The Court of Appeal determined that a set-off arrangement entered into by a company shortly before liquidation involved a "payment of money" that could be set aside by the liquidator as a transaction having preferential effect under the Companies Act 1993.
This is a curious decision and one that should concern all those whose businesses rely on the enforceability of contractual set-off (such as banks and derivatives counterparties). An application for leave to appeal to the Supreme Court has been made.
Trans Otway Limited and Newman Carrying Limited agreed that the companies would set off the debts that each owed to the other. These debts included $95,000 owed by Newman Carrying to Trans Otway for freight services and the same amount owed by Trans Otway to Newman Carrying by way of an agreement for the purchase of Newman Carrying's client list. Newman Carrying went into liquidation shortly after the set-off agreement was entered into, and the liquidators sought to recover $95,000 from Trans Otway.
Under section 292 of the Companies Act 1993, a liquidator may set aside a "payment of money" as a transaction having preferential effect if it:
The issue for the Court of Appeal in this casewas whether the set-off arrangements involved a "payment of money" for the purpose of section 292(e). The Court found that there is no requirement in this respect for the physical passing of a cash or cheque, and payment may be effected by way of set-off.
The Court stated that it was not required to determine whether the set-off arrangement enabled Trans Otway to receive more towards satisfaction of the debt owed by Newman Carrying than Trans Otway would have received in the liquidation. However, the Court nonetheless went on to say that "Newman's 'payment' of its $95,000 debt to Trans Otway clearly enabled Trans Otway to receive more towards satisfaction of that debt than Trans Otway would otherwise have received or be likely to have received in the liquidation. That is self-evident. The debt was paid in full. Clearly, if the debt had not been paid, Trans Otway would now be proving in the liquidation and would receive in respect of that debt a very much lower figure".
Consequently, the amount owed by Newman Carrying that had been set off by Trans Otway could potentially be clawed back by the liquidators.
This decision appears to conflict with well-established authority that a creditor will not be regarded as having been "preferred" if it is merely put in the same position that it would have been in had the mandatory liquidation set-off rule applied. That rule is set out in section 310 of the Companies Act 1993 and would have applied to set off the debts of Trans Otway and Newman Carrying for the purposes of any claim by Trans Otway in the liquidation.
Also, there seems to have been a good argument for saying that the set-off agreement was a "bilateral netting agreement" for the purposes of section 310A of the Companies Act 1993. If that were the case, only the "netted balance" (zero in this case) would have been claimable by the liquidators from Trans Otway. However, the argument seems not to have been considered by the Court of Appeal.
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