You can set-off your legal debt of $1 million, despite having actual notice of insolvency, according to a recent NSW Supreme Court case.
Justice White was at pains to explain his “disquiet” in ruling in such a way, commenting that the case must be decided on a “most unsatisfactory basis”.
The reason for His Honour’s displeasure involved the way the Liquidators case had been pleaded by his legal team.
The Liquidator was pursuing a company director for unpaid loans totalling more than $1 million. The director raised set-off by saying that he was owed more than $1.4 million by the company (**this involved an assignment of debts into a 50% constructive trust).
To set-off a debt (excluding contractual or equitable set-off), you must meet the requirements under section 553C Corporations Act.
One of these requirements is that you can’t set-off, if at the time you were owed the money you had actual notice of the company’s insolvency (section 553C(2) Corporations Act).
But in this case, the liquidators legal team didn’t plead 553C(2), meaning they couldn’t rely upon that requirement at trial.
His Honour even stated in the case that he believed the director had actual notice of insolvency.
This is an expensive illustration of why pleadings are so important!