In brief: Court of Appeal decision clarifies the law of set-off rights

The case of Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (In Liquidation) (Receivers and Managers Appointed) [2018] WASCA 163 (Court of Appeal Decision), concerned an appeal of a decision of the Supreme Court.

The previous Supreme Court decision of Justice Tottle in Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (In Liquidation) (Receivers and Managers Appointed) [2017] WASC 152 (Supreme Court Decision) was overturned in the appeal.

The effect of the previous Supreme Court Decision was that there would be no set-off available to a contracting party in circumstances where: 

(a) following the execution of the contract, the company entered into a General Security Agreement (GSA) with a third party; 

(b) the company subsequently entered into external administration; and

(c) the basis for Justice Tottle's findings were, in summary, that section 553C of the Corporations Act 2001 (Cth) (Act) was an exclusive code following the introduction of the PPSA, which did not allow contractual / equitable set-off and that entry into a GSA severed the mutuality that is required for a party to rely on section 553C set-off.

As a result of the Court of Appeal Decision, and subject to any further appeal, the legal landscape in respect to set-off has substantially returned to its earlier position. This provides greater comfort to parties seeking to rely on traditional set-off in construction or other contracts following a liquidation.

The Court of Appeal Decision provides that:

(a) Subject as always to the specific terms of the relevant GSA, statutory rights of set-off will be available against an insolvent company that has entered into a GSA either prior to or after the date of entering into a contract with the party claiming set-off. 

(b) Statutory rights of set-off under section 553C are not an exclusive code for set-off and it is capable of operating concurrently with the PPSA. 

(i) A point of distinction raised by the Court of Appeal decision was that the "credits, debts or claims need not be vested, liquidated, or enforceable" at the time of the winding up. This means that the rights of set-off, whilst they may not have been enforced prior to the winding up of the company, arose prior to the relevant date and, as a result, section 553C could apply in respect to those rights: at [68].

(c) Contractual and equitable rights of set-off will still be available depending on the terms of the contract.

(i) If the rights to enjoy the benefits under the contract reside with the third-party under the GSA, contractual or equitable rights of set-off may be raised in recovery proceedings brought for the benefit of that third party.

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