When a liquidator brings a claim for an unfair preference against a company or individual, there are a number of defences available to them.
In our earlier two articles we discussed the good faith defence and the running account defence. Another commonly used defence is the defence of set off.
Although the law in this area is not settled, the below outlines an arguable position.
What is the set off defence?
If a liquidator has brought a claim against you for an unfair preference, then it is arguable that any amounts the company in liquidation owes to you should be set off against the amounts claimed to be an unfair preference.
What do you need to prove to successfully use this defence?
Elements to prove a set off defence include:
- there are mutual credits, mutual debts or other mutual dealings between an insolvent company and a creditor;
- the creditor wants to have a debt or claim admitted against the company; and
- the creditor did not have notice of the fact that the company was insolvent (this is a different test to a suspicion of insolvency).
For a liquidator to defeat a set off claim, when is the relevant knowledge of insolvency of the creditor?
The relevant time used in determining knowledge of insolvency for the purpose of set off is the time at which credit is received from the company (often at the time of issuing invoices relating to the outstanding debt, but not always).
If you have a claim against you for an unfair preference, always keep in mind any offsetting claim you may have. It can potentially decrease the claim against you significantly or in some cases completely.