ARTICLE
3 December 2020

Unpacking Unfair Preferences Series: Set off defence and unfair preferences

M
Madgwicks

Contributor

Madgwicks Lawyers has been serving clients since 1975 with reliable legal advice, clear explanations of outcomes, and practical options. Their deep expertise helps clients navigate complex matters by providing informed decision-making. The firm prioritizes developing long-term relationships with clients locally and globally, adding value beyond legal services. With over 100 staff and expertise in key practice areas, Madgwicks is an award-winning commercial firm. As part of Meritas, they are connected to a global alliance, offering business law services in 92 countries.
If a liquidator brings a claim against you for an unfair preference, keep in mind any offsetting claim you may have.
Australia Insolvency/Bankruptcy/Re-Structuring

When a liquidator brings a claim for an unfair preference against a company or individual, there are a number of defences available to them.

In our earlier two articles we discussed the good faith defence and the running account defence. Another commonly used defence is the defence of set off.

Although the law in this area is not settled, the below outlines an arguable position.

What is the set off defence?

If a liquidator has brought a claim against you for an unfair preference, then it is arguable that any amounts the company in liquidation owes to you should be set off against the amounts claimed to be an unfair preference.

What do you need to prove to successfully use this defence?

Elements to prove a set off defence include:

  • there are mutual credits, mutual debts or other mutual dealings between an insolvent company and a creditor;
  • the creditor wants to have a debt or claim admitted against the company; and
  • the creditor did not have notice of the fact that the company was insolvent (this is a different test to a suspicion of insolvency).

For a liquidator to defeat a set off claim, when is the relevant knowledge of insolvency of the creditor?

The relevant time used in determining knowledge of insolvency for the purpose of set off is the time at which credit is received from the company (often at the time of issuing invoices relating to the outstanding debt, but not always).

Lessons

If you have a claim against you for an unfair preference, always keep in mind any offsetting claim you may have. It can potentially decrease the claim against you significantly or in some cases completely.

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. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.

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