in respect of an unfair preference claim that a person "pay to the company an amount" the amounts recovered are to be distributed by liquidators for the benefit of the company's creditors. The company is not free to do what it likes with the unfair preference recovery.

There is no trust (in the legal sense) formed or administered by the liquidator but the recoveries are not for the benefit of the company in the same sense that the company benefited from the credit it was given. The entities involved in the credits, debts and dealings when a Court order is made on an unfair preference claim include the liquidator as well as the company and creditor. The company is altered by the liquidation as compared to the time when credit was given to the company. If the debts, credits and dealings are between or involve different entities there can be no mutuality.

Applying set-off to voidable transactions has the potential to lead to outcomes that do not benefit creditors. Liquidator's recoveries are to the benefit of all creditors.

Set-off offends that principle because it enables a single unsecured creditor found liable in respect of a voidable transaction to benefit at the expense of the other creditors by reducing the amount of its liability. Creditors as a whole will be worse off in the liquidation by virtue of the set-off reducing the amount of the liquidator's recovery.

A further concern arising from the decision is that set-off is not available where the person seeking the set-off has "notice of the fact of insolvency" under s553C(2) of the Act. Clearly, after the making of a Court order following a claim by a liquidator, the person seeking to benefit from the set-off has notice of the fact insolvency.


There are obvious legal and practical difficulties in applying set-off to liquidator's recoveries under the Act. At present though the authorities establish that set-off is available. The debate remains open as to whether that position is correct because of the nature and circumstances of those authorities. Re Parker and Smith v Bone were decisions of single judges of the Federal Court; the point was not determinative in Buzzle; and Rexel is a lower Court decision. It remains to be seen whether a superior Court, after hearing full argument and with detailed consideration, will uphold the application of set-off in similar circumstances. Certainly detailed consideration of the position at that level would be welcome.

There was an appeal by the creditor in Rexel. The appeal related only to the Court's findings in respect of insolvency and the running account defence. The judgment in the appeal (Rexel Electrical Supplies Pty Ltd v Morton (as liquidator of South East Queensland Machinery Manufacturing and Distribution (Mining No.1) (in liq) [2015] QCA 235) upheld the District Court's findings. There was no cross-appeal by the liquidator in respect of the set-off points discussed in this article.


i The criticism was originally in Rory Derham's book The Law of Set-off, 3rd ed (Oxford University Press, 2003) and has been extended by him: Rory Derham, 2015, 'Set-off against statutory avoidance and insolvent trading claims in company liquidation', Australian Law Journal, Volume 89, Page 459-490

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

Click to Login as an existing user or Register so you can print this article.

Adam Khan
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”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
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).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.