Hamersley Iron

New authority – Set-off may be available between creditors and companies in liquidation who are subject to General Security Agreements under the PPSA   The Court of Appeal – Supreme Court of Western Australia has recently confirmed that section 553C of the Corporations Act 2001 (Cth) may operate to offset mutual debts owed between companies in liquidation and their creditors, even in circumstances where the company in liquidation is subject to a general security agreement properly registered on the Personal Property Securities Register. In doing so, the Court of Appeal overturned the first-instance decision of the Supreme Court of Western Australia, which found that statutory set-off was not available in such circumstances.   In Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (In Liquidation) (Receivers and Managers Appointed) [2018] WASCA 163, the Court of Appeal unanimously found among other things that:  

1. As set out by the High Court of Australia in Gye v McIntyre [1991] HCA 60, “mutuality” of debts, credits or dealings in section 553C requires that:

 

a. first, the credits, debts or claims arising from the other dealings must be the same persons;

 

b. secondly, the benefit or burden of the credits, debts, or claims arising from the other dealings must lie in the same interests; and

 

c. thirdly, the requirement of mutuality is that the credits must ultimately sound in money.

 

2. As to the second criterion of “mutuality”, the critical question when assessing mutuality is not the classification of a charge over the receivables of a company in liquidation as “fixed” or “floating”, but whether the chargor has the right to use payments received for its own benefit.

 

3. In the case of general security agreements which, up until the liquidation of the company, permit the company to use moneys received from creditors for their own benefit, section 553C may continue to apply to set off the mutual debts between the creditor and company in liquidation.

 

4. On the other hand, once the charge becomes fixed there is an absence of mutuality for the purposes of set-off pursuant to section 553C.

  The Court of Appeal’s decision brings certainty and fairness to the operation of statutory set-off in the context of the Personal Property Securities Act 2009, which was an issue previously lacking judicial guidance at an appellate level. If the first instance decision had not been overturned (and assuming no alternative rights of set-off were available), in the above circumstances a creditor would need to account in full for amounts owing to the company in liquidation, but at the same time would be left to prove in the liquidation for any debts owed to the creditor if the company (often for significantly less than 100c/$). Conversely, a secured creditor would receive a windfall, as it would receive the entire amount owed by the creditor to the company, without accounting at all for the debts owing by the company in liquidation to that creditor.   For these reasons, we consider that the decision is a significant step forward for ensuring that substantial justice is afforded to creditors of companies in liquidation.