Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liq) (Receivers and Managers Appointed)

[2018] WASCA 163

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT :   THE COURT OF APPEAL (WA)

CITATION:   HAMERSLEY IRON PTY LTD -v- FORGE GROUP POWER PTY LTD (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) [2018] WASCA 163

CORAM:   MURPHY JA

MITCHELL JA

ALLANSON J

HEARD:   21, 22 & 26 MARCH 2018

DELIVERED          :   21 SEPTEMBER 2018

FILE NO/S:   CACV 72 of 2017

BETWEEN:   HAMERSLEY IRON PTY LTD

Appellant

AND

FORGE GROUP POWER PTY LTD (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED)

Respondent

ON APPEAL FROM:

Jurisdiction              :   SUPREME COURT OF WESTERN AUSTRALIA

Coram:   TOTTLE J

Citation: HAMERSLEY IRON PTY LTD -v- FORGE GROUP POWER PTY LTD (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) [2017] WASC 152

File Number             :   CIV 1245 of 2015

Catchwords:

Corporations - Insolvency - Statutory set-off - Corporations Act 2001 (Cth) s 553C - Whether s 553C is an exclusive code regulating set-off in insolvency - Pari passu principle - Whether s 553C operated to the exclusion of any contractual or equitable rights of set-off available in insolvency - Whether set‑off rights preserved in insolvency by Personal Property Securities Act 2009 (Cth) (PPSA) s 80(1)

Transferee of an account - Whether PPSA s 80(1) applies to assignments by way of charge or only outright assignments

Floating charges - Equitable set-off - Crystallisation - General law - Circulating assets under PPSA - Control - Circulating security interests under Corporations Act ch 5

Personal Property Securities - PPSA - Where contractor has entered general security agreement with lender - Where lender has registered security agreement over contractor's personal property - Where contractor has gone into liquidation - Whether general security agreement effective according to its terms creating charge over claims to personal property - Whether attachment of a security interest destroys mutuality

Account under PPSA - Whether claim for wrongful call under guarantees provided by builder under building contract an 'account'
Contract - Construction contract - Interpretation - contractual right of deduction

Legislation:

Corporations Act 2001 (Cth), s 553C
Personal Property Securities Act 2009 (WA), s 12, s 18, s 19, s 20, s 32, s 79, s 80, s 81, s 254, s 338, s 339, s 340, s 341

Result:

Appeal allowed
Leave to appeal allowed

Category:    A

Representation:

Counsel:

Appellant	:	Mr B Dharmananda SC & Mr D Jackson SC
Respondent	:	Mr SK Dharmananda SC, Mr R J Price & Ms L A Widdup

Solicitors:

Appellant	:	Holman Fenwick Willan (Perth)
Respondent	:	Clayton Utz

Case(s) referred to in decision(s):

Addis v Knight (1817) 2 Mer 117; 35 ER 885

Agnew v Commissioner of Inland Revenue [2001] 2 AC 710

Altarama v Camp (1980) 5 ACLR 513

Ansett Australia Ltd v Travel Software Solutions Pty Ltd [2007] VSC 326; (2007) 214 FLR 203

Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd [2000] HCA 25; (2000) 202 CLR 588

AWA Ltd v Exicom Australia Pty Ltd (1990) 19 NSWLR 705

Bailey v New South Wales Medical Defence Union Ltd [1995] HCA 28; (1995) 184 CLR 399

Baillie v Edwards (1848) 2 HL Cas 73; 9 ER 1020

Bank of Boston Connecticut v European Grain & Shipping Ltd [1989] AC 1056

Bank of Waunakee v Rochester Cheese Sales Inc, 906 F 2d 1185 (7th Cir, 1990)

Biggerstaff v Rowatt's Wharf Ltd [1896] 2 Ch 93

Brice v Bannister (1878) 3 QBD 569

British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 1 WLR 748

Caltex Oil (Australia) Pty Ltd v Best [1990] HCA 53; (1990) 170 CLR 516

Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550

Clyne v Deputy Commissioner of Taxation [1981] HCA 40; (1981) 150 CLR 1

Colonial Mutual General Insurance Co Ltd v ANZ Banking Group (New Zealand) Ltd [1995] 1 WLR 1140

