Set-Off Against a Liquidator’s Preference Claim: What Metal Manufactures v Morton Changed

For a Victorian creditor facing a liquidator’s demand to repay money received before a customer entered liquidation, the position on statutory set-off in an unfair preference claim in Australia is settled. In Metal Manufactures Pty Limited v Morton [2023] HCA 1; (2023) 275 CLR 100, the High Court held that section 553C of the Corporations Act 2001 (Cth) is unavailable against the recovery claim. There is no set-off against preference recovery, even if the company still owes the creditor more than the payment claimed. 

The critical issue is section 553C mutuality. The creditor’s pre-liquidation debt and the liquidator’s statutory recovery right do not arise between the same parties in the same interests. The recovery right is exercised within the liquidation regime for creditors. 

Creditor exposure under a liquidator’s section 588FF claim must still be tested against the evidence and statutory elements. A creditor may dispute whether the payment was an unfair preference under section 588FA, the company’s insolvency or the amount claimed, and may invoke section 588FG where its requirements are met. A running account defence may also affect the calculation after Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2, which confirmed that peak indebtedness is abolished. 

What Law Governs Set-Off Against an Unfair Preference Claim in Australia? 

The governing provisions are sections 553C, 588FA, and 588FF of the Corporations Act 2001 (Cth). Section 588FA(1) defines an unfair preference. A transaction is preferential if a company and its creditor are parties to it, and the creditor receives, in respect of an unsecured debt, more than it would have received had the transaction been set aside, and the creditor proved in the winding up. The transaction must also satisfy the insolvency and timing requirements in Part 5.7B. Under section 588FF, a court may, on a liquidator’s application, make orders concerning a voidable transaction, including repayment to the company. 

Section 553C requires an account to be taken where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company being wound up and a person seeking to prove a debt. Only the balance is payable or provable. Section 553C mutuality requires the cross-demands to be between the same persons, in the same interests and capable of being expressed in money. 

In Metal Manufactures Pty Limited v Morton [2023] HCA 1; (2023) 275 CLR 100, the High Court held that those requirements are not met when a creditor seeks to set off its provable debt against the liability asserted in a liquidator’s section 588FF claim. The liquidator’s recovery right did not exist before the winding up and is exercised by the liquidator as an officer of the court, not as the company’s agent. Money recovered is also subject to the statutory distribution regime for creditors. The creditor’s debt and the recovery right therefore lack temporal and substantive mutuality. The result is no set-off against preference recovery under section 553C. 

Section 588FA(3) remains important where payments and further supplies formed an integral part of a continuing business relationship. It treats the transactions within that relationship as a single transaction when assessing whether the creditor received a preference. In Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2, the High Court confirmed that the statutory scheme does not permit a liquidator to select the point of peak debt as the starting point. Although commonly called the running account defence, section 588FA(3) is better understood as part of calculating whether, and to what extent, a preference exists. The practical effect was that the peak indebtedness rule was abolished, but the existence and duration of the continuing relationship remain factual questions. 

How Will a Court Assess a Liquidator’s Unfair Preference Claim After Metal Manufactures and Badenoch? 

What must the liquidator establish before obtaining a recovery order? 

A payment is not recoverable merely because it was made before liquidation. Subject to any statutory presumptions, the liquidator must establish that the company was insolvent when the transaction occurred, or became insolvent because of it, and that the transaction was made within the applicable statutory period. The liquidator must also show that the creditor received more in respect of an unsecured debt than it would have received if the payment were set aside, and it proved in the winding up. The court determines each element from the evidence rather than treating the liquidator’s demand as conclusive. 

Can an unpaid invoice reduce the amount claimed by the liquidator? 

After Metal Manufactures, an outstanding debt owed by the company cannot be applied as a statutory set-off against preference recovery. The court does not simply compare two amounts owed between trading parties. It asks whether the competing rights satisfy section 553C mutuality at the commencement of the winding up. A liquidator’s recovery right arises under the statutory liquidation regime and serves creditors, while the creditor’s invoice is a pre-liquidation claim against the company. If the preference is repaid, section 588FI may permit the creditor to prove for the restored debt, but that is distinct from reducing the recovery order by set-off. 

When will the running account provisions apply? 

Section 588FA(3) applies only where the payment was, for commercial purposes, an integral part of a continuing business relationship in which the company’s indebtedness increased and decreased through a series of transactions. Under Badenoch, this is an objective characterisation of the actual business relationship. Courts may examine invoices, payment patterns, credit terms, demands, payment plans, threats or suspensions of supply, correspondence and whether payments induced further supply. The parties’ intentions may be relevant but are not decisive. 

A relationship may end before all dealings cease. Later payments may fall outside the running account defence if, viewed commercially, they were directed to recovering old debt rather than sustaining reciprocal supply. Continued supply during an agreed wind-down will not necessarily preserve the relationship. 

How is a continuing account calculated after Badenoch? 

