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22
Oct 2018

Set off issue resolved

In the matter of Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liquidation) (Receivers and Managers appointed) [2018] WASCA 163, the Western Australian Court of Appeal ruled that section 553C of the Corporations Act 2001 (Cth) (Act) does not operate as a “code” to the exclusion of other contractual and equitable rights to set-off.

It also determined that mutuality under section 553C of the Act would not be destroyed by reason of the granting of a security interest by one party over its personal property pursuant to the Personal Property Securities Act 2009 (Cth) (PPSA).

The decision effectively overturned the primary judge’s ruling in Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liquidation) (Receivers and Managers appointed)  [2017] WASC 152, who had accepted Forge Group Power Pty Ltd’s (Forge) contentions,  that:

  1. Hamersley Iron Pty Ltd (Hamersley) could not rely on the operation of section 553C of the Act because any mutuality between Hamersley and Forge had been negated by the granting of a charge to Australian and New Zealand Banking Group (ANZ) over Forge’s personal property; and
  2. In the context of a liquidation, section 553C operated to the exclusion of any contractual or equitable set-off for which Hamersley intended to rely upon.

Background

In 2012, Hamersley engaged Forge under two separate contracts to perform the engineering, procurement and construction of two power stations at West Angeles and Cape Lambert in Western Australia (Contracts).

The following year, Forge entered into a facility agreement with ANZ which included the granting of a security interest over Forge’s personal property pursuant to the terms of a General Security Agreement (GSA).

In February 2014, Administrators and Receivers were appointed to Forge which was wound up shortly after. The Receivers of Forge subsequently brought a claim against Hamersley for monies that were allegedly due to Forge under the Contracts.

Hamersley claimed that any monies owing to Forge by Hamersley could be set-off against monies Hammersley owed by Forge by reason of either contractual rights, equitable set-off, or set-off in accordance with section 553C of the Act.

Hamersley said that it would then be entitled to prove for the balance of the claims owing to it in Forge’s liquidation.

At first instance, the primary judge rejected Hamersley’s claims and said that it was not entitled to the benefit of set-off, even though it was owed money by Forge.

Section 553C of the Act

Section 553C of the Act provides that:

(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.

 The Court of Appeal considered whether the required element of mutuality was in existence to allow a set off.  It adopted the three considerations established by the High Court in Gye v McIntyre [1991] HCA 60:

  1. credits, debts or claims arising from the dealings and between the same person;
  2. benefit or burden of the credits, debts or claims arising from other dealings lie in the same interests; and
  3. the credits, debts or claims arising from the other dealings be monetary claims.

The Court of Appeal referred to the decision Hiley v People’s Prudential Assurance Co Ltd (in liq) [1938] HCA 40 which held that “the relevant time at which mutuality is to be assessed is the commencement of the winding up in insolvency [emphasis added]” (see Hamersley at [68]). In this case, mutuality was to be assessed as at the date of the administrators’ appointment, being 11 February 2014.

Issues on Appeal

The operation of section 553C of the Act gave rise to three main issues in this case:

  • First, whether there were any “dealings” between Hamersley and Forge.
  • Second, whether those dealings were capable of giving rise to, and subsequently did give rise to, claims by one against the other.
  • Both of these questions were not in dispute and were answered in the affirmative. The main issue before the Court of Appeal concerned the second consideration of mutuality established in Gye. Specifically, whether the benefit or burden of the claims arising from Hamersley’s and Forge’s dealings lay “in the same interests” and whether, as pleaded by Forge, the granting of a security interest over its personal assets to ANZ negated mutuality between it and Hamersley.  The issue was that because Forge had granted security over the debtors it would not recover them for its own benefit, but for the benefit of the financier.  The Court at first instance held this fact meant there was no mutuality.

The Court of Appeal considered that to resolve this issue it was required to determine “whether the charger has the right to use payments received for its own benefit” (see Hamersley at [72]).

To answer its own question regarding the mutuality between Hamersley and Forge, the Court of Appeal considered whether, at the date of the appointment of the administrators, Forge was entitled to receive the payments due from Hamersley under the Contracts for its own benefit, rather than only for the benefit of ANZ.

Does the burden or benefit lie in the same interests?

Pursuant to the terms of the GSA, Forge’s claims against Hamersley were found to be circulating assets within the meaning of section 339(3)(a) of the PPSA. In reaching this conclusion the Court of Appeal assessed the claims as being “accounts” in accordance with sections 340(1)(a) and 340(5)(a) of the PPSA and determined that Forge was entitled to receive the payments for its own benefit based on, inter alia, the following:

  1. ANZ did not require Forge to open and maintain a Controlled Account for which it would have had control over the withdrawal of funds in that account;
  2. pursuant to the terms of the GSA, ANZ permitted Forge to collect the proceeds of its claims and disburse it in accordance with its permitted uses;
  3. the terms of the Terms Deed between Forge and ANZ allowed Forge to apply the payments towards debts owed to trade creditors for services rendered to Forge in the ordinary course of Forge’s business;
  4. Forge’s claims were accounts over which ANZ had no control within the meaning of s 340(2) of the PPSA and therefore only had a security interest which had attached to a circulating asset.

Accordingly, the Court of Appeal confirmed that, in circumstances where Forge was able to use the payments received under the Contract for its own benefit, mutuality was deemed to subsist between Hamersley and Forge for the purposes of section 553C and therefore the provision was capable of operation.

Does section 553C operate as a “code”?

The Court of Appeal also considered whether Hamersley was entitled to apply any other rights to set-off Forge’s claims where, as Forge contended, there was no mutuality for the purposes of section 553C – or whether ANZ would take the interest free of any of Hamersley’s set-off rights.

Contrary to the court below, the Court of Appeal found that under general law and/or statutory equities pursuant to section 80(1) of the PPSA, Hamersley’s right to set-off would subsist without the operation of section 553C.

The Court of Appeal deemed it necessary to consider whether in the absence of statutory set-off, the circumstances gave rise to an underlying Parliamentary intention to preclude all other rights to set-off that may have been applicable.

In these circumstances, the Court of Appeal did not find it appropriate to allow ANZ to take its interest in Forge’s claims free from any right that Hamersley may have had to set-off especially where such circumstances would create a windfall for ANZ and prejudice the unsecured creditors in the winding up.

Takeaway

Subject to an application for leave to the High Court, the current position in respect of insolvency set-off can be summarised as follows:

  1. Mutuality for the purposes of section 553C will continue to subsist between two parties in circumstances where the grantor is able to retain, for its own burden or benefit, the same interest as the other party — despite the granting of a security interest to a secured party.
  2. Section 553C does not operate as a “code”, therefore a party retains its right to contractual or equitable set-off during liquidation even in circumstances where a lack of mutuality prevents the operation of section 553C.