Comptroller of Stamps (Victoria) v Howard-Smith [1936] HCA 12; (1936) 54 CLR 614

Coventry v Charter Pacific Corporation Ltd [2005] HCA 67; (2005) 227 CLR 234

Davies v Gertig (2003) 85 SASR 226

Davies v Gertig (No 2) [2002] SASC 257; (2002) 83 SASR 521

Day & Dent Constructions Pty Ltd (in liq) v North Australian Properties Pty Ltd (1981) 54 FLR 277

Day & Dent Constructions Pty Ltd (in liq) v North Australian Properties Pty Ltd [1982] HCA 20; (1982) 150 CLR 85

Dearle v Hall (1828) 3 Russ 1; 38 ER 475

Deputy Commissioner of Taxation v Lai Corporation Pty Ltd (receivers and managers appointed) [1987] WAR 15

Durham Brothers v Robertson [1898] 1 QB 765

Edward Nelson & Co Ltd v Faber & Co [1903] 2 KB 367

Equititrust Ltd v Franks [2009] NSWCA 128; (2009) 258 ALR 388

Ex parte Blagden (1815) 19 Ves Jun 465; (1815) 34 ER 589

Ex parte Cleland; In re Davies (1867) LR 2 Ch 808

Ex parte Stephens (1805) 11 Ves Jun 24; (1805) 32 ER 996

Felton v Mulligan (1971) 124 CLR 367

Ferrier v Bottomer [1972] HCA 11; (1972) 126 CLR 597

Fire Nymph Products Pty Ltd v Heating Centre Pty Ltd (in liq) (1992) 7 ACSR 365

Forster v Wilson (1843) 12 M & W 191; 152 ER 1165

G & M Aldridge Pty Ltd v Walsh [1999] VSCA 179; [1999] 3 VR 601

G M & A M Pearce and Co Pty Ltd v RGM Australia Pty Ltd [1998] 4 VR 888

George Barker Transport Ltd v Eynon [1974] 1 WLR 462

Golf Australia Holdings Ltd v Buxton Construction Pty Ltd [2007] VSCA 200

Gye v Davies (1995) 37 NSWLR 421

Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609

Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liq) (receivers and managers appointed) [2017] WASC 152; (2017) 52 WAR 90

Handberg v Smarter Way (Aust) Pty Ltd [2002] FCA 469; (2002) 20 ACLC 856

Hazcor Pty Ltd v Kirwanon Pty Ltd (1995) 12 WAR 62

Hiley v People's Prudential Assurance Co Ltd (in liq) [1938] HCA 40; (1938) 60 CLR 468

Holroyd v Marshall (1862) 10 HL Cas 191; 11 ER 999

Hoverd Industries Ltd v Supercool Refrigeration & Air Conditioning (1991) Ltd [1995] 3 NZLR 577

In re City Life Assurance Co Ltd [1926] 1 Ch 191

In re Printz (2012) 478 BR 876

In re Spectrum Plus Ltd (in liq) [2005] 2 AC 680

International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151

J & S Holdings Pty Ltd v NRMA Insurance Ltd (1982) 61 FLR 108

James v Commonwealth Bank of Australia (1992) 37 FCR 445

Krishell Pty Ltd v Nilant [2006] WASCA 223; (2006) 32 WAR 540

Landall Holdings Ltd v Caratti [1979] WAR 97

Lord v Direct Acceptance Corporation Ltd (receivers and managers appointed) (in liq) (1993) 32 NSWLR 362

Mangles v Dixon (1852) 3 HL Cas 702; 10 ER 278

Mathieson's Trustee v Burrup Mathieson & Co [1927] 1 Ch 562

McDonnell and East Ltd v McGregor (1936) 56 CLR 50

McIntyre v Gye (1994) 51 FCR 472

McIntyre v Perkes; McIntyre v Gye (1990) 22 FCR 260

Mine & Quarry Equipment International Ltd v McIntosh [2005] QCA 186; (2005) 54 ACSR 1

MS Fashions Ltd v Bank of Credit and Commerce International SA (in liq) [1993] Ch 425

Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439

N W Robbie & Co Ltd v Whitney Warehouse Co Ltd (1963) 1 WLR 324

Norman v Federal Commissioner of Taxation [1963] HCA 21; (1963) 109 CLR 9

Norman; Re Forest Enterprises Ltd v FEA Plantations Ltd [2011] FCAFC 99; (2011) 195 FCR 97

Northern Territory of Australia v Northern Land Council (1992) 81 NTR 1

Oswal v Commonwealth Bank of Australia [2013] WASCA 58

Paganini v The Official Assignee (Unreported, NZCA, 12 March 1999)

