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Legislation Cited: Bankruptcy Act 1966 (Cth)
Conveyancing Act 1919 (NSW)
Corporations Act 2001 (Cth)
Trustee Act 1925 (NSW)

Cases Cited: Carter Holt Harvey Woodproducts Australia Pty Limited v The Commonwealth of Australia (2019) 268 CLR 524; [2019] HCA 20
Forster v Wilson (1843) 12 M & W 191; 152 ER 1165
Gye v McIntyre (1991) 171 CLR 609; [1991] HCA 60
Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) (2018) 53 WAR 325; [2018] WASCA 163
Hiley v People’s Prudential Assurance Company Limited (In Liquidation) (1938) 60 CLR 468; [1938] ALR 469
Jenner v Morris (1861) 3 De GF & J 45; 45 ER 795
Lane (Trustee), in the matter of Lee (Bankrupt) v Deputy Commissioner of Taxation (2017) 253 FCR 46; [2017] FCA 953
Metal Manufactures Pty Limited v Morton (as liquidator of MJ Woodman Electrical Contractors Pty Limited (in liq) (2023) 275 CLR 100; [2023] HCA 1
Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439
Naaman v Jaken Properties Australia Pty Limited (2025) 281 CLR 635; [2025] HCA 1
Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360; (1979) 4 ACLR 575
Segal v Sharma [2022] NSWSC 496
Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319; [1945] HCA 37
Zen Ridgeway Pty Ltd v Adams [2009] QSC 117; 2 Qd R 298

Texts Cited: Derham, R, Derham on the Law of Set-Off (Oxford University Press, 5th ed, 2025)
Heydon JD and MJ Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis, 8th ed, 2016)
McPherson, B H, “The Insolvent Trading Trust”, in Finn (ed) Essays in Equity (1985)
Mitchell, C, The Law of Subrogation (Clarendon Press, Oxford, 1994)

Category: Consequential orders

Parties: 2018/190679
Phillip Segal (plaintiff)
Praneal Dutt Sharma (first defendant)
Greg Chen (second defendant)
Adam Preiner in his capacity as receiver and manager of the property, assets and undertaking of the SWR Holding Unit Trust (third defendant)
Glenn Ian Livingstone in his capacity as liquidator of South West Radiology Pty Limited (In Liquidation) in its own right and in its capacity as trustee of the SWR Holding Unit Trust (fourth defendant)
2018/381397
Praneal Sharma & Associates Pty Ltd (first plaintiff)
Praneal Dutt Sharma (second plaintiff)
South West Radiology Pty Ltd (Administrator Appointed) (first defendant)
Phillip Segal (second defendant)
Yanyi Pty Ltd (third defendant)
Melita Segal as trustee for Segal Family Trust (fourth defendant)
Rosalina Chen as trustee for Yanmin Trust (fifth defendant)

Representation: 2018/190679
Counsel:
E T Finnane (first defendant)
J Hynes / B Millington (fourth defendant)
No other appearances
Solicitors:
Uther Webster & Evans (first defendant)
Bridges Lawyers (fourth defendant)
2018/381397
Counsel:
E Finnane (plaintiffs)
J Hynes / B Millington (liquidator/receiver) (interested party)
No other appearances
Solicitors:
Uther Webster & Evans (plaintiffs)
Bridges Lawyers (liquidator/receiver) (interested party)

File Number(s): 2018/190679; 2018/381397

Publication restriction: N.A.

JUDGMENT

1. The matters addressed in these reasons concern the tail end of a long and complicated dispute about a radiology business that operated in Liverpool, Sydney. Many aspects of the dispute are addressed by Slattery J in Segal v Sharma [2022] NSWSC 496. The background is commercially and legally complex but it is largely irrelevant for present purposes.

2. The main issue that arises for determination involves an issue about how the set-off provisions in s 553C of the Corporations Act 2001 (Cth) operate when the insolvent company is a trustee.

The context of the dispute

3. I will endeavour to draw out so much of the background circumstances that are relevant to the questions now before the Court. The detail is canvassed more fully in the reasons of Slattery J.

4. South West Radiology Pty Limited (in liquidation) (SWR) was registered on 25 August 2003. Its directors are Dr Praneal Sharma, Dr Phillip Segal and Ms Rosalina Chen. They are also the shareholders of SWR (either personally or through an associated entity) in the ratio of 2:2:1. SWR is the trustee of the SWR Holding Unit Trust (SWR Trust). The unitholders in the SWR Trust are entities or persons associated with Dr Sharma, Dr Segal and Ms Chen and are likewise held in the ratio of 2:2:1.

5. SWR operated the radiology business. It did so as trustee of the SWR Trust. It did not undertake any activities other than as trustee of that trust.

6. Dr Sharma and Dr Segal were once in partnership. Separately, there was once a partnership between Dr Sharma, Dr Segal and Ms Chen. On 20 June 2018, Dr Segal commenced these proceedings, seeking orders for the appointment of receivers over the assets and undertakings of both partnerships. By order of the Court, both partnerships were dissolved on 26 June 2018. Ms Jennifer Nettleton and Ms Cassandra Matthews were appointed as receivers and managers to dispose of the partnerships’ assets, discharge any liabilities and pay the net proceeds into Court.

7. On 11 December 2018, Dr Sharma commenced proceedings to wind up SWR on the ground of insolvency.

8. On 12 December 2018, the directors of SWR resolved to vest the SWR Trust, with 31 January 2019 to be the vesting date.

9. On 10 April 2019, Mr Giles Woodgate was appointed as voluntary administrator of SWR. He held that position until 20 May 2019.

10. The Court made orders on 20 May 2019 to wind up SWR. Mr Adam Preiner was appointed as liquidator. He was also appointed as receiver and manager of the SWR Trust.

11. On 30 July 2019, the Court made orders providing for the payment of the net proceeds of sale of the partnerships’ assets into Court. As at 21 August 2025, approximately $600,000 was held in Court with respect to the Segal/Sharma/Chen partnership and $2.5m with respect to the Segal/Sharma partnership.

12. Mr Preiner was replaced as liquidator of SWR by Mr Glenn Livingstone on 17 September 2019. Mr Livingstone remains the liquidator of SWR. Mr Preiner was not replaced as receiver and manager of the SWR Trust at that time.

13. On 12 August 2020, the Court made orders in these proceedings by which various matters were referred to Dr Rodney Ferrier for inquiry and report, including as to amounts due by each partnership to SWR and amounts due to each partnership by SWR. Dr Ferrier issued a final report on 20 December 2020.

14. Dr Segal sought orders from the Court concerning the adoption of Dr Ferrier’s report. The reasons in Segal v Sharma [2022] NSWSC 496 deal with that application. The Court largely adopted the report.

15. Dr Ferrier’s report relevantly concluded as follows:

16. The Segal/Sharma/Chen partnership owed the SWR Trust the sum of $149,716. That was mainly on account of various expenses paid by SWR Trust on behalf of the Segal/Sharma/Chen partnership in relation to a fit out and other property expenses between 18 August 2014 and 12 March 2018.

17. The SWR Trust owed the Segal/Sharma/Chen partnership the sum of $40,000 for rent due from November 2015 to February 2016 and April 2018.

18. The Segal/Sharma partnership owed the SWR Trust the sum of $484,000. The report does not explain how that debt came to be accrued; it merely notes that the records of both the SWR Trust and the Segal/Sharma partnership indicate that this amount is owed.

19. The SWR Trust owed $382,745 to the Segal/Sharma partnership. This was mainly on account of debts arising from the acquisition of a CT scanner and a MRI machine, and also for unpaid rent.

20. After giving reasons on the application for the adoption of Dr Ferrier’s report, Slattery J made final orders on 27 June 2022. Relevantly, those orders included:

4. The Court declares that:…

(b) The Segal Sharma Chen Partnership owes South West Radiology Pty Ltd (ACN 106 041 007) as trustee for the SWR Holding Unit Trust the sum of $149,716, subject to any set-off that might be determined.

(c) South West Radiology Pty Ltd (ACN 106 041 007) as trustee for the SWR Holding Unit Trust owes the Segal Sharma Chen Partnership the sum of $40,000, subject to any set-off that might be determined…

(f) The Segal Sharma Partnership owes South West Radiology Pty Ltd (ACN 106 041 007) as trustee for the SWR Holding Unit Trust the sum of $484,000, subject to any set-off that might be determined.

(g) South West Radiology Pty Ltd (ACN 106 041 007) as trustee for the SWR Holding Unit Trust owes the Segal Sharma Partnership the sum of $382,745, subject to any set-off that might be determined…

5. Note that the question of whether amounts in Orders 4(b) and 4(c) are set off against each other is reserved, to the intent that question, if not otherwise resolved, be determined, in these or other proceedings in the presence of the parties and the liquidator of South West Radiology Pty Ltd (ACN 106 041 007).

6. Note that the question of whether amounts in Orders 4(f) and 4(g) are set off against each other is reserved, to the intent that question, if not otherwise resolved, be determined, in these or other proceedings in the presence of the parties and the liquidator of South West Radiology Pty Ltd (ACN 106 041 007)...

Mr Livingstone, as the liquidator of SWR, was not a party to the proceedings at the time those orders were made. He was joined on 21 August 2024.

17. Dr Sharma and Mr Livingstone have been unable to resolve the questions of whether:

(a) the amount of $149,716 owed by the Segal/Sharma/Chen partnership to SWR as trustee of the SWR Trust is subject to a set-off with the $40,000 owed by SWR as trustee of the SWR Trust to the Segal/Sharma/Chen partnership; and (b) the amount of $484,000 owed by the Segal/Sharma partnership to SWR as trustee of the SWR Trust is subject to a set-off with the $382,745 owed by SWR as trustee of the SWR Trust to the Segal/Sharma partnership.

18. Dr Sharma contends that, in each case, there is a set-off that occurred by force of s 553C of the Corporations Act 2001 (Cth). Mr Livingstone takes a different view. The resolution of this dispute is the principal matter addressed in these reasons.

19. If there is a set-off, the Segal/Sharma/Chen partnership owed $109,716 to SWR as trustee of the SWR Trust and the Segal/Sharma partnership owed $101,255 to SWR as trustee of the SWR Trust. It was agreed that at least those amounts were owed by the partnerships. Those undisputed amounts have been paid to SWR out of the net proceeds that were paid into Court by the receivers after they realised the partnerships’ remaining assets.

20. Dr Sharma contends that because of a set-off arising from the operation of s 553C, nothing more is owed by either of the partnerships to SWR. He contends that the balance of the funds held by the Court should be dispersed to the partners of each partnership.

21. Mr Livingstone contends that there is no s 553C set-off. He submits that the Segal/Sharma/Chen partnership remains indebted to SWR in the amount of $40,000 and the Segal/Sharma partnership remains indebted to SWR in the amount of $382,745. Those amounts reflect the amounts that would still be owing by each partnership to SWR if there is no set-off. Mr Livingstone contends that those amounts should be paid to SWR.

22. By an interlocutory process filed on 23 December 2025, Mr Livingstone has made an application seeking judicial advice and directions. He seeks orders for the payment of money to SWR out of the funds currently held by the Court following the realisation of the assets of the partnerships. He also seeks orders in relation to his remuneration.

23. By a separate notice of motion filed on 22 December 2025, Dr Sharma seeks orders concerning the payment out of the funds held by the Court following the realisation of the assets of the partnerships. Those orders suppose that there is a set-off. Dr Sharma does not dispute Mr Livingstone’s claim for remuneration.

24. The practical implication from Mr Livingstone’s perspective is that if the money paid into Court is distributed to the partners in accordance with Dr Sharma’s application, then SWR will not receive any further funds. This would have the consequence that there would be no funds available for Mr Livingstone to recover the remuneration he seeks and other creditors, including priority creditors, will not receive a dividend by virtue of the money currently held by the Court. While this practical implication is no doubt a matter of importance to Mr Livingstone and the creditors, it is irrelevant to the matters that I must determine. Section 553C does not confer any discretion.

Section 553C

25. Section 553C of the Corporations Act provides:

(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:

(a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and

(b) the sum due from the one party is to be set off against any sum due from the other party; and

(c) 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.

There was no suggestion by either Dr Sharma or Mr Livingstone that a set-off is not available by reason of the exception outlined in s 553C(2).

26. The operation of s 553C has been considered in various cases, including recently by the High Court in Metal Manufactures Pty Limited v Morton (as liquidator of MJ Woodman Electrical Contractors Pty L**imited (in liq) (2023) 275 CLR 100; [2023] HCA 1. Another helpful decision is Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) (2018) 53 WAR 325; [2018] WASCA 163.

27. In Metal Manufactures at [18]-[19], the plurality noted two key features of s 553C. Both features are important in this case.

28. The first key feature is s 553C’s temporal element. For the purposes of assessing the “mutual credits, mutual debts or other mutual dealings”, the relevant time to make the assessment is the time of winding up. Division 1A of Part 5.6 of the Corporations Act concerns the time when a winding up is taken to begin. The effect of s 513A(b) and s 513C(b) is that if at the time a company is wound up in insolvency under s 459A the company was under administration, the winding up is taken to have commenced on the day the administration began. This means that the winding up of SWR is taken to have commenced on 10 April 2019. Section 553C applies in respect of mutual credits, mutual debts or other mutual dealings extant at that date.

29. The second key feature is mutuality. In Metal Manufactures, the plurality accepted (at [19]) that the statement of principle expressed by the Court in Gye v McIntyre (1991) 171 CLR 609; [1991] HCA 60 at 623 in the context of s 86 of the Bankruptcy Act 1966 (Cth) expressed the three aspects of a “mutual dealing”:

The first is that the credits, the debts, or the claims arising from other dealings be between the same persons. The second is that the benefit or burden of them lie in the same interests. In determining whether credits, debts or claims arising from other dealings are between the same persons and in the same interests, it is the equitable or beneficial interests of the parties which must be considered: see, eg, Hiley. The third requirement of mutuality is that the credits, debts, or claims arising from other dealings must be commensurable for the purposes of set-off under the section. That means that they must ultimately sound in money.

The plurality also quoted the following passage from Gye v Mcintyre at 618-619 (at [16]):

It has often been pointed out that the object of set-off in bankruptcy is, in the words of Parke B in Forster v Wilson, ‘to do substantial justice between the parties, where a debt is really due from the bankrupt to the debtor to his estate’. Where there are genuine mutual debts, credits or other dealings, it would be unjust if the trustee in bankruptcy could insist upon having 100 cents in the dollar upon the whole of the debt owed to the bankrupt but at the same time insist that the bankrupt’s debtor must be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him. It was to prevent such injustice that the ‘mutual credits’ and ‘mutual debts’, and later ‘mutual dealings’, provisions were introduced into bankruptcy legislation. (footnote omitted)

It is this same perceived injustice that lies behind s 553C.

30. The effect of a set-off in the context of s 553C is that less becomes available for distribution than would otherwise have been the case. The creditor who has the benefit of the set-off effectively secures a financial advantage over other creditors to the assets of the insolvent company, and secures that advantage because the person is also a debtor. As a matter of substance, it might be thought that this creditor gets a first priority over the assets of the insolvent company. The priority lies in respect of that amount owing by the insolvent company to the creditor that is also owed by that creditor as a debtor to the insolvent company. With the set-off, the creditor effectively gets 100 cents in the dollar from the insolvent company in respect the amount of money that the creditor also happens to owe to the insolvent company as a debtor. Without the set-off, the creditor/debtor will have to pay the whole if its debt to the insolvent company (swelling the assets available for distribution) and then lodge a proof of debt in respect of the whole amount owed to it, and it will then recover its share (if any) of the pool of assets available for distribution on a pari passu basis (like other creditors).

Is there mutuality in this case?

31. In order to determine whether there is any set-off under s 553C in this case, it is necessary to focus on the interests of the parties, including their equitable or beneficial interests, as at 10 April 2019.

32. A complexity that arises is that SWR was the trustee of the SWR Trust and undertook all of its trading and commercial activities in that capacity. Counsel for Dr Sharma informed me that he had searched for but was unable to locate any authorities where the issue of mutuality has arisen, in the context of s 553C, where the insolvent company is a corporate trustee.

