One of the harbingers of the end of the mining boom in Western Australia was the collapse of the Forge Group in early 2014. Forge Group Ltd (Forge) and the companies associated with it were substantial players in the mining services sector. Towards the end of 2013 Forge went into an extended trading halt arising from concerns about its ability to meet debt covenants. In early 2014 the company announced that it had reached a deal with its bank, ANZ, which would “solve the liquidity issues and strengthen Forge Group’s balance sheet”.
But when voluntary administrators were appointed a few weeks later, on 11 February 2014, they found 1200 trade creditors owed a total of nearly $50 million; 1600 employees owed $15.5 million in employment entitlements; and secured creditors owed over half a billion dollars, the main one being ANZ, which appointed receivers and managers to the companies on the day the administrators went in.
Forge went into liquidation in March 2014. The size of the collapse and the complexity of the issues faced by the liquidators, and the receivers and managers, mean that while there has already been plenty of litigation involving Forge, there may be a lot more to come.
Litigation over the Forge collapse has already generated a number of interesting and informative decisions in the insolvency space over the past 6 months, some of which we briefly review here.
Leave to sue Forge Group refused
In Rushleigh Services Pty Ltd v Forge Group Ltd (in Liq) a company commenced a shareholder class action against Forge and two of its directors for losses allegedly sustained by those who purchased Forge’s shares in the 18 months prior to its collapse. It was alleged that the losses arose due to Forge’s failure to comply with continuous disclosure requirements, and engaging in misleading and deceptive conduct.
Normally you can only sue companies in external administration with the leave of the court. Rushleigh did not do this when it commenced proceedings in December 2014. It made an application to obtain such leave retrospectively.
Late last year Rushleigh’s application for leave was dismissed, so it could not continue its claim. The problem wasn’t that leave was being sought after the event. Whether leave is sought prospectively or retrospectively, there has to be some reason to depart from the normal rule that liquidation stops the commencement or continuation of legal action against a company. In this case, insurance policies that would otherwise have responded to this claim would be fully exhausted by other, separate claims, and there was no prospect of any return to unsecured creditors of Forge.
The refusal of leave was therefore not an unexpected outcome in the circumstances, but Foster J’s decision provides, with respect, a very cogent and useful statement of the principles that are to be applied in cases of this type.
Receivers v Priority Creditors
Re Forge Group Ltd involved the receivers of Forge Group, who were appointed under a General Security Agreement (GSA) granted by Forge Group to ANZ. The receivers had lodged objections to tax assessments filed by the company in 2012 and 2013 and had obtained a refund of nearly $50 million for the secured creditor.
However the Department of Employment had shelled out a substantial amount of money in paying the employees of Forge their employment entitlements, under the Federal Government’s Fair Entitlements Guarantee (FEG) scheme, and it wanted to get some of that money back if possible.
The Department pointed to s.433 of the Corporations Act, which provides that where a receiver is appointed before a company has commenced winding up, and then takes possession or assumes control of property subject to a circulating security interest, the receiver must pay out certain priority creditors before applying the money to the secured debt. In this case the priority creditor was the Department of Employment, who had picked up the unpaid employment entitlements.
Earlier this year the Federal Court found for the receiver and therefore the ANZ. Gilmour J found that the tax refunds did not come into existence until March 2015, a year after the receivers were appointed and section 433 was engaged. For the purposes of this case, the refunds were not circulating assets. His Honour used the language of floating charges in the decision, and took the view that old authorities dealing with floating charges would apply to GSAs under the Personal Property Securities Act (PPSA).
Notwithstanding this outcome, the terminology used in the PPSA leaves some scope for arguing that GSAs operate differently in some respects from floating charges. Many of these arguments were put forward in detail by the Department of Employment, and were comprehensively dealt with and rejected by Gilmour J in the judgment. However receivers should study the decision carefully before they hand over post appointment assets to a secured creditor, because this issue may not yet be settled.
The Lost Turbines
In February 2017 the New South Wales Court of Appeal dismissed an appeal by a company that leased 4 large and very expensive mobile gas turbine generator sets to Forge Group Power Pty Ltd (FGP) to help it with a construction project in Port Hedland .
The lease was for longer than 12 months; the company was regularly engaged in the business of leasing goods; and the turbines had not become fixtures to the land.
The PPSA therefore applied to the lease. The company failed to register its interest on the PPSR. Therefore, pursuant to section 267 of the PPSA, property in the turbines vested in FGP immediately before the administrators were appointed on 11 February 2014, handing a $45 million windfall to Forge’s secured creditors.
This was a disastrous outcome for the company but, as we reported early last year in Forge PPSR Decision Yields No Surprises, it was also entirely predictable, as was the dismissal of the appeal earlier this year. The case serves as a cautionary tale about the dangers of not understanding the PPSA and failing to ensure that security interests are properly registered.
Set offs and the PPSA
Most recently, the Forge saga has produced another important decision in the Western Australia Supreme Court for companies defending claims brought by liquidators. Again it relates to FGP.
In 2012 FGP entered into 2 construction contracts with Hamersley Iron. In July 2013, Forge charged its rights under the contracts to the ANZ pursuant to a GSA – which was registered on the PPSR.
On 11 February 2014, when the voluntary administrators and receivers were appointed, Hamersley terminated the contracts.
The claims that thereby arose were substantial. FGP is claiming around $9 million as being certified as payable, but unpaid, under the two contracts, plus over $50 million payable due to allegedly wrongful calls by Hamersley on performance securities under the contracts.
Hamersley’s claims for loss and damage for breach of the contracts are much larger, each exceeded $110 million. Under the two contracts Hamersley is entitled to set its claim off against the amount claimed by Forge and pursue the balance (FGP still denies that a balance in favour of Hamersley in fact exists).
However Hamersley has encountered a serious problem. Tottle J in the Supreme Court of Western Australia has determined that section 553C of the Corporations Act, which deals with rights of set-off when dealing with insolvent companies, is an exclusive code which displaces contractual or equitable rights of set off; and under that code, FGP destroyed the mutuality between the parties that is required for a set off by charging its interest in the contracts to ANZ.
The practical effect of this is that Forge can pursue Hamersley for the full value of its claim; Hamersley can only prove in the winding up of FGP and line up with the other unsecured creditors for whatever they will get at the end of the liquidation process. It is a wonderful result for ANZ but the fact that a GSA can have such an effect in an insolvency context should a serious concern to contracting parties in a wide range of situations.