Palette Shoes Pty Ltd v Krohn [1937] HCA 37; (1937) 58 CLR 1

Piccone v Suncorp Metway Insurance Ltd [2005] FCAFC 260; (2005) 148 FCR 437

Popular Homes Ltd v Circuit Developments Ltd [1979] 2 NZLR 642

Qantas Airways Ltd v Gubbins (1992) 28 NSWLR 26

Re Anroma Pty Ltd [1987] 2 Qd R 134

Re Asiatic Electric Co Pty Ltd (in liq) [1970] 2 NSWR 612

Re Bank of Credit and Commerce International SA (No 8) [1996] Ch 245

Re Bank of Credit and Commerce International SA (No 8) [1998] AC 214

Re Diesels & Components Pty Ltd [1985] 2 Qd R 456

Re Harry Simpson & Co Pty Ltd and the Companies Act (1963) 81 WN (Pt 1) NSW 207

Re Langdon; Forge Group Limited (receivers and managers appointed) (in liq) [2017] FCA 170; (2017) 118 ACSR 434

Re Margart Pty Ltd (in liq) (1984) 9 ACLR 269

Re NIAA Corporation Ltd (in liq) (1993) 12 ACSR 141

Re Norman Holding Co Ltd (in liq) [1991] 1 WLR 10

Re Parker (1997) 80 FCR 1

Re SSSL Realisations (2002) Ltd (in liq) (2006) Ch 610

Re Trivan Pty Ltd (1996) 134 FLR 368

Redman v Permanent Trustee Co of New South Wales Ltd [1916] HCA 47; (1916) 22 CLR 84

Relwood Pty Ltd v Manning Homes Pty Ltd (No 2) [1992] 2 Qd R 197

Roadshow Entertainment Pty Ltd v (ACN 053006269) Pty Ltd (receiver and manager appointed) (1997) 42 NSWLR 462

Robertson v Grigg [1932] HCA 29; (1932) 47 CLR 257

Rother Iron Works Ltd v Canterbury Precision Engineers Ltd [1974] QB 1

Roxburghe v Cox (1887) 17 Ch D 520

Sheahan v Carrier Air Conditioning Pty Ltd [1997] HCA 37; (1997) 189 CLR 407

SL Sethia Liners Ltd v Naviagro Maritime Corporation (The 'Kostas Melas') [1981] 1 Lloyd's Rep 18

Smith v Perpetual Trustee Co Ltd [1910] HCA 39; (1910) 11 CLR 148

Southern British National Trust Ltd (in liq) v Pither [1937] HCA 28; (1937) 57 CLR 89

Stein v Blake [1995] 2 WLR 710

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Stoddart v Union Trust Ltd [1921] 1 KB 181

Strategic Finance Ltd (in rec and in liq) v Bridgman [2013] NZCA 357; (2013) 3 NZLR 650

Swiss Bank Corporation v Lloyd's Bank [1982] AC 584

The Government of Newfoundland v The Newfoundland Railway Co (1887) 13 App Cas 199

Thomas v National Australia Bank Ltd [1999] QCA 525; [2000] 2 Qd R 448

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Torkington v Magee [1902] 2 KB 427

United States Trust Co of New York v Australia and New Zealand Banking Group Ltd (1995) 37 NSWLR 131

United Travel Agencies Pty Ltd v Cain (1990) 20 NSWLR 566

Walker v Secretary, Department of Social Security (1995) 56 FCR 354

Westfield Management Ltd v AMP Capital Property Nominees Ltd [2012] HCA 54; (2012) 247 CLR 129

Westmex Operations Pty Ltd (in liq) v Westmex Ltd (in liq) (1994) 12 ACLC 106

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Table of contents

Introduction

Background

The Contracts - 2011/2012

Forge's security arrangements - July 2013/January 2014

Insolvency appointments to Forge and termination of contracts - February/March 2014

The parties' pleaded claims

Hamersley's claims against Forge

West Angelas

Cape Lambert

Forge's claims against Hamersley

West Angelas

Cape Lambert

The pleas with respect to set‑off

Forge's prayer for relief

The preliminary questions and the answers given by the primary judge

Grounds of Appeal

Respondent's notice of contention

General law observations

Assignments

Equitable set‑off

Charges

Floating charges

Fixed and floating charges, circulating assets, and the PPSA

Set-off in insolvency

Mutuality

The burden or benefit must lie in the same interest

Credits, debts and mutual dealings

The nature of the set-off

The object of insolvency statutory set-off

The application of s 553C of the Corporations Act in this case

The financing documents

Grant of security interest and its nature

Control Event

Collection of proceeds by Forge

Controlled Account

Dealings with Collateral

Event of default

Bank's rights upon Event of Default

Restrictions in Terms Deed

Permitted repayment of Financial Indebtedness

The effect of the bank's financing documents and the application of s 553C

Conclusion as to the application of s 553C in this case

Whether and to what extent s 553C operates as a 'code'

