Creditors Claiming Set-Offs to Preference Claims

Last reviewed and updated: April 2026

On 5 March 2015 the District Court handed down its decision in the case of Morton v. Rexel Electrical Supplies Pty Ltd [2015] QDC 49 (Morton) whereby it held that a creditor who is required to pay back into the liquidation an unfair preference payment made to it pursuant to section 588FE of the Corporations Act 2001 (Cth) (the Act) may claim a set-off against debts owed to it by the liquidated company pursuant to section 553C. This decision has significant practical implications for both creditors and liquidators involved in insolvency administrations in Queensland and across Australia.

What Is an Unfair Preference Claim?

An unfair preference claim arises under section 588FE of the Corporations Act 2001 (Cth) and allows a liquidator to recover payments made by a company to a creditor during the six months immediately before the relevant date (broadly, the date the company enters external administration).

To establish an unfair preference, a liquidator must prove:

1. The transaction occurred during the six-month relation-back period
2. The company was insolvent at the time of the transaction
3. The creditor received more than they would have received in a winding up on a pari passu (equal ranking) basis

The purpose of the unfair preference regime is to prevent one creditor from obtaining an advantage over others in the period leading up to insolvency. A payment to a creditor that reduces what would otherwise be available for the general body of creditors is regarded as preferring that creditor, which the law treats as unfair to the remaining unsecured creditors.

The amounts at stake can be substantial. Where a company has been making regular payments to a supplier in the months before collapse, the entire quantum of those payments may be recoverable by the liquidator, leaving the creditor significantly out of pocket.

What Is a Set-Off Under Section 553C?

Section 553C of the Corporations Act 2001 (Cth) provides a mechanism for creditors to offset mutual debts against amounts they are otherwise required to repay into the liquidation. In broad terms, where there are mutual credits, mutual debts, or other mutual dealings between an insolvent company and a creditor, an account is taken of what is due from each party to the other. The balance of that account is then either provable as a debt against the company or payable to the company, as the case may be.

The set-off under section 553C is not available where, at the time of giving credit to the insolvent company, the creditor had notice of the fact that the company was insolvent. This limitation is critical: a creditor who knew the company was insolvent when it extended credit cannot later claim the benefit of the set-off.

The facts of Morton involved a Plant Mixing Company (Machinery) who engaged Rexel Electrical Supplies (Rexel) to provide electrical equipment and installation. Rexel provided the goods and rendered invoices totalling $242,982.86. Between 26 March 2012 and 6 June 2014, Machinery paid Rexel approximately $197,469.16.

The liquidators of Machinery sought repayment of the $197,469.16 as an unfair preference payment under section 588FE of the Act. By way of defence, Rexel claimed a set-off in the agreed amount of $92,323.88, representing amounts Machinery owed Rexel for goods and services not paid for. The Court found that Machinery was insolvent during the times the payments were made, and those payments were unfair preference payments. Critically, the Court also held that Rexel was entitled to claim the set-off under section 553C against the liquidator’s preference claim.

How Does Section 553C Set-Off Apply to Preference Claims?

The interaction between the unfair preference regime (Part 5.7B of the Act) and the set-off provision (section 553C) is legally complex and was not fully settled before Morton.

In Morton, the Court considered Re Parker (1997) 150 ALR 92, which was later considered in Buzzle Operations Pty Ltd (in liq) v Apple Computers Australia (2011) 81 NSWLR 47 (Buzzle), which held that set-offs are available against voidable transactions under sections 588FA to 588FF of the Act (which includes unfair preference payments). The liquidators in Morton argued that allowing a set-off defence frustrates the purpose of the unfair preference provisions by permitting a creditor to reduce the recoverable amount.

The Court rejected this argument. The practical effect of the ruling is that the amount a liquidator actually recovers from a creditor on an unfair preference claim is reduced by the amount of any valid section 553C set-off. For creditors, this can be a powerful tool: if the company owed the creditor significant amounts at the time it was wound up, the creditor may be able to offset those debts against the preference claim, dramatically reducing or even eliminating the net amount payable to the liquidator.

It should be noted that the Morton decision was a District Court decision and the authorities it relied upon were not determinative single judge decisions. The matter was heard on appeal, but the set-off issue was not revisited on appeal. Whether a superior court would uphold the section 553C set-off defence after full consideration remains to be tested.

The Good Faith Defence (Section 588FG)

Separate from the section 553C set-off defence, creditors facing an unfair preference claim may rely on the good faith defence under section 588FG of the Act. This defence requires the creditor to establish:

1. No reasonable grounds to suspect insolvency: The creditor did not have, and a reasonable person in the creditor’s position would not have had, reasonable grounds to suspect that the company was insolvent at the time of the transaction.
2. Valuable consideration: The creditor provided valuable consideration under the transaction (meaning the payment was for goods, services, or another genuine commercial exchange, not a gift).
3. Honest transaction: The creditor acted in good faith throughout.

