In Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (In Liquidation)(Receivers and Managers Appointed) [2018] WASCA 163 (WASCA), the Western Australian Court of Appeal (Court) overturned Tottle J’s decision at first instance in Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (In Liquidation)(Receivers and Managers Appointed) [2017] WASC.
The brief facts
In broad terms, in 2012 Hamersley Iron Pty Ltd (Hamersley) (as principal) engaged Forge Group Power Pty Ltd (In Liquidation)(Receivers and Managers Appointed) (Forge) (as builder) to carry out certain works in relation to the construction of certain power stations. In or about 2013, Forge obtained funding from a bank, and granted to the bank certain security over its personal property. The bank registered the charge pursuant to the Personal Property Securities Act 2009 (Cth) (PPSA) on 2 July 2013. In 2014, the bank appointed receivers to Forge, and Forge subsequently went into liquidation.
When Forge went into liquidation, Hamersley owed Forge, and Forge owed Hamersley, certain debts. Forge’s debt to Hamersley exceeded Hamersley’s debt to Forge. Hamersley therefore claimed that it was entitled to set-off its claims against Forge’s claims, and to prove for the balance in the liquidation of Forge. To do so, Hamersley relied on contractual rights of deduction under the Contracts, equitable set-off, and/or alternatively set-off in insolvency pursuant to section 553C of the Corporations Act 2001 (Cth) (Corporations Act).
Tottle J at first instance
At first instance, Tottle J denied Hamersley’s claim to set-off, and held, amongst other things, that:
- The attached security interest pursuant to the PPSA created a proprietary interest in favour of the bank, having the effect that, while Hamersley still owed Forge in respect of Forge’s claims against Hamersley, Forge did not owe Hamersley in respect of Hamersley’s claims against Forge, but rather owed the bank, and thus mutuality (which is required for set-off) was destroyed; and
- When a company is placed into liquidation, section 553C operated as an exclusive code in respect of the setting-off of debts as between the company and its creditors, and thereby excluded the possibility of other avenues being explored, such as equitable set-off and contractual rights to deduction.
The Court’s decision
Mutuality
The Court, in overturning Tottle J’s decision in relation to ‘mutuality’ stated that the critical question is whether, at the commencement of the liquidation, the debt sought to be used as a set-off by the creditor of an insolvent party would have been recovered ‘for his own benefit, or vice versa: [84].
The key distinction is that, prior to a company going into liquidation, the chargor may collect the receivable and use the proceeds for its own benefit (as in the case of a circulating asset under the PPSA), whereas, once the charge becomes fixed, there is an absence in mutuality for the purposes of insolvency set-off, as, the receivable which is being recovered is for the benefit of the chargee, and not the insolvent chargor.
The Court stated that, as at the time of the appointment of the administrators, Hamersley was entitled to receive payments of money under the contracts for its own benefit, rather than only for the benefit of the bank: [99]. The effect was that, at the time that Forge was placed into liquidation (as this is the crucial time when mutuality is to be assessed), the dealings between Hamersley and Forge under the contracts were mutual dealings within the meaning of section 553C of the Corporations Act, notwithstanding the bank’s security interest [132].
A security interest that is a floating charge is treated in the same way as a security interest attached to a circulating asset where the grantor has title to that asset [134]. The result, according to the Court, is that section 553C of the Corporations Act is capable of operating concurrently with the PPSA. Further, and importantly, when ‘statutory set off’ applies to the circumstances, it cannot be contracted out of (and applies by operation of the law).
Section 553C is not an exclusive code
The Court continued to state that, if it erred in its analysis relating to the existence of mutuality (and thus Tottle J was correct at first instance in holding that Forge’s claims were recoverable for the benefit of the bank rather than for Forge), then, the bank does not take Forge’s claims free of the equities or any set-off (equitable or otherwise) which would otherwise be applicable under the general law and, or alternatively, the statutory ‘equities’ provided for in s80(1) of the PPSA (as the Court found that: [179] (i.e. section 553C is not an exclusive code).
The Court provided detailed reasons for holding that section 553C is not an exclusive code. The material consideration was however one of statutory construction, as, the Court said that, where, in an insolvency, a statutory set-off does not apply to the particular circumstances of the case (such as held by Tottle J at first instance, but overturned by the Court), it is necessary to consider whether the absence of a statutory set-off in those particular circumstances reflects an underlying Parliamentary intention to exclude any set-off otherwise applicable: [174].
The Court’s view was that, at least in the circumstances of this case, the bank stood outside the administration of the insolvent company and relied on its security to collect, for its own benefit, the debt owed to the insolvent Forge, there is nothing in section 553C or its purpose or policy that would relieve the bank (being the chargee) of any equities that would otherwise apply to the charged debt: [175]. It would be different, according to the Court, if the bank had surrendered its debt, and proved it in the winding up of Forge, as, in that case, Forge’s liquidator would have been recovering Forge’s debt for the benefit of all the unsecured creditors, as well as for the bank itself (which would have been a former secured creditor).
Significance
The Court’s decision reversed the trial judge’s decision and has returned the legal position, broadly, to where it was prior to the commencement of this case.
The banks and institutional lenders no longer enjoy the position that they had following the trial judge’s decision, as the financier’s security interests will no longer trump an unsecured creditor’s equities. Set-off pursuant to section 553C occurs automatically, by operation of the law, and, applies in circumstances where, at the time of the company being placed into liquidation, the chargor may collect the receivable and use the proceeds it for its own benefit (as in the case of a circulating asset under the PPSA).
Additionally, even if that is incorrect, or if a novel situation presents itself where section 553C is found not to apply for different reasons, the banks and institutional lenders will still, where they attempt to recover their claims while standing outside the administration of the liquidation, and rely on their security for recovering the debt, be forced to take their secured interest or charged debt subject to the equities.
General contracting parties, on the other hand, will remain entitled to rely on equities that are for their benefit.
We understand that an application for Special Leave to the High Court has been made. We will provide an update once more information is known.
This article was written by Michael Suttner, Associate in our Perth Office
Publication Editor: Grant Whatley