The liquidator cannot choose the point at which the company’s debt was highest. The relevant account begins with the first transaction after the start of the statutory period, the date of insolvency, or the commencement of the continuing relationship. All qualifying transactions are then treated as one transaction. With peak indebtedness abolished, the court considers their net effect rather than a selectively chosen high point. 

What statutory protection may still answer the claim? 

Section 588FG(2) may protect a creditor that proves it received the payment in good faith, lacked reasonable grounds for suspecting insolvency, and shows that a reasonable person in its circumstances would also have lacked those grounds. The creditor must also prove that it gave something of value as part of the transaction or changed its position in reliance on receiving the payment. Courts assess both actual knowledge and objective warning signs, making contemporaneous credit records central to creditor exposure. 

What Disputes and Practical Problems Arise When a Liquidator Demands Repayment of An Unfair Preference? 

In practice, the first dispute is often about the liquidator’s calculation. A demand may identify every payment received during the relation-back period and present the total as recoverable, without adequately addressing the date of insolvency, the parties’ trading relationship or the value of further supplies. The creditor should reconcile the demand against its ledger, invoices, credit notes, bank records, and proof of delivery. Errors on dates, duplicated payments, third-party payments, and amounts applied to secured debts can materially affect the claim. 

Insolvency is another frequent point of contest. The fact that invoices were overdue does not, by itself, establish that the company was insolvent when each payment was made. The analysis may involve cash flow, available finance, payment arrangements, dishonoured payments, unpaid tax liabilities, and the company’s dealings with other creditors. Statutory presumptions may assist the liquidator, particularly where company records are inadequate, but the evidentiary basis should still be examined rather than assumed. 

The most fact-intensive disputes commonly concern the running account defence. Trading records may show progression from ordinary credit terms to payment plans, supply limits, cash on delivery, temporary suspensions, or an agreed wind-down. Courts consider the commercial character of each phase. Payments associated with continuing supply may form part of the statutory single transaction, while later payments directed principally to reducing historical debt may fall outside it. Identifying when that change occurred can alter creditor exposure. 

Section 588FG disputes usually turn on what the creditor knew, or should have suspected, at the relevant time. Collection emails, internal account notes, requests for security, repeated broken promises and threats to stop supply may contradict a later assertion that insolvency was not suspected. Evidence that staff believed the customer would pay is not necessarily enough, because the statutory test includes what a reasonable person in the creditor’s circumstances would have suspected. 

A further practical problem arises when a creditor deducts unpaid invoices from the demand. Metal Manufactures establishes no set-off against preference recovery, so that approach may obscure stronger arguments about insolvency, statutory elements, section 588FG or the correct running-account calculation. The sounder response is to reconstruct the relevant transactions, test each element and quantify the defensible amount before engaging on settlement or proceedings. 

What Should a Creditor Do Before Responding to An Unfair Preference Demand? 

A creditor should not treat a liquidator’s demand as establishing either liability or the amount recoverable. The first step is to identify the relation-back day, the alleged insolvency date, each challenged payment, and the statutory basis for the calculation. Any response should avoid unnecessary admissions while requesting the documents and particulars needed to assess the liquidator’s section 588FF claim. 

The evidence should then be organised payment by payment. Relevant material includes invoices, account statements, bank records, proof of supply, credit-limit decisions, payment arrangements, and internal communications about the customer’s financial position. For a running account defence, the chronology should record the balance before and after each payment and supply, together with any change in credit terms, interruption of supply or shift towards debt recovery. Contemporaneous records will generally carry more weight than explanations reconstructed after liquidation. 

Each available response should be assessed separately. These may include disputing insolvency, challenging whether the statutory elements of an unfair preference are satisfied, contesting the liquidator’s calculation, relying on section 588FG, or applying section 588FA(3). Since Metal Manufact golfures, the company’s unpaid debt cannot reduce the recovery through section 553C, although repayment of a preference may restore the creditor’s right to prove that debt. Commercial exposure should therefore account for the claimed repayment, potential interest, and legal costs, as well as the dividend from the liquidation. 

Timing also matters. A demand letter is not a court determination, but section 588FF imposes a statutory period for commencing recovery proceedings and allows an extension only in specified circumstances. Early analysis gives the creditor a better basis to reject an unsupported claim, narrow the issues or negotiate a resolution proportionate to the evidence and litigation risk. 

Frequently Asked Questions 

What Should a Creditor Do After Receiving a Liquidator’s Unfair Preference Demand? 

After Metal Manufact, a creditor cannot use section 553C to set off an unpaid debt against an unfair preference recovery. That does not make every liquidator’s demand payable. The liquidator must still establish the statutory elements, while the creditor may contest insolvency, preferential effect, the amount claimed, and the evidence supporting the demand. The running account defence and section 588FG protection may also remain available, depending on the trading history and the creditor’s knowledge. 

Early review is important because correspondence, account records, and the timing of any response can affect both the legal and commercial position. If your business has received a liquidator’s demand, speak with our corporate insolvency lawyers to assess the claim and available responses, or book a consultation. 

This article is general information only and not legal advice. For advice specific to your circumstances, please contact our team.