Consideration is given to section 553C of the Corporations Act 2001 (Cth) (the Act) in determining whether a set-off can be applied against an amount owed to a party. This section permits the application of set-off in cases where there have been mutual credits, debts or other mutual dealings between parties. However, the right to set-off is conditional upon a party not having been aware of another party’s insolvency at the time credit was extended or received.
If a party had notice of another party’s financial position, the set-off cannot be relied upon by the relevant party.
Interestingly, some cases have put forward the proposition that a set-off is available if the facts and events leading to the set-off arose prior to the notice of insolvency.
In the case of Grapecorp Management Pty Ltd (in liq) v Grape Exchange Management Euston Pty Ltd [2012] VSC 112 (Grapecorp), it was considered by Goode J that post-liquidation receipts, payments and debts are capable of set-off provided they existed as contingent claims at the commencement of the winding up and are of a kind that ultimately mature into pecuniary demands which are capable of set-off.
Similarly, in Re Force Corp Pty Ltd (in liq) [2020] NSWSC 1842 (Force Corp), the Court affirmed the provisions of section 553C(1) of the Act, allowing set-off for mutual debts and credits existing at the date of winding-up. In this case, the Court also reinforced that mutual dealings include debts that are contingent and which ultimately mature into pecuniary demands.
Further, in Gye v McIntyre (1991) 171 CLR 609 at 624 and Hiley v The Peoples Prudential Assurance Co Ltd (in liq) (1938) 60 CLR 468 at 497, the Full Bench of the High Court stated that “provided they exist as contingent at that date and are of a kind which will ultimately mature into pecuniary demands susceptible of set-off, the requirement of the section may be satisfied in relation to them”.
Circumstances may arise, particularly in relation to construction projects, where rectification works may have been required to have been undertaken by a company (which subsequently goes into liquidation) and it would have been responsible for undertaking such rectification works at some point prior to its liquidation. Such as the company’s work was defective and it had an obligation to ensure those defective works were rectified by it (or completed by the other party at the company’s expense). Despite the company being obliged to undertake rectification works prior to it going into liquidation, it may have failed to undertake those rectification works (and even though it had been repeatedly requested to do so by the other party).
The Liquidator may be faced with a situation where a debtor of the company seeks to rely on set-off arising from those rectification works. One of the critical elements which must be satisfied in order to rely on set-off, is that the other party had no notice of insolvency. Accordingly, on all relevant material in the possession of the Liquidator, it may appear unreasonable that even though the other party had notice of insolvency (but the facts and circumstances concerning the rectification works arose before notice of insolvency), it would be required to bear those additional costs associated with the rectification works in circumstances where the company would have ordinarily attended to such rectification works, and it was obliged to do so, had it not ceased to operate.
The company may have agreed to undertake the rectification works on numerous occasions over a period of months and simply failed to do so. Therefore, despite that party having notice of insolvency in respect of the company’s position, all of the facts and circumstances may demonstrate that the debtor is entitled to rely on set-off to claim the costs of the rectification works which it has incurred as that would have been a responsibility which should have been attended to by the company prior to liquidation.
Based on the cases of Grapecorp and Force Corp, a set-off may be permissible when the facts giving rise to the set-off meant that the company had an obligation to undertake certain works and it would have done so if it had not ceased to trade and went into liquidation. This is despite the other party having notice of insolvency at the time of the mutual dealings .
If you require advice or assistance in navigating the complexities of set-off rights under the Act, our Dispute Resolution and Insolvency team is here to help.
