A recent court decision is a timely reminder of the limitations that can affect a person’s ability to rely on set-off rights when a debtor or contract counterparty becomes insolvent.
The decision of Tottle J of the Supreme Court of Western Australia in Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) has given much needed clarification of the operation of the statutory set-off provision in section 553C of the Corporations Act 2001 and the effect of the attachment of a security interest under section 19 of the Personal Property Securities Act 2009 (PPSA).
The case involved a contest between the rights of a secured creditor and the rights of set-off of a debtor’s counterparty. Tottle J’s key findings were that:
Forge and Hamersley were party to two engineering, procurement and construction contracts entered into in 2012 (EPC Contracts). Later in 2012 Forge, the contractor, commenced the works pursuant to the EPC Contracts.
In July 2013, Forge entered into a General Security Agreement by which it granted to ANZ collateral over all of its present and after-acquired property (GSA). ANZ registered the GSA on the PPSR on the same day.
In February 2014, Forge appointed voluntary administrators, on the same day ANZ appointed receivers and managers pursuant to the GSA and in March 2014 Forge went into liquidation.
Tottle J found that the relevant provisions of the EPC Contracts entitled Hamersley to elect to set-off the money claimed by Forge for work done pursuant to the EPC Contracts against the money owed to Hamersley in losses and damages arising from their breach. In doing so, Tottle J rejected Hamersley’s submission that the relevant clauses of the contracts operated to automatically net-off the money due to Hamersley.1
Put simply, the EPC Contracts gave Hamersley a discretion to exercise its rights of set-off. Hamersley failed to exercise those rights before the administrators were appointed. This failure resulted in a debt arising that was due and payable to Forge.
Tottle J next considered whether Hamersley’s contractual or equitable set-off rights could be relied on by Hamersley when Forge was put into liquidation.2 In finding that they could not, and that the statutory set-off rights under section section 553C constitutes a code that regulates set-off in insolvency, Tottle J relied on:
The fundamental submission advanced by Hamersley, and rejected by Tottle J, was that ANZ’s security interest was a floating charge that had not crystallised. It followed, submitted Hamersley, that mutuality of interest between Forge’s claims and Hamersley’s claims continued to exist.
In rejecting that submission, Tottle J concluded that the process of attachment provided in section 19(2) of the PPSA renders the equitable concept of crystallisation redundant in the context of a security interest over personal property regulated by the PPSA.
Section 553C(1) of the Corporations Act provides that 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:
The concept of mutuality conveys the notion of reciprocity and is concerned with the status of the parties and their relationship to each other. The central principle being that one party’s money shall not be applied to pay another party’s debt.
Section 19(2) of the PPSA provides that a security interest attaches to collateral when:
Tottle J found that, on satisfaction of the conditions in this section, the PPSA operates to confer on the secured party a proprietary interest in the collateral. By so doing, Tottle J confirmed that the use of the mechanism of a floating charge for taking security over circulating assets is redundant.5
Tottle J concluded that a statutory proprietary interest of the nature conferred by a security interest under the PPSA is sufficient to destroy mutuality of interest for set-off purposes.
The Hamersley Iron decision highlights:
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