Over the past year, you may have heard that legal uncertainty had been created around the right to set-off debts owed to insolvent companies against amounts due by them where a Personal Property Securities Act 2009 (Cth) (PPSA) registered general security over present and post-acquisition property exists. The first instance decision that created this uncertainty has now been overturned on appeal in Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed)  WASCA 163.
The background to the case is that Hamersley Iron Pty Ltd (Hamersley) engaged Forge Group Power Pty Ltd (Forge) to carry out works in relation to the construction of power stations. Forge obtained funding from a bank to complete the works and granted the bank security over its property in the form of a General Security Agreement (GSA), which the bank registered pursuant to the PPSA. Forge subsequently went into liquidation, and disputes arose involving opposing claims between it and Hamersley. Hamersley sought to set-off its claims against those of Forge, including under the statutory insolvency set-off provision, section 553C of the Corporations Act 2001 (Cth). This set-off defence is one often used by companies faced with claims by insolvent companies where mutual debts exist.
At first instance, Justice Tottle found that the security interest granted to the bank meant that there was no mutuality between the Forge and Hamersley debts. As such, section 553 did not apply. He also found that section 553 was exclusive and prevented reliance on any contractual or equitable concepts of set-off with the result being that, because section 553 did not apply, Hamersley had no alternative grounds to seek to set-off the debt owed to Forge against the debt owed by Forge to Hamersley.
The Court of Appeal disagreed, finding:
- on a close examination of the precise terms of the GSA and the level of control of the security holder, the mutuality had not been destroyed because, as at the appointment of administrators, Forge’s claims were, as a matter of substance, recoverable for its own benefit rather than that of the bank. Factors tending towards this finding included that the bank did not have control over those monies. In addition, under the GSA, Forge was permitted to withdraw, transfer or dispose of any amounts paid to it by Hamersley, or could use those amounts to repay some permitted financial indebtedness (such as debts incurred in the course of business); and
- while it is widely accepted that statutory set-off applies to the exclusion of contractual or general law rights to set-off, if circumstances are such that section 553C does not apply and a bank stands outside the administration of the insolvent company and relies on its security to collect a debt owed to the insolvent company (in this case Forge), then section 553C does not operate to exclude equities that would otherwise have applied to the charged debt. If section 553C had not applied, the bank would have taken its interest in Forge’s claims subject to any rights of set-off Hamersley may have had under general law or, alternatively, the “statutory equities” provided for in section 80(1) of the PPSA.
The key takeaway is that the existence of a PPSA registered general security interest over present and post-acquisition property will not necessarily destroy rights of set-off that exist between contracting parties. However, the precise terms of any financing documents will be key, in particular the precise extent to which the company would have control over amounts sought to be set-off, or whether these would be recovered for the benefit of the secured party.
If you would like to discuss the impact of this case on your rights or on your contract drafting, please contact us.