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Focus: Some not so sour grapes. Maybe you can set-off more than you thought?

9 May 2012

In brief: A recent Victorian Supreme Court decision confirms that post-liquidation debts arising from pre-liquidation obligations can be set-off. Partner Michael Quinlan and Lawyer Amy Burton report.

How does it affect you?

  • The decision is a reminder that rights of set-off in relation to transactions do not automatically stop from the date that a company is wound up.
  • A creditor may be able to set off amounts owed to liquidators for post-liquidation debts against amounts owed to the creditor at the date of the winding up if those post-liquidation debts arose out of pre-liquidation obligations.

Background

In 2004 and 2005, Grapecorp Management Pty Ltd (Grapecorp) – a member of the Timbercorp group of companies – entered into management agreements with Timbercorp Securities Limited (TSL) to manage the Bella Vista Vineyard. Grapecorp agreed to harvest and sell the grapes, and pay the proceeds to TSL. In return, TSL agreed to pay management fees to Grapecorp.

On 17 January 2008, Grapecorp sub-contracted its role to Grape Exchange Management Euston Pty Ltd (Grape Exchange). Grape Exchange agreed to pay the net proceeds from the sale of grapes to Grapecorp, in return for a management fee (monthly in arrears) and payment of its direct costs and expenses (monthly in advance).

During the 2009 harvest, administrators and then liquidators were appointed to Grapecorp. On 24 July 2009, TSL, Timbercorp Limited, Align, Grapecorp, Grape Exchange, and Costa Exchange agreed to keep the management agreement on foot; Grape Exchange was to continue to undertake its management obligations.

From mid-August 2009, the liquidators to Grapecorp demanded payment from Grape Exchange of unpaid net proceeds for the 2009 harvest. Grape Exchange had collected $2,831,796 in proceeds from the harvest but had only paid Grapecorp $475,313. Grape Exchange argued that it was entitled to keep the remaining $2,356,483 to fund its costs and expenses, and that it was owed an additional $355,512. Grapecorp disagreed, and issued proceedings to claim the unpaid proceeds.1

During the hearing, Grape Exchange submitted that it should be automatically entitled to set off the amount it owed from the sale of the grapes, against the amount it should have received from Grapecorp for management fees and direct costs and expenses.

The decision

The main issue to be addressed by Justice Sifris in the appeal was whether Grape Exchange was entitled to set off the amount claimed under section 553C of the Corporations Act 2001 (Cth).

Section 553C provides the following:

  1. Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up, and a person who wants to have a debt or claim admitted against the company:
    1. an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and
    2. the sum due from the one party is to be set off against any sum due from the other party; and
    3. only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.
  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.

Grape Exchange argued that there were mutual debts owing between the parties, and that, at the time of giving/receiving credit, Grape Exchange did not have reason to suspect that Grapecorp was insolvent.

Did 'mutual credits, mutual debts or other mutual dealings' exist between the parties?

Justice Sifris held that 'mutual credits, mutual debts or other mutual dealings' should be construed widely. The claims made by the parties arose as a result of the management agreement. This was sufficient evidence to establish that the dealings were 'mutual' in substance.

Justice Sifris did not accept Grapecorp's claim that the moneys owed were trust funds to be on-paid to TSL and so incapable of set-off. His Honour held that there was nothing from the nature of the agreement (eg no requirement to keep the funds in a separate bank account), or the surrounding circumstances that indicated that Grape Exchange was holding the money as trustee. Rather, Grape Exchange received the moneys as agent of Grapecorp.

Which 'debts' can be set-off?

Grape Exchange argued that it should be entitled to claim the benefit of set-off for debts that were contingent at the date that Grapecorp was wound up, not just for debts due at that date. It sought to set-off its direct costs and expenses even though they had been incurred after Grapecorp was wound up.

Justice Sifris held that post-liquidation receipts, payments and debts are capable of set-off provided they were incurred pursuant to obligations that were pre-existing at the date Grapecorp was wound up, and were of a kind that would ultimately mature into pecuniary demands. There were no new or fresh transactions between Grapecorp and Grape Exchange post-liquidation that gave rise to the debts. The debts arose from the management agreement, which was entered in 2008 and which remained on foot after the date of wind-up.

In reaching this decision, Justice Sifris referred to a passage in Community Development Pty Ltd v Engwilda Construction Co (1969) 120 CLR 455 at 459, in which Justice Kitto held:

there must be an existing obligation and out of that obligation a liability on the part of the company to pay a sum of money will arise in a future event, whether it be an event that must happen, or only an event that may happen.

Did Grape Exchange have 'notice' of Grapecorp's insolvency?

Justice Sifris held that Grape Exchange was entitled to the benefit of set-off, unless Grapecorp could demonstrate that Grape Exchange had notice of its insolvency on the date that the management agreement was executed in 2008. The relevant time for considering notice of insolvency is not when the debt becomes payable but when the obligation which arose from it was incurred. There was no indication on the date the parties entered the management agreement that Grapecorp was insolvent. Grape Exchange was entitled to the benefit of set-off.

Comment

While the case does not create new law, it does help to confirm the scope of s553C of the Corporations Act, which is often poorly understood.

Footnotes
  1. Grapecorp Management Pty Ltd (in liq) v Grape Exchange Management Euston Pty Ltd [2012] VSC 112.

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