When Set-Off Meets Fairness: Insights from Metal Manufactures v Morton
Home › Case Studies › Case Law Library › Commercial & Business Cases › Debt recovery & Insolvency › Metal Manufactures Pty Limited v Morton [2023] HCA 1
Published: 15 November 2025 | Reviewed: 15 November 2025
(3-minute read)
Case Summary - Facts, Reasoning and Principles
Metal Manufactures Pty Limited v Morton [2023] HCA 1 addressed a deceptively simple question: can a creditor who received an unfair preference use statutory set-off (s 553C) to reduce or eliminate the liquidator’s claim to claw that money back?
Metal Manufactures had received two payments ($50,000 and $140,000) during the relation-back period from MJ Woodman Electrical Contractors. The liquidator accepted the company still owed Metal Manufactures a separate debt of $194,727.23. If set-off were available, Metal Manufactures could reduce its liability to zero.
The High Court unanimously held the answer is no.
The Court’s reasoning turned on five key features of the statutory liquidation scheme:
The liquidator’s power to gather assets belongs to the statutory regime, not to the pre-insolvency commercial relationship.
Only debts and claims arising from circumstances before winding up are provable (s 553).
Set-off only operates on mutual dealings between the same parties in the same interests, existing before winding up begins.
A liquidator’s right under s 588FF to recover unfair preferences is a new statutory right, created only after the winding up.
Allowing set-off would distort the pari passu distribution system, letting a preferred creditor retain the very advantage preference law exists to correct.
The appellant argued that the liquidator’s future right to sue was a “contingent liability” capable of mutuality. The Court rejected this: no pre-existing obligation existed between the parties. The liquidator’s recovery right was not mutual, not reciprocal, and not held for the same beneficial purpose. Its object is the equal distribution of assets for all creditors.
Allowing set-off would let a preferred creditor “use each dollar owed to it to neutralise each dollar of preference liability,” undermining the statutory purpose of unfair-preference law. The appeal was dismissed.
Why This Judgment Still Matters Today
Beyond its insolvency context, Metal Manufactures v Morton reinforces a deeper commercial insight: fairness depends on the structure of the relationship, not on isolated transactions.
The High Court emphasised three enduring principles:
Fairness cannot be manufactured by selective accounting.
The Court rejected attempts to use technical set-off rules to control the narrative of who owes what.Financial dealings must be evaluated in context, not in isolation.
A creditor’s attempt to offset its preference liability ignored the broader statutory purpose.Power over money creates vulnerability.
When one party controls the flow of funds, the other becomes exposed in ways that are not immediately visible.
These points apply broadly across business and professional relationships. Modern commercial arrangements often involve back-and-forth payments, rolling accounts, or circumstances where one party holds superior information or influence over how funds move. Without structural safeguards, this creates risk - even where everyone believes they are acting properly.
The Court’s message is quiet but clear: fairness cannot depend on unilateral control of money.
How to Avoid the Same Trap - Escrow Safeguards as Structural Fairness
Within Clean Law’s client-protection model, the safeguard that mirrors this case most closely is Escrow Safeguards (Rank #2).
Just as the High Court refused to let a creditor use its own position to control the financial outcome of insolvency recoveries, escrow prevents the same type of unilateral control arising in legal practice.
In the traditional model, a client deposits funds into a lawyer’s trust account. The lawyer decides when to draw on those funds. The client, a layperson without specialist knowledge, must simply trust the process. The power imbalance is baked into the structure, not the character of the people involved.
Escrow safeguards rebalance that structure:
No one person controls the movement of funds.
Money cannot leave escrow without the client’s informed approval.Two-lawyer oversight protects against conflicts.
One lawyer advocates; the other safeguards the process and financial integrity.The full context is visible.
Clients see the entire financial picture, not selective snapshots.
This resonates with the High Court’s reasoning. The Court rejected set-off because it would distort the fairness of distribution. Escrow systems prevent comparable distortions in legal services, ensuring no lawyer can “re-frame” the financial relationship by drawing funds unilaterally.
The principle is simple: when you protect the structure, you protect the person.
Reflection
The High Court’s judgment reminds us that fairness is never accidental, it is engineered. Whether in insolvency or legal services, people rely on the integrity of the system, not the discretion of individuals. Escrow safeguards give clients what the law gives creditors: clarity, balance, and shared control.
To see how Clean Law turns the fairness principles in Metal Manufactures v Morton into everyday client protection, explore how escrow safeguards keep financial control transparent and shared.
Request a Confidential Consultation
If you’re navigating an insolvency issue or want clarity on how these safeguards apply to your matter, you can request a confidential call here.
By Nicky Wang
Principal Solicitor
Legal Liaison Ltd (trading as Clean Law)
Prepared in accordance with public-interest governance,
annual Law Society trust-account audits, and ACNC-reported standards.
Disclaimer: This page is intended to provide general information only and is not legal advice. The contents may not reflect the most current legal developments and do not take into account your individual circumstances. You should not act or refrain from acting on the basis of this information without obtaining legal advice tailored to your situation.
