The Case
Citation: Segal v Sharma; In the matter of South West Radiology Pty Ltd (No 3) [2026] NSWSC 543
Court: Supreme Court of New South Wales
Judges: Brereton J
Date of judgment: 18 May 2026
Key takeaways
- Where a company trades solely as trustee, statutory insolvency set-off under s 553C will not automatically net cross-claims between that company and its counterparties.
- Mutuality may be absent because the debts owed to the trustee company are held on trust for the beneficiary unitholders, not beneficially by the company itself.
- A creditor’s right of subrogation to the trustee’s power of exoneration will not necessarily cure the absence of mutuality, at least not as at the date winding up commences.
- Timing is outcome-determinative: mutuality is assessed at the statutory snapshot date (the commencement of winding up), not at any later point.
Case background
South West Radiology Pty Ltd (in liquidation) (‘SWR’) was the corporate trustee of the SWR Holding Unit Trust. It conducted a radiology business in Liverpool, Sydney, and undertook no activities other than in its capacity as trustee. Its three directors, Dr Sharma, Dr Segal and Ms Chen, were also unitholders in proportions of 2 : 2 : 1.
Two separate partnerships existed between the principals: a Segal/Sharma partnership and a three-way Segal/Sharma/Chen partnership. Both were dissolved by court order in June 2018, with receivers appointed. SWR was wound up on 20 May 2019, with the winding up taken to have commenced on 10 April 2019 (being the date voluntary administration began) for the purposes of s 553C.
An earlier referral to Dr Rodney Ferrier yielded a report adopted by Slattery J in Segal v Sharma [2022] NSWSC 496. The report established four debts (see the table below for illustration):
Segal/Sharma/Chen partnership | Segal/Sharma partnership |
Owed to SWR (as trustee): $149,716 Owed by SWR (as trustee): $40,000 | Owed to SWR (as trustee): $484,000 Owed by SWR (as trustee): $382,745 |
The competing positions
Dr Sharma contended that s 553C operated automatically to produce a netting of the cross-debts, leaving net amounts of $109,716 and $101,255 (which had already been paid). On that basis, no further amounts were said to be payable (see [19]–[20]).
The liquidator, Mr Livingstone, contended that no set-off arose. On that basis, the Segal/Sharma/Chen partnership remained indebted to SWR in the amount of $40,000 and the Segal/Sharma partnership remained indebted to SWR in the amount of $382,745, and those amounts should be paid to SWR (see [21]).
Brereton J observed that although the commercial consequences were significant, s 553C does not involve any discretion (see [24]).
The legal framework
Section 553C(1) requires that there be “mutual credits, mutual debts or other mutual dealings” between the insolvent company and a person who wants to have a debt admitted. Where mutuality is established, an account is taken and only the balance is admissible to proof or payable to the company (see [25]).
Following Metal Manufactures Pty Ltd v Morton [2023] HCA 1 (see [27]), two key features were identified:
- Temporal requirement:
Mutuality is assessed as at the commencement of the winding up. In this case, that date was 10 April 2019 (see [28]).
- Mutuality:
As explained in Gye v McIntyre (1991) 171 CLR 609 (see [29]), mutuality has three requirements:
(i) the credits, debts or claims must be between the same persons;
(ii) the benefit or burden must lie in the same interests (determined by reference to equitable or beneficial interests)
(iii) the claims must be commensurable, meaning they must ultimately sound in money.
The Court’s Analysis: mutuality in the context of an insolvent trustee
A central issue before the Court was whether the requisite mutuality existed for the purposes of s 553C of the Corporations Act 2001 (Cth), in circumstances where the insolvent company, South West Radiology Pty Ltd (SWR), had operated solely as trustee of a trading trust.
Brereton J approached the issue by examining the parties’ respective rights and interests as they existed immediately prior to the commencement of winding up on 10 April 2019.
The analysis began with the debts owed by the partnerships to SWR. Those debts were choses in action held by SWR on trust for the beneficiary unitholders. Although the SWR Trust had vested on 31 January 2019, there had been no transfer of the debts in accordance with s 12 of the Conveyancing Act 1919 (NSW). SWR therefore continued to hold the benefit of those debts on trust for the unitholders of the SWR Trust.
The position was different for the debts owed by SWR to the partnerships. Those debts were owed by SWR personally, even though they had been incurred in its capacity as trustee. They were not debts of the trust itself.
SWR did, however, have a power of exoneration. That power entitled it to apply trust assets in discharge of liabilities properly incurred as trustee. It arose under the trust deed and s 59(4) of the Trustee Act 1925 (NSW). It also survived vesting, because clause 11.2 of the trust deed required SWR to make “all proper provision for liabilities” before distribution. The power of exoneration gave SWR an equitable proprietary interest in the trust assets.
As creditors of SWR, the partnerships could seek to enforce that power by subrogation to SWR’s rights. That right has been described as an indirect claim against trust assets through the trustee’s lien or right of indemnity, and as a form of “disguised direct action” against the trust estate.