The good faith defence and the section 553C set-off defence operate independently. A creditor may be entitled to rely on one, both, or neither, depending on the circumstances of the particular transactions involved. A combined strategy that pleads both defences (where the facts support them) is often the most effective approach.

Strategic Implications: Creditors vs Liquidators

The availability of the section 553C set-off defence has important strategic implications for both creditors and liquidators.

For Creditors

Creditors who receive a preference demand should immediately assess whether the company owed them money at the time it entered liquidation. If so, the set-off amount can reduce the net preference liability significantly. Creditors should also consider whether the running account principle applies: where a creditor and company maintained a running account (a continuous series of transactions), the “preference” may be calculated on a net basis rather than by reference to individual payments, which can dramatically reduce the exposure.

Early engagement of legal advisers is critical. Evidence to support a set-off claim (such as unpaid invoices, statements of account, and delivery records) should be gathered and preserved as soon as a demand is received.

For Liquidators

Liquidators must account for the possibility that creditors will raise set-off defences when assessing the likely return from preference recoveries. A preference claim that appears to be worth $200,000 on its face may yield significantly less if the creditor has a legitimate set-off of $80,000 or more. Liquidators who fail to anticipate this are at risk of reporting inflated recoveries to creditors.

Liquidators may contest a set-off claim on the basis that the creditor had notice of the company’s insolvency at the time credit was extended. Documentary evidence of the creditor’s state of knowledge at the relevant time is central to this issue.

What to Do If a Liquidator Comes After You

If you receive a preference demand from a liquidator, the following steps are recommended:

1. Do not ignore the demand: Preference demands typically set a response deadline. Failing to respond can lead to court proceedings being commenced against you.
2. Seek legal advice immediately: An experienced insolvency lawyer can assess your exposure, identify available defences, and advise on the most effective response strategy.
3. Gather all relevant documents: Collect all invoices, statements of account, delivery records, and correspondence with the insolvent company. This evidence is essential for assessing both the set-off and good faith defences.
4. Assess whether a set-off applies: Review what the company owed you at the time it entered liquidation. Any amounts owing to you may be available as a set-off against the preference claim.
5. Consider the good faith defence: Review your knowledge of the company’s financial position at the time each payment was made. If you had no reasonable grounds to suspect insolvency, the good faith defence may be available.
6. Respond within the required timeframe: Whether you dispute the claim or intend to negotiate a resolution, respond in writing before any deadline expires.

Frequently Asked Questions

What is an unfair preference claim in liquidation?

An unfair preference claim is a claim by a liquidator to recover payments made by an insolvent company to a creditor in the six months before the company entered liquidation, where the creditor received more than they would have in a winding up on an equal-ranking basis. The claim is made under section 588FE of the Corporations Act 2001 (Cth).

Can creditors claim a set-off against a liquidator’s preference claim?

Yes. The District Court in Morton v. Rexel confirmed that a creditor can claim a set-off under section 553C of the Corporations Act 2001 (Cth) against an unfair preference claim. The set-off reduces the amount the creditor must repay by the amount the insolvent company owed the creditor, subject to the creditor not having had notice of the company’s insolvency when credit was extended.

What is the Morton v Rexel decision?

Morton v. Rexel Electrical Supplies Pty Ltd [2015] QDC 49 is a Queensland District Court decision handed down on 5 March 2015. It confirmed that a creditor required to repay an unfair preference can claim a set-off under section 553C of the Corporations Act for debts owed to it by the liquidated company, reducing the net amount payable to the liquidator.

How does section 553C of the Corporations Act work?

Section 553C requires an accounting of mutual credits, debts, and dealings between an insolvent company and a creditor. The balance is either a provable debt against the company or an amount payable to the liquidator. A creditor cannot claim the set-off if they had notice of the company’s insolvency when they extended credit.

What should I do if a liquidator sends me an unfair preference demand?

Act immediately. Seek legal advice, gather all relevant documents (invoices, account statements, payment records), and assess whether the set-off or good faith defence applies to your situation. Do not ignore the demand — failure to respond can result in court proceedings being filed against you.

If you have received a preference demand or need advice on insolvency-related legal matters, contact Boss Lawyers to speak with our insolvency lawyers Brisbane businesses and creditors trust for clear, strategic advice.

This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.

Written by Mark Harley, Principal Solicitor, Boss Lawyers.