The recent decision of the Court of Appeal of Western Australia, Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in Liquidation) (Receivers and Managers Appointed)  WASCA 163 provides much needed clarity around the law of set-off. The decision will no doubt help creditors sleep well at night, knowing that when contracting with counterparties that later become insolvent they will not lose their set-off rights for a lack of mutuality where the counterparty has granted security over its assets.
Back in 2017, Tottle J of the Supreme Court of Western Australia held that mutuality, and therefore the right of set-off, was effectively lost by reason of the grant of security. You can read our discussion of that decision here.
In 2012, Hamersley Iron Pty Ltd (Hamersley) and Forge Group Power Pty Ltd (Forge) were parties to construction contracts for the West Angelas and Cape Lambert Power Stations (Contracts). The following year, Forge later obtained finance from ANZ. In doing so, Forge granted ANZ security over all its property, including its rights under the Contracts.
In early 2014, both administrators and receivers were appointed and Forge subsequently went into liquidation. Forge’s receivers caused it to bring a claim against Hamersley for funds owing to Forge under the Contracts. In defending the claim Hamersley argued that s 553C applied and that it was able to set-off debts owing by Forge to Hamersley and prove in the liquidation for the balance.
Tottle J determined that s 553C cannot be contracted out of and operates as a ‘code’ to the exclusion of contractual and equitable rights of set-off. Tottle J went on to determine that s 553C did not apply because the mutuality of interest between Forge and Hamersley was destroyed when Forge entered into the general security agreement with ANZ.
The Court of Appeal has unanimously overturned the decision of Tottle J. The judgment considers numerous legal principles, however two are particularly noteworthy.
- Mutuality is to be assessed at the time of commencement of the winding-up. The key question to be considered at that point is whether Forge had the right to use any payments received from Hamersley for its own benefit, or whether the payments received from Hamersley were being received for the benefit of ANZ. In this case, at the commencement of the winding-up, Forge’s claims were recoverable for the benefit of Forge, not ANZ and any amounts recovered by Forge from Hamersley could be used for its own benefit (and likewise any amounts recovered by Hamersley from Forge could be used for Hamersley’s own benefit). The Court found that at that point in time, there were mutual dealings for the purposes of s 553C notwithstanding ANZ’s security interest.
- Section 553C is not a code. Having taken into account the relevant policy considerations, the Court was clear that if s 553C did not apply then it did not also operate such that ANZ could take its interest in Forge’s claims free from any other right of set-off which Hamersley might have. Consequently, the general law rights of set-off and the statutory equities provided for in s 80(1) of the PPSA remained available.
Contracting parties seeking to rely on a right of set-off will take comfort in the fact that their entitlement to do so will not be set aside merely because the counterparty has provided an ‘all property’ security interest in its assets, including any rights under a contract between the two parties. Furthermore, any such contracting party may also rest easy knowing that s 553C does not operate to exclude other rights of set-off generally available to it under the contract and in equity.
Given the significance of this decision and its implications, an application for special leave to appeal might be on the cards.