Contracting out - principles

Whether the parties can agree that s 553C has no application

Whether s 553C operates as a 'code' when s 553C does not apply

Account and Forge's Securities Claims

The Contractor's Performance Security

The primary judge's findings in relation to 'account' and Forge's Securities Claims

Account definition

Strategic and Re Langdon

Disposition

Security interests and the transfer of accounts under the GSA

Section 12 of the PPSA

Transfers of interests in collateral - pt 2.7 of the PPSA

Forge's notice of contention

Hamersley's reliance on contractual set-off

Contractual terms

GC 16.4, 16.5 and 16.12

The primary judge's findings

The parties' submissions

Disposition

Conclusion

JUDGMENT OF THE COURT:

Introduction

1. This is an appeal against a decision of the primary judge,[1] concerning certain claims by the appellant (Hamersley Iron Pty Ltd (Hamersley)), against the respondent (Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) (Forge)).  The dispute is essentially between Hamersley and Forge's receivers and managers (Receivers).

   [1] Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liq) (receivers and managers appointed) [2017] WASC 152; (2017) 52 WAR 90 (primary decision).

2. In broad terms, in 2012 Hamersley (as principal) engaged Forge (as builder) to carry out certain works in relation to the construction of power stations at West Angelas and Cape Lambert (collectively, Contracts).  In or about 2013, Forge obtained funding from a bank, and granted to the bank certain security over its personal property.  The bank registered the charge pursuant to the Personal Property Securities Act 2009 (Cth) (PPSA) on 2 July 2013.  In 2014, the bank appointed Receivers to Forge, and Forge subsequently went into liquidation.  Disputes arose involving claims by Hamersley against Forge, and claims by Forge against Hamersley.[2] 

   [2] Primary decision [11] - [21].

3. Hamersley alleged that its claims against Forge exceeded the claims Forge had against it, and that it was entitled to set‑off its claims against Forge's claims, and prove for the balance in the liquidation of Forge.[3] Hamersley relied on contractual rights of deduction under the Contracts, equitable set‑off, and/or alternatively, set‑off in insolvency pursuant to s 553C of the Corporations Act 2001 (Cth).

   [3] Primary decision [2].

4. Forge, by its Receivers, alleged that Hamersley has no entitlement to deduction or set‑off. The Receivers contended, in effect, that once liquidation supervened, there was no right of set‑off other than under s 553C of the Corporations Act, and s 553C had no application in the circumstances. 

5. In broad terms, the Receivers contended, first, that mutuality under s 553C was determined by reference to equitable interests and secondly, that there was no mutuality because the equitable interest in Forge's claims against Hamersley subsisted in the bank, by virtue of the operation of the PPSA, as from 2 July 2013.

6. The Receivers accordingly contended that Hamersley was obliged to pay the Receivers the debts and other monies due to Forge, effectively for the benefit of the bank, and that Hamersley was left to prove in the liquidation of Forge for the whole of its claims, without the benefit of any set‑off.[4] 

   [4] Primary decision [3].

7. The primary judge upheld Forge's contentions in a trial of preliminary issues, in which there was an agreed statement of facts.  Hamersley challenges that decision.  The decision is interlocutory and leave to appeal is required.[5]

   [5] Supreme Court Act 1935 (WA) s 60(1)(f).

8. For the reasons which follow, leave should be granted and the appeal should be upheld.  In broad summary:

   1.Section 553C of the Corporations Act applied and provided for Hamersley's claims to be set-off against Forge's claims, and for the balance to be admissible to proof against Forge.  As at the commencement of the winding up of Forge in insolvency, the relevant dealings between Hamersley and Forge under the Contracts were mutual dealings for the purposes of s 553C.  That is on the basis that, at that time, Forge retained the right to use amounts paid by Hamersley to Forge under the Contracts for Forge's own benefit.  Section 553C operated to the exclusion of any contractual or equitable rights of set-off which Hamersley had prior to the commencement of the winding up of Forge.[6]

   2.Alternatively, if s 553C did not apply because the amounts due by Hamersley to Forge under the Contracts were payable for the benefit of the bank rather than the benefit of Forge, then s 553C does not preclude Hamersley from asserting any available contractual or equitable rights of set-off in recovery proceedings brought for the benefit of the bank as secured party.[7]

   3.The rights of the bank (as the transferee of an account) in relation to Forge's claims against Hamersley are subject to the terms of the Contracts and any equity, defence, remedy or claim arising in relation to the Contracts (including a defence by way of a right of set-off), pursuant to s 80(1)(a) of the PPSA.[8]

Background[9]

The Contracts - 2011/2012

[6] See [65] - [138] and [250] below.