33. In order to understand how the s 553C set-off operates in the context of a trust, it is useful to consider what Parke B stated in Forster v Wilson (1843) 12 M & W 191; 152 ER 1165 (at 203-204), beyond what was quoted in Gye v McIntyre (see above):

But, under the bankruptcy statutes, the mutual credit clause has not been so construed. The object of this clause … is not to avoid cross actions, for none would like against assignees, and one against the bankrupt would be unavailing, but to do substantial justice between the parties, where a debt is really due from the bankrupt to the debtor to his estate; and the Court of King’s Bench, in construing this clause … have held that it did not authorize a set‐off, where the debt, though legally due to the debtor from the bankrupt, was really due to him as a trustee for another, and, though recoverable in a cross action, would not have been recovered for his own benefit…

The words “would not have been recovered for his own benefit” in this passage were emphasised in Hamersley Iron v Forge at [74].

34. In Hiley v People’s Prudential Assurance Company Limited (I**n Liquidation) (1938) 60 CLR 468; [1938] ALR 469 (another decision cited in Gye v McIntyre in a passage quoted in Metal Manufactures), Dixon J made observations that are consistent with this passage from Forster v Wilson as follows (at 497):

In the second place, the equitable or beneficial interest of the parties in the mutual debts, credits or dealings must be considered, and not merely the dry legal right. A set-off will be allowed between a debt owing by C to a liquidating company and a debt owing by it to B, if B as creditor holds the chose in action as bare trustee for C. Correspondingly, a set-off will be refused between a debt owing by B to a liquidating company and a debt owing by it to B, if B as creditor holds the chose in action as bare trustee for C — cf. Bailey v Finch, (1871) LR 7 QB 34; Bailey v Johnson, (1871) LR 6 Ex 279 and LR 7 Ex 263; Ex parte Morier, (1879) 12 Ch D 491 at p 496; Mathieson's Trustee v Burrup, Mathieson and Co ., [1927] 1 Ch 562 at pp 568–9.

This passage identifies two different circumstances, which can be drawn out as follows:

1. C owes a debt to an insolvent company. The insolvent company owes a debt to B. B holds that debt as bare trustee for C. Set-off is permitted. There is mutuality between the insolvent company and C. That is because C owes a debt to the insolvent company and C also has (in equity) the benefit of the debt owed by the insolvent company to B.
2. B owes a debt to an insolvent company. The insolvent company owes a debt to B. B holds that debt as bare trustee for C. Set-off is not permitted. There is no mutuality between the insolvent company and B. That is because while B owes a debt to the insolvent company, it is C who has the benefit of the debt owed by the insolvent company to B.

In both circumstances, the creditor of the insolvent company holds the debt as trustee in favour of the beneficiary. The difference between the two circumstances is that in the first case, the beneficiary is the debtor to the insolvent company (hence mutuality); whereas in the second case, the trustee is the debtor to the insolvent company (no mutuality). That is, the question of mutuality is to be determined by paying attention to the equitable or beneficial interests.

35. Neither of the two circumstances considered by Dixon J in Hiley matches the circumstances of this case. That is at least because here the trustee is the insolvent company, rather than the creditor. The circumstances in this case are closer to the following: C owes a debt to an insolvent company, which is held by the insolvent company as bare trustee for B. The insolvent company owes a debt to C. It might be thought that there would be no mutuality because while the insolvent company owes a debt to C, the insolvent company holds the benefit of the debt owed to it by C for the benefit of B. However, an issue arises about whether this analysis changes because the insolvent company as trustee may have a right of exoneration or indemnity from the trust assets in respect of the debt it owes to C, and C might have a right of subrogation in respect of the right of exoneration or indemnity. That raises the possibility that there is mutuality lying between C and B.

36. In order to draw out this issue, it is best to consider the actual facts of this case. The issue of mutuality requires attention to be paid to the equitable and beneficial interests, which is best done by reference to concrete facts rather than in the abstract.

37. As to the debts owed by the Segal/Sharma/Chen partnership and the Segal/Sharma partnership to SWR, those debts, reflected in choses in action, were held by SWR on trust for the beneficiaries of the SWR Trust. As at the relevant date, 10 April 2019, the vesting date of the SWR Trust had passed. By clause 11.1 of the trust deed, the trusts created by the deed had been determined. SWR was obliged to call in any of the investments and property constituting the trust fund and divide the proceeds among the unitholders (clause 11.2). That has not occurred. There has not been any transfer of debts in conformity with s 12 of the Conveyancing Act 1919 (NSW). Notwithstanding that in one sense the trust had vested, there can be no doubt that as at 10 April 2019, in so far as the partnerships had debts in law owed to SWR, SWR held the benefit of those debts on trust for the unitholders of the SWR Trust.

