Section 553C set-off not available to creditors with notice of insolvency

A right of set-off arises through the mutuality of a debit and a credit, when a person is both owed money by and owes money to someone, the net balance is calculated and that balance is then payable or receivable.

This right applies outside insolvency law, but it has been placed into Part 5 of the Corporations Act for various reasons, including that it will not apply when the person had notice of the insolvency of the company at the time of giving or receiving the credit. This provisions stops people from a beneficial set-off when they know the Company is insolvent.

The Act provides this restriction under 553C(2). A person is not entitled under this Section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the Company was insolvent.

In a recent Queensland Case-Morton & Anor v Rexel Electrical Supplies Pty Ltd

( 2015) QDC 49- the key point was that a set-off may not be claimed if at the time of extending credit or receiving credit from the insolvent Company the person had notice of the fact that the Company was insolvent. In this Case the District Court ordered the Creditor to pay the Liquidator a sum representing all invoices (Creditor knew Debtor’s Insolvency) except for one invoice which was allowed to be set-off pursuant to Section 553C of the Act.

Overall, with Section 553C of the Act, it could either reduce the amount of the Preference Payments or fully eliminate the recovery amount for Insolvency Practitioners.