[7] See [139] - [177] below.

[8] See [178] - [232] below.

[9] The following is taken from the 'Agreed statement of facts' filed in the primary proceedings, unless otherwise indicated.

1. On or about 11 February 2012, Hamersley and Forge entered into a written lump sum contract pursuant to which Forge agreed to perform the engineering, procurement and construction of the West Angelas Power Station (West Angelas Contract).[10]

   [10] Agreed statement of facts, par 1; GB 1A.

2. The West Angelas Contract included a Formal Instrument of Agreement and a schedule incorporating General Conditions of Contract (GCs).[11]

   [11] Amended statement of claim dated 19 February 2016, par 9; BB 124 - 125; amended defence and counterclaim dated 12 April 2016, par 9; BB 149.

3. On or about 2 November 2011, Forge commenced work under the West Angelas Contract.[12]

   [12] Agreement statement of facts, par 2; GB 1A.

4. On or about 28 August 2012, Hamersley and Forge entered into a written lump sum contract pursuant to which Forge agreed to perform the engineering, procurement and construction of the Cape Lambert Power Station (Cape Lambert Contract).[13]

   [13] Agreed statement of facts, par 3; GB 1B; primary decision [11].

5. The Cape Lambert Contract also included a Formal Instrument of Agreement and General Conditions, which were in materially identical terms to the GCs in the West Angelas Contract.[14]

   [14] Primary decision [11], [21]; amended statement of claim, par 34; BB 138; amended defence and counterclaim, par 34; BB 167.

6. On or about 3 September 2012, Forge commenced work under the Cape Lambert Contract.[15]

Forge's security arrangements - July 2013/January 2014

[15] Agreed statement of facts, par 4; GB 1B; primary decision [12].

1. On or about 2 July 2013, Forge entered into:

   1.a facility agreement with Australia and New Zealand Banking Group Limited (the bank);

   2.a General Security Agreement (GSA) with the bank and ANZ Fiduciary Services Pty Ltd as trustee of the Forge Security Trust (ANZFS); and

   3.a Common Terms Deed with the bank and ANZFS.

2. Also on 2 July 2013, the GSA was registered on the Personal Property Securities Register.[16]

   [16] Agreed statement of facts, par 7; GB 1B.

3. On 28 January 2014, Forge entered into a Second Deed of Amendment and Restatement of the Common Terms Deed,[17] and Deed of Amendment and Restatement of the Security Trust Deed.[18]

Insolvency appointments to Forge and termination of contracts - February/March 2014

[17] GB 883.

[18] GB 1090.

1. On 11 February 2014, the directors of Forge resolved to appoint voluntary administrators to Forge pursuant to s 436A of the Corporations Act.  It was common ground on the pleadings that the Contracts provided that the appointment of voluntary administrators constituted an 'Event of Insolvency' for the purposes of the Contracts.[19]

   [19] Amended statement of claim, par 10(a)(vi); BB 126; amended defence and counterclaim, par 10(a)(vi); BB 149.

2. On 11 February 2014, after the appointment of the voluntary administrators, ANZFS appointed the Receivers of Forge pursuant to the GSA.[20]

   [20] Agreed statement of facts, par 11; GB 1B.

3. On 12 February 2014, Forge terminated the employment of employees who had been performing the work under the Contracts.[21]

   [21] Amended statement of claim, pars 12, 37; BB 132, 139; amended defence and counterclaim, par 12(a)(i); BB 158.

4. Also on 12 February 2014, the Receivers sent a letter to the creditors of Forge stating, amongst other things that the Receivers had not adopted any of Forge's contracts.[22]

   [22] Amended statement of claim, pars 12, 37; BB 132, 139; amended defence and counterclaim, par 12(a)(ii); BB 158; GB 1199.

1. On 24 February 2014, each of the Contracts came to an end.[23]

   [23] Primary decision [17].