38. As to the debts owed by SWR to the Segal/Sharma/Chen partnership and the Segal/Sharma partnership, SWR was (as at 10 April 2019) personally liable for those debts, notwithstanding that the debts were incurred in fulfilling the role as trustee of the SWR Trust: see Carter Holt Harvey Woodproducts Australia Pty Limited v The Commonwealth of Australia (2019) 268 CLR 524; [2019] HCA 20 at [24] (Kiefel CJ, Keane and Edelman JJ), [129] (Gordon J). A liability incurred by SWR, even as a named trustee, was not a liability of the trust.

39. There was no suggestion that SWR incurred the debts to the partnerships otherwise than in the proper exercise of its duties as trustee of the SWR Trust. At the time SWR incurred the various debts to the partnerships, it had a power of exoneration: Naaman v Jaken Properties Australia Pty L**imited (2025) 281 CLR 635; [2025] HCA 1 at [86]-[87] (Gordon, Edelman and Steward JJ). That was a power to use the trust funds to discharge the debts. The power derived (at least) from the terms of the trust deed (see clauses 15 to 17). Section 59(4) of the Trustee Act 1925 (NSW) also conferred a right to pay out of the trust property. Notwithstanding that by 10 April 2019 the vesting date of the trust had passed, SWR retained the power to use trust funds to discharge the debts owing to the partnerships. The obligation imposed on SWR by clause 11.2 of the trust deed to call in, and convert into money, the investments and property constituting the trust fund expressly required SWR to do so making “all proper provision for liabilities”. Thus, as at 10 April 2019, SWR had a power of exoneration from the trust assets in respect of the debts that it owed to the Segal/Sharma/Chen partnership and the Segal/Sharma partnership. That right generates an equitable proprietary interest in relation to the trust assets: Naaman v Jaken Properties at [88].

40. As creditors, the partnerships could have looked to SWR directly to recover the debts but they may have been able to enforce the power of exoneration by subrogation to SWR’s rights: Carter Holt Harvey at [34]; Naaman v Jaken Properties at [56]. This claim can be described as “an indirect claim against the assets by way of subrogation to the lien or right of indemnity of the trustee”: Jacobs’ Law of Trusts in Australia (8th ed) at [21-12]; see also Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319; [1945] HCA 37 at 328 (Latham CJ), 336 (Dixon J). It has been described as “a means of giving the business creditors a disguised direct action against the trust estate”: Mitchell, C, The Law of Subrogation at 156.

41. The question that arises is whether, as at 10 April 2019, there was mutuality arising from:

42. the debts that the partnerships owed to SWR, which SWR held as trustee for the beneficiary unitholders; and

43. the debts owed by SWR to the partnerships, in respect of which the partnerships may have had the benefit of subrogation in respect of SWR’s powers of indemnity against the trust assets.

There was no mutuality between the partnerships and SWR, because SWR held the debts owed to it on trust for the unitholders. However, the possibility of subrogation gives rise to the possibility of mutuality lying between the partnerships and the beneficiary unitholders.

42. There is some authority for the proposition that subrogation will establish mutuality where it would otherwise not otherwise exist. In Jenner v Morris (1861) 3 De Gf. & J. 45; 45 ER 795, the plaintiff deserted his wife without making any provision for her. There being no imputation of misconduct against her, any person who supplied her with necessaries had a right in equity to sue the husband for the cost of those necessaries. Although not referred to as subrogation in terms, that was the character of the right to sue the husband. The defendant in that case supplied the wife with necessaries, thus giving rise to a right to stand in the shoes of the wife and sue the plaintiff. The defendant also separately owed a debt to the plaintiff. A set-off between the amounts was recognised. See further Derham, R, Derham on the Law of Set-Off (5th ed) at [17.176].

