The decisions in Metal Manufactures Pty Limited v Morton [2023] HCA 1 and Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2 have been viewed as conflicting for liquidators. In this week’s TGIF, we examine these proceedings and why the decisions benefit both liquidators and creditors.

Key takeaways

Liquidators and creditors should be aware of the High Court's analysis of the limits of set-off under s 553C of the Corporations Act 2001 (Cth).

A Win for Subcontractors and Suppliers

When a construction company goes broke, the subcontractors and suppliers often receive letters from the liquidator demanding repayment of so-called ‘unfair preferences’.

When an ongoing business relationship has existed between the creditor company and the company in liquidation, liquidators have historically worked out the amount of the ‘unfair preference’ on a ‘running account’ basis by reference to the so-called ‘peak indebtedness principle’. For example, if the following transactions took place:

The High Court’s recent decision in Bryant & Ors v. Badenoch Integrated Logging Pty Ltd [2023] HCA 2 (Gunns case) has important implications for liquidators and companies, as it has removed liquidators’ unfair advantage in unfair preference cases.

This article analyses the decision of Ball J in Kennedy Civil Contracting Pty Ltd (Administrators Appointed) (KCC) v Richard Crookes Construction Pty Ltd (RCC); in the matter of Kennedy Civil Contracting Pty Ltd [2023] NSWSC 99 and considers the ramifications for the scope of section 32B of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).

Key Points:

If you operate a business, it is important to be aware of what can happen if you receive a payment from a customer who subsequently goes into bankruptcy or liquidation, and that payment is found to be an unfair preference payment. Payments that are unfair preferences can be ‘clawed back’ by a liquidator or bankruptcy trustee.

Although the term ‘unfair preference’ is commonly referred to when a company goes into liquidation, the concept of an ‘unfair preference payment’ is not commonly understood. So, what is does ‘unfair preference’ mean and what you should you be aware of?

An administration is intended to achieve one of two objectives: 1. to rescue the company as a going concern; or 2. to achieve a better result for the company's creditors as a whole than would be likely if the company was placed into liquidation

The High Court of Australia in Metal Manufactures Pty Limited v Morton [2023] HCA 1 has confirmed the view of the Full Court of the Federal Court of Australia that the "set off" defence under section 553C of the Corporations Act 2001 (Cth) (Act) is no longer available to claims by liquidators for an unfair preference claim made under section 588FA of the Act.

This decision brings finality to claims brought by Creditor Defendants to such claims and no doubt brings much joy to liquidators across Australia.

The High Court has handed down its long-awaited decisions in Bryant v Badenoch Integrated Logging Pty Ltd [2023] (Badenoch) HCA 2 and Metal Manufactures Pty Ltd v Morton [2023] HCA 1 (Morton) providing guidance on common defences to unfair preference claims that may be brought by liquidators. The key takeaways for insolvency practitioners are: