There is an old joke among insolvency lawyers that the only people who profit from a winding up are the liquidators. The recent decision of Brereton J in Segal v Sharma; In the matter of South West Radiology Pty Ltd (No 3) [2026] NSWSC 543, handed down on 18 May 2026, does little to dispel that impression. The case is a defining example of how insolvency set-off corporate trustee arrangements can unravel, turning on whether s 553C of the Corporations Act 2001 (Cth) applied where the insolvent company was acting as trustee. As it turned out, the answer was no – and the consequences for the parties were not trivial.
The decision is a useful reminder of just how ruthlessly the concept of “mutuality” is applied in insolvency law, and it contains an important lesson for anyone doing business through a corporate trustee: if that trustee goes under, the usual rules of fairness you might expect to apply can evaporate rather quickly.
The Background: Radiology, Partnerships, and a Trust That Tied Everyone in Knots
The dispute had its origins in a radiology business operating out of Liverpool, Sydney. South West Radiology Pty Ltd (“SWR”) was the corporate trustee of the SWR Holding Unit Trust. SWR did not trade in its own right – everything it did was in its capacity as trustee. The unitholders were entities associated with the business’s principals: Dr Sharma, Dr Segal and Ms Chen, holding interests in the ratio of 2:2:1.
Things evidently did not go well between the principals. By mid-2018, partnerships between them had been dissolved by court order and receivers appointed. SWR itself was wound up in insolvency in May 2019, with a liquidator and receiver installed over the trust.
Earlier proceedings before Slattery J had established, by reference to an independent report, that the partnerships owed money to SWR as trustee, and SWR as trustee owed money to the partnerships. Specifically:
- The Segal/Sharma/Chen partnership owed SWR $149,716, while SWR owed that partnership $40,000.
- The Segal/Sharma partnership owed SWR $484,000, while SWR owed that partnership $382,745.
The undisputed net amounts had already been paid. The fight was about whether the cross-debts could be set off against each other, which would have significantly reduced what the partnerships owed to SWR. Dr Sharma said yes. The liquidator, Mr Livingstone, said no. Roughly $422,000 turned on the answer.
The Legal Issue: Does s 553C Work When the Insolvent Company is a Trustee?
Section 553C of the Corporations Act provides for an automatic set-off between an insolvent company and a creditor. It applies where there have been “mutual credits, mutual debts or other mutual dealings.” The provision is designed to prevent a perceived injustice. Without it, a creditor who also owes money to the insolvent company faces an unfair outcome. That creditor would have to pay their debt in full. Yet they would receive only cents in the dollar on what the company owes them.
The critical requirement is mutuality. As the High Court confirmed in Metal Manufactures Pty Limited v Morton (2023) 275 CLR 100, mutuality requires that the credits, debts or claims be between the same persons and that the benefit or burden lies in the same interests. Crucially, it is the equitable or beneficial interests that matter, not just the legal ones.
This is where the trustee issue created a problem. SWR held the debts owed to it by the partnerships on trust for the unitholders. At law, the debts were owed to SWR. But in equity, the benefit of those debts belonged to the unitholders. Conversely, the debts SWR owed to the partnerships were personal liabilities of SWR, even though they were incurred in SWR’s capacity as trustee.
An Illustrative Example
To illustrate the principle at work, consider the following scenario.
Party A is a company that acts as trustee of a unit trust. The beneficiaries of that trust are Party B and Party C. Party A does not trade in its own right – it only acts as trustee.
Party D does business with Party A (in its capacity as trustee). As a result, Party D ends up owing $100,000 to Party A, and Party A ends up owing $80,000 to Party D.
Party A then becomes insolvent and is wound up.
Party D argues: “I owe $100,000 and I am owed $80,000 – let us set these off, and I will simply pay the net $20,000.” That sounds fair enough on its face.
But the Court says: not so fast. The $100,000 debt owed by Party D is held by Party A on trust for Party B and Party C. The real beneficiaries of that debt are Party B and Party C, not Party A. Meanwhile, the $80,000 owed to Party D is a personal liability of Party A.
There is no mutuality. Party D’s claim is against Party A personally, but Party D’s debt is owed for the benefit of Party B and Party C. The credits and debts are not between the same parties in the same interests. Section 553C does not apply.
The result? Party D must pay the full $100,000 to the insolvent estate. Party D must then lodge a proof of debt for the $80,000. After that, Party D joins the queue with all other creditors. Party D will recover whatever dividend the liquidator eventually distributes. If experience is any guide, that dividend will be a modest fraction of the amount owed.
That is precisely what happened in Segal v Sharma (No 3).
What About Subrogation?
Dr Sharma raised an inventive argument. SWR, as trustee, had a right of exoneration – a power to use trust assets to discharge debts it incurred in the course of acting as trustee. The partnerships, as creditors, could potentially enforce that right by subrogation, stepping into SWR’s shoes to access the trust assets. Dr Sharma argued that this subrogation right created the necessary mutuality between the partnerships and the beneficiary unitholders.
Brereton J rejected the argument. His Honour held that at the date of winding up (10 April 2019), the partnerships’ right of subrogation was not yet a fully formed, enforceable right. The partnerships had an indirect and contingent claim against the trust assets, not a direct claim against the unitholders. That inchoate right was not sufficient to establish mutuality for the purposes of s 553C.
As his Honour noted, the characterisation might have been different upon the winding up of SWR – but s 553C requires mutuality to be assessed at the time of winding up, not afterwards. By the time the subrogation rights might have crystallised, it was too late.
Conclusion
The takeaway from Segal v Sharma (No 3) is straightforward: insolvency changes everything. Common-sense assumptions — like the idea that mutual debts between the same commercial parties should simply be netted off — do not survive contact with a winding up.
The law is not concerned with commercial reality alone. It cares about equitable interests, trust structures, and who really has the benefit of each obligation. When those interests do not line up, the set-off vanishes, and the creditor joins the queue with everyone else.
The lesson? Know the structure of the entity you are dealing with, particularly if it is a corporate trustee. Once insolvency hits, it is too late to discover that the ground rules were never quite what you assumed — and as this case shows, the Court will not rewrite s 553C just because the outcome feels unfair.
Jake McKinley notes that this article is written for the purpose of providing generalised information and not to provide specialised legal advice. If you require qualified legal advice on anything mentioned in this article, our experienced team of solicitors at Jake McKinley are here to help. Please get in touch with us on 02 9232 8033 today to make an enquiry.
Article Written by Hayden Nelson, Solicitor