43. The decision in Jenner v Morris is not determinative. The subrogation in that case was of a different character to any subrogation that the partnerships may have in this case.

44. In the 5th edition of Derham on the Law of Set-Off, it is said at [17.139] that in the context of a debt owed by a trust, “the circumstances in which the subrogation right may be enforced are not entirely clear” (citing McPherson, B H, “The insolvent trading trust” in Finn (ed) Essays in Equity (1985), 142, 151). The author refers to the decision in Octavo Investments Pty L**td v Knight (1979) 144 CLR 360; (1979) 4 ACLR 575 at 370. In that case it was said (at 367-368 per Stephen, Mason, Aickin and Wilson JJ, footnotes omitted):

The creditors of the trustee have limited rights with respect to the trust assets. The assets may not be taken in execution (Savage v Union Bank of Australia Ltd; Re Morgan; Pillgrem v Pillgrem but in the event of the trustee's bankruptcy the creditors will be subrogated to the beneficial interest enjoyed by the trustee: Vacuum Oil Co Pty Ltd v Wiltshire; Ex parte Garland.

These principles lead naturally to the conclusion that the beneficial interests which, by subrogation, the creditors whose claims arise from the carrying on of the business have in the assets held by a bankrupt trustee form part of the property of the bankrupt divisible amongst his creditors…

It was further stated (at 370):

The fact that the trust property itself cannot be taken in execution by the creditors of the trustee is not to the point. Those creditors are nevertheless subrogated to the rights of the trustee in relation to that property, and in the event of the trustee becoming bankrupt, it is those rights which are to be realized in their favour.

These passages suggest that the subrogation occurs upon the bankruptcy. There may be a separate question about whether there was some pre-existing right of subrogation.

45. In Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439, Giles J expressed the view that the creditor is subrogated to the trustee’s rights and can gain access to the trust property “at least where the trustee can not satisfy the liability” (at 464). In Zen Ridgeway Pty Ltd v Adams [2009] QSC 117; 2 Qd R 298, M A Wilson J observed (at [13], footnote omitted):

However, the right of access to the trust assets by way of subrogation is inchoate unless the trustee is insolvent or it is otherwise reasonable to assume that obtaining a judgment against the trustee would be pointless…

See also Lane (Trustee), in the matter of Lee (Bankrupt) v D**eputy Commissioner of Taxation (2017) 253 FCR 46; [2017] FCA 953 at [62] (Derrington J).

46. Although I am unaided by any authority directly on point, I conclude that there was a lack of mutuality in the present case. At the time immediately prior to the winding up, the relevant dealings should be analysed in the following way:

47. In so far as SWR was owed money by the partnerships, that was a dealing in favour of the beneficiary unitholders.

48. In so far as SWR owed money to the partnerships, those were debts of SWR. SWR had a power of exoneration from the trust assets. Each of the partnerships could enforce that power by subrogation to SWR’s rights. However, at the time immediately prior to the winding up of SWR, the partnerships had inchoate rights to have indirect recourse to the trust assets in lieu of direct recourse against SWR.

There is an absence of mutuality because there is not relevantly a claim that existed in favour of either of the partnerships against the beneficiary unitholders. The inchoate and indirect claim against the trust assets was not sufficiently a claim engaging the beneficiary unitholders. At the time of the winding up, the claims of the partnerships were properly characterised as claims against SWR, not as claims against the beneficiary unitholders. That characterisation may well have been different upon the winding up of SWR – but that is not the relevant time.

Conclusion

47. Section 553C has not been engaged. Specifically:

(a) the amount of $149,716 owed by the Segal/Sharma/Chen partnership to SWR as trustee of the SWR Trust is not subject to a set-off against the $40,000 owed by SWR to the Segal/Sharma/Chen partnership; and (b) the amount of $484,000 owed by the Segal/Sharma partnership to SWR as trustee of the SWR Trust is not subject to a set-off against the $382,745 owed by SWR to the Segal/Sharma partnership.

48. With the assistance of these reasons, I expect the parties should be in a position to provide proposed short minutes of order to give effect to them and to dispose of the two applications before the Court.

Orders

49. The parties are to provide proposed short minutes of order (preferably agreed) to the Associate of Brereton J by 4pm on 22 May 2026.

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