The question for the Court was whether the partnerships’ possible subrogation rights were enough to create mutuality between them and the beneficiary unitholders.
Why subrogation did not save mutuality
The question, therefore, was whether mutuality could be found between the partnerships and the beneficiary unitholders, given the partnerships’ potential right of subrogation in respect of SWR’s power of exoneration.
Brereton J acknowledged that subrogation can sometimes establish mutuality (see Jenner v Morris (1861) 3 De GF & J 45). However, that case was distinguishable on its facts.
Drawing on the 5th edition of Derham on the Law of Set-Off and the High Court’s discussion in Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, Brereton J noted that the circumstances in which a creditor’s subrogation right against trust assets may be enforced are “not entirely clear”, and that the language in Octavo suggests the subrogation crystallises upon the trustee’s bankruptcy. In Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439, Giles J expressed the view that creditors can gain access to trust property “at least where the trustee can not satisfy the liability”. In Zen Ridgeway Pty Ltd v Adams [2009] QSC 117, M A Wilson J characterised the subrogation right as “inchoate” unless the trustee is insolvent or it is otherwise reasonable to assume that obtaining judgment against the trustee would be pointless (at [45]).
Therefore, the partnerships’ subrogation rights had not yet matured into enforceable claims. As at the time immediately prior to the winding up (at [46]):
- The amounts owed to SWR by the partnerships were trust assets held for the unitholders.
- The amounts owed by SWR to the partnerships were SWR’s personal liabilities, against which the partnerships had only inchoate and indirect subrogation rights. At most, the partnerships had only inchoate and indirect rights to seek recourse against the trust assets, rather than any direct claim against SWR in its capacity as trustee or against the unitholders.
The Court held that inchoate rights were insufficient to constitute a sufficiently direct claim engaging the beneficiary unitholders. There was accordingly an absence of mutuality, and s 553C was not engaged.
The result
Section 553C was not engaged (at [47]):
- The $149,716 owed by the Segal/Sharma/Chen partnership to SWR as trustee is not subject to set-off against the $40,000 owed by SWR to that partnership.
- The $484,000 owed by the Segal/Sharma partnership to SWR as trustee is not subject to set-off against the $382,745 owed by SWR to that partnership.
The parties were directed to provide proposed short minutes of order by 22 May 2026.
Why this matters beyond Segal v Sharma
The Judgment is significant because it addresses a point that had not previously been the subject of direct authority: whether mutuality can exist for s 553C purposes where the insolvent company holds the relevant asset as trustee.
Three points are likely to matter beyond the facts of the case.
First, the trust structure creates a real barrier to mutuality. Where an insolvent company holds debts as trustee, the beneficial interest in those debts sits with the beneficiaries, not with the company itself. That distinction is enough to break mutuality for the purposes of statutory set-off.
Secondly, subrogation will not necessarily cure the problem. Rights of subrogation that have not crystallised as at the date winding up commences are inchoate and indirect, and may not be sufficient to establish the requisite mutuality.
Thirdly, timing can be outcome determinative. Mutuality is assessed at a fixed statutory snapshot date. Rights that may exist at a later point cannot be imported back to satisfy the s 553C test.
Practical takeaways
For liquidators. Where the insolvent company traded exclusively as trustee, the liquidator may be well placed to resist a s 553C set-off claim. The debts owed to the company are likely held on trust for the beneficiaries, and the cross-debts are personal liabilities of the company. That structural separation is likely to defeat mutuality, and the creditor’s subrogation rights, being inchoate at the relevant date, may not bridge the gap.
For trust creditors. It may not be safe to assume that amounts owed to a trustee company can be netted against amounts the trustee company owes in return. Even where a creditor has a potential right of subrogation to the trustee’s power of exoneration, that right may be characterised as inchoate and indirect at the date of winding up and therefore insufficient to engage s 553C. The likely practical consequence is that the creditor will be required to pay its debt to the company in full and prove for the reciprocal debt in the liquidation, recovering only a dividend, if any, on a pari passu basis with other creditors.
For partnership disputes involving trusts. Where a corporate trustee is interposed between partners, or their partnerships, and the trust, cross-debts between the partnerships and the trustee may not enjoy the benefit of statutory set-off in the trustee’s winding up. Partners who are also unitholders may find themselves in the position of owing debts to the trust through the trustee while potentially receiving only a fraction of what the trustee owes them.
For advisers structuring trust arrangements. The decision highlights the importance of the distinction between a trustee’s personal liabilities and the trust’s assets. Advisers may wish to be alert to the possibility that the insolvency of a corporate trustee that has incurred liabilities in the course of its trusteeship could create an asymmetry. Creditors may be unable to set off against the trust assets, because the debts owed to them are likely personal debts of the trustee, while the debts they owe to the trustee may be held for the benefit of the unitholders.
Further Information
For further information about insolvent corporate trustees, statutory set-off under s 553C, trust creditor claims and mutuality in liquidation, please contact the author of this article.
