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The Court of Appeal - Supreme Court of Western Australia has delivered a decision confirming that a statutory set-off under s 553C of the Corporations Act can still be available to a creditor where a general security interest has attached to the amounts it is seeking to set-off (provided those amounts are circulating assets of the insolvent company), whilst leaving the door open for creditors to rely upon set-off rights at general law in those instances where set-off under s 553C is unavailable. A link to the full decision is here.
In February 2012, Hamersley Iron Pty Ltd (Hamersley) entered into two engineering, procurement and construction contracts (Contracts) with Forge Group Power Pty Ltd (In Liquidation) (Receivers and Managers Appointed) (Forge). The following year Forge entered into a GSA with the ANZ, which was registered under the PPSA.
On 11 February 2014, voluntary administrators were appointed to Forge, and the following day ANZ appointed Receivers pursuant to the GSA. Ultimately, Forge was wound up in March 2014.
Hamersley and Forge both had claims against the other. Hamersley’s claim was in breach of contract, and Forge claimed to be entitled to payments due under the Contracts. Hamersley relied upon a right to set-off its claims against amounts due to Forge, pursuant to a contractual right of deduction, equitable set-off, and/or set-off in insolvency under s 553C of the Act.
Section 553C allows set off of “mutual” debts and credits between an insolvent company and a creditor, such that only the balance of the account will be admissible to proof against the company.
In this instance, the Receivers argued there were no “mutual” debts or dealings for the purposes of s 553C because the equitable interest in Forge’s claims against Hamersley subsisted in ANZ, by virtue of the operation of the GSA and the provisions of the PPSA. It argued that Hamersley was therefore obliged to pay the whole amount of Forge’s claim to the Receivers, and then prove in the liquidation for the whole of its claims, without the benefit of any set-off.
At first instance, the Court found that the bank’s charge was fixed by the attachment process in s 19(2) of the PPSA, and that attachment transferred the equitable interest in the amounts due to ANZ, such that there was no longer any “mutuality of interest” as required by s 553C between Hamersley and Forge. The Court also found that Hamersley could not rely upon its other contractual or equitable rights of set-off, as they had been extinguished by s 553C, which essentially created a complete code for dealing with set-off in insolvency.
On appeal, the Court of Appeal overturned the Court’s decision. Its central findings were that:
Secured creditors relying upon security rights over circulating assets should be aware that if the insolvent company has the benefit of those assets as at the date of winding up, a section 553C set off may remain available to creditors.
As always, the decision was determined on its facts and whenever a set-off is claimed a court will examine the terms of the security instrument and the circumstances of the liquidation. Given the significance of this decision, we will watch with interest as to whether an application is lodged for special leave to appeal to the High Court.
 Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (In Liquidation) (Receivers and Managers Appointed)  WASCA 163
 Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (In Liquidation) (Receivers and Managers Appointed)  WASC 152.
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