WA Court of Appeal Overturns First Instance Decision in Hamersley v Forge
To set-off or not to set-off? That was the question recently answered in the affirmative by the West Australian Court of Appeal in Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liq) (Receivers and Managers appointed) [2018] WASCA 163. The Court of Appeal held that the judge at first instance was wrong to conclude that attachment of a security interest under the Personal Property Securities Act 2009 (Cth) (PPSA) will destroy mutuality for the purposes of the statutory set-off provided for in section 553C of the Corporations Act 2001 (Cth).
Background
In 2012, Hamersley engaged Forge to carry out certain building works in relation to the construction of power stations. In 2013, Forge obtained bank finance and granted to the bank certain security over its personal property, which security was registered pursuant to the PPSA. In 2014, the bank appointed receivers to Forge (immediately following the appointment of voluntary administrators) and Forge ultimately went into liquidation.
Hamersley alleged that its claims against Forge exceeded Forge’s claims against it and that it was entitled to set-off those claims under the contract, in equity and/or alternatively pursuant to section 553C.
Forge’s Receivers argued that by virtue of Forge’s liquidation, the only right of set-off was pursuant to section 553C but that there was no mutuality between the parties because the equitable interest in Forge’s claims against Hamersley had subsisted in the bank as a result of the operation of the PPSA.
The primary judge accepted Forge’s contentions.
Issues for determination
The operation of section 553C raised the following questions for determination:
- Whether there were “dealings” between Hamersley and Forge;
- Whether those dealings were capable of giving rise to, and subsequently did give rise to, claims by one against the other;
- Whether those claims were “mutual” (that is, ‘genuinely mutual as a matter of substance‘ for the purposes of set-off).
There was no dispute between the parties as to questions 1 and 2. The only issue was question 3, and specifically, whether the benefit or burden of the claims arising from Hamersley and Forge’s dealings lay “in the same interest”. In this regard, the Court of Appeal considered the critical question in assessing mutuality to be “whether the chargor has the right to use payments received for its own benefit“.
In reaching its decision, the Court of Appeal made the following findings:
- Forge’s claims were circulating assets within the meaning of section 339 of the PPSA such that the bank’s security interest in Forge’s claims was a security interest attached to a circulating asset.
- Forge’s claims were accounts over which the bank had no control within the meaning of section 340 of the PPSA because the General Security Agreement permitted Forge to use moneys received from Forge’s claims to pay debts owed to trade creditors without prior reference to or consent from the bank.
- At the commencement of the winding up (deemed to be the appointment of the voluntary administrators), the dealings between Hamersley and Forge were mutual dealings within the meaning of section 553C and notwithstanding the bank’s security interest because Forge’s claims were, as a matter of substance, recoverable for the benefit of Forge rather than for the benefit of the bank.
Moreover, the Court of Appeal confirmed that where the requirements of section 553C are satisfied, that provision will prevail and will operate to the exclusion of any pre-existing contractual or equitable rights of set-off. Where, however, section 553C does not apply to the circumstances of the case, contractual or equitable set-off rights may still apply.
Conclusion
The Court of Appeal’s decision confirms that section 553C is capable of operating concurrently with the PPSA and reverses much of the confusion and speculation that followed the first instance decision. Given the significance of the decision, it is expected that the High Court will also have a say on the issue.
Authored by:
Wendy Jones, Partner
Natasha Riach, Senior Consultant
Cynthia Di Blasio, Special Counsel
