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Liquidators beware: creditors may rely on set-off in unfair preference claims

The use of the set off defence has drawn plenty of heated criticism from the legal and insolvency community for a number of reasons.

It is argued by critics that the necessary element of mutuality, that is an essential requirement for the application of section 553C Corporations Act 2001 (Cth) (the Act), is lacking.1

In Turkalerts dated 10 June 2015 and 1 February 2016 we reported on the decision of Morton & Anor v Rexel Electrical Supplies [2015] QDC 49  where the set off defence was applied. As it was a lower court decision, it left room for debate about whether the set off defence would be applied in higher courts.

Now, in yet a further blow to liquidators, and a potential boon for creditors, the Federal Court of Australia (FCA) In the matter of Stone v Melrose Cranes & Rigging Pty Ltd, in the matter of Cardinal Project Services Pty Ltd (in liq) (No 2) [2018] FCA 530 has confirmed its position that a set off under section 553C of the Act can be utilised by creditors in unfair preference claims.

The FCA decision provides substantial support to creditors who are in a position to rely on the set off defence and seek to dissuade the critics who say it has no application, and will fail if the argument is tested in the Courts.

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