Is it mutual? A tale of set-off and security

June, 2017

By Partner, Ariel Borland and Law Graduate, Hannah Wilson

The reconciliation of contractual, equitable and statutory set-off rights in insolvency has long been a problematic area for creditors and principals alike. The findings in Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (In Liquidation) (Receivers and Managers Appointed) [2017] WASC 152 fundamentally improve the position of a liquidator and the insolvent company’s financiers to recover debts due to a company in liquidation.

The decision has clarified that:

  1. the only set-off available to a creditor on liquidation is set-off under s553C of the Corporations Act 2001 (Cth) (CA), contractual and equitable set-off rights the creditor may otherwise enjoy are not available; and
  2. attachment of a security interest to the debt owed to the company in liquidation under s19 of the Personal Property Securities Act 2009 (Cth) (PPSA) will destroy mutuality for the purposes of s553C, such that the set-off under that section will not apply.

Background

Forge and Hamersley entered into two contracts (Contracts) in which Forge agreed to perform the engineering, procurement and construction of two power stations.

Forge entered into a facility agreement and a general security agreement with ANZ on 2 July 2013. ANZ’s security interest was perfected by registration on the Personal Property Securities Register (PPSR) that same day.

On 11 February 2014, the directors of Forge resolved to appoint joint and several administrators to the company pursuant to s436A of the CA. Later that day, ANZ appointed joint and several receivers and managers to Forge pursuant to the General Security Agreement. It was resolved by Forge’s creditors on 18 March 2014 that Forge be wound up and the administrators were consequently appointed as joint and several liquidators.

Hamersley alleged that it had contractual and equitable rights of set-off, as well as rights pursuant to s553C, and was therefore permitted to deduct any amounts for which it was liable to Forge from amounts that Forge owed to it for damages and debt due under the Contracts.

Forge disputed Hamersley’s interpretation of the Contracts, claiming that s553C came into operation mandatorily and exclusively from the appointment date and the equitable and contractual set-off provisions were therefore unenforceable.

It was also argued by Forge that the ANZ’s security interest destroyed the mutuality between the claims and debts of Hamersley and Forge and, accordingly, s553C was not applicable.

Issues for determination

There were three primary questions before the Court:

  1. Did the contractual term on which Hamersley relied provide for a netting-off or set-off?
  2. As a party wanting to have a claim admitted in the liquidation of Forge, was Hamersley able to rely on the contractual and/or equitable rights of set-off? and
  3. Was the mutuality of interest between Forge’s claims and Hamersley’s claims brought to an end by the attachment of the ANZ’s security interest over debts due to Forge?

Did Hamersley’s Contracts provide netting off or set-off?

Tottle J emphasised that the determination of whether a contract created netting off arrangements or set-off rights must focus on the construction of the relevant documents. His Honour concluded that neither the language of the clause nor the context in which it appeared supported Hamersley’s position that the clause effected a netting off of the position between Hamersley and Forge such that no debt was due to Forge. His Honour found that the terms of Hamersley’s agreement created a debt due to Forge that could then, at Hamersley’s discretion, be set off against debts due to Hamersley.

Was Hamersley able to rely on contractual or equitable rights of set-off?

His Honour noted that the issue of whether contractual or equitable set-off rights can subsist to the extent s553C is not engaged is technically still open in Australia. However, His Honour ultimately agreed with Forge, confirming that s553C operates exclusively and is intended to govern all debts and claims between an insolvent company, its debtors and its creditors. Allowing contractual or equitable set-offs, His Honour said, would be inconsistent with the intention of Part 5.6 of the CA in that it provides an alternative system for admission and payment of debts.

Was mutuality destroyed?

His Honour concluded that the mutuality of interest between Forge’s claims and Hamersley’s claims had ceased to exist after ANZ’s security interest attached to the debts owed to Forge. His Honour found that attachment under s19 of the PPSA conferred a proprietary interest upon ANZ at the time its security interest attached to the debts owed to Forge, and thus mutuality ceased to exist.

His Honour also noted that the pre-PPSA concept of crystallisation had been made redundant by the PPSA. Hamersley’s submission that mutuality was preserved because Forge was still able to deal with the collateral was irrelevant because ANZ had acquired a proprietary interest in the collateral on attachment.

Conclusion

Hamersley v Forge will greatly assist liquidators and financiers in their recovery of debts due to companies in liquidation. It is now clear that any rights of set-off are governed exclusively by s553C, and any equitable or contractual set-off rights the parties may have enjoyed pre-appointment are displaced. It is now also clear that mutuality for the purposes of s553C can be destroyed by a secured creditor acquiring a proprietary interest in debts owed to the insolvent company through the attachment of their security interest to that debt.

The scenario of an insolvent contractor granting a security interest to a financier that attaches to debts owing under contracts for goods and services is common. Hamersley v Forge is likely to prompt principals to revisit their contractual arrangements and scrutinise the PPSR registrations over contractors more carefully. It will be important for insolvency practitioners and financiers to carefully review contractual arrangements moving forward to determine whether netting off claims are sustainable, and if not, whether principals should be pursued for payment of the full amount owed to a company in liquidation.

Contact Mills Oakley

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Ariel Borland | Partner
T: +61 3 9605 0015
E: aborland@millsoakley.com.au

 

 

 

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