2. On 18 March 2014, Forge's creditors resolved that Forge be wound up and that the voluntary administrators be appointed the liquidators of Forge.[24] 

   [24] Agreed statement of facts, par 10; GB 1B; primary decision [18].

3. The winding up of Forge is taken to have commenced on 11 February 2014.[25]

The parties' pleaded claims[26]

Hamersley's claims against Forge

[25] Amended statement of claim, par 57; BB 144; amended defence and counterclaim, par 57; BB 181.

[26] See the agreed document entitled 'Summary of claims in the amended statement of claim of 19 February 2016 and the defence and counterclaim of 12 April 2016' handed up by consent at the hearing of the appeal.  See also primary decision [38] - [40].

1. Hamersley's claims against Forge are as follows:

West Angelas

1.Liquidated damages of $12,195,000 under the West Angelas Contract in respect of the failure to meet contracted Completion Dates for six different 'Separable Portions' which had Completion Dates ranging between 1 November 2012 and 1 October 2013 which, as at 11 February 2014, had not been completed.[27]

[27] Amended statement of claim, par 17; BB 133.

2.Damages for repudiation and breach of the West Angelas Contract in respect of additional costs to complete the works of $114,820,000, ie, the amount that Hamersley has paid or will have to pay to complete the works under the Contract, less the amount that it would have paid to Forge had Forge completed the work in accordance with the Contract.[28]

[28] Amended statement of claim, par 19; BB 134.

3.Hamersley's claims of $12,195,000 and $114,820,000 are reduced to $111,775,000 by reason of Hamersley having realised performance securities in the sum of $15,240,000.[29]

[29] Amended statement of claim, par 20; BB 134.

Cape Lambert

4.Damages for repudiation and breach of the Cape Lambert Contract in respect of additional costs to complete the works of $120,710,000, ie, the amount that Hamersley has paid or will have to pay to complete the work under the Contract, less the amount that it would have paid to Forge had Forge completed the work in accordance with the Contract.[30]

5.Hamersley's claim of $120,710,000 is reduced to $73,380,000 by reason of Hamersley having realised performance securities in the sum of $47,330,000.[31]

Forge's claims against Hamersley

[30] Amended statement of claim, par 41; BB 140.

[31] Amended statement of claim, par 42; BB 141.

1. On 12 September 2014, Forge by its Receivers claimed certain amounts from Hamersley in respect of the Contracts.[32]  Forge characterised its claims as falling within three broad categories:[33]

   1.'Payment Certificate Claims' - claims for amounts certified for payment by Hamersley by the West Angelas Payment Certificate and the Cape Lambert Payment Certificate.

   2.'Progress Claims' - specific amounts Forge claimed were due to it for work done, but which had not been certified for payment.

   3.'Securities Claims' - claims arising from securities which Forge alleged were wrongfully drawn down by Hamersley.

   [32] Amended statement of claim, pars 23, 45; BB 135, 141; amended defence and counterclaim, pars 23, 45; BB 164, 176; primary decision [69]. See also the agreed document entitled 'Summary of claims in the amended statement of claim of 19 February 2016 and the defence and counterclaim of 12 April 2016' handed up by consent at the hearing of the appeal. That document, at par 17, refers also to a sum of $3,852,726.11 claimed by Forge for additional amounts said to be due under the Cape Lambert Contract for work performed before 11 February 2014, but not certified. The primary judge appears to make no reference to this in primary decision [69].

   [33] Primary decision [262].

2. More particularly, Forge's claims against Hamersley are as follows:[34]

   [34] Primary decision [69].

West Angelas

1.The sum of $458,190.50 certified for payment pursuant to the West Angelas Payment Certificate issued by Hamersley on 28 January 2014 (less than 15 business days before 11 February 2014), which was not paid.[35]

[35] Amended statement of claim, par 23(b)(i); BB 135; amended defence and counterclaim, pars 11(a)(iv)(d), 11(a)(iv)(e), 23(b)(i); BB 157 - 158, 164.

2.Further amounts totalling $7,019,752.17 which the Receivers claimed were due to Forge under the West Angelas Contract for work performed before 11 February 2014 (but not certified).[36]

[36] Amended defence and counterclaim, par 23(b)(ii); BB 165.

3.Amounts of $9,224,372.10 and US$5,440,160.40 realised by Hamersley in respect of (alleged) wrongful calls on performance securities under the West Angelas Contract.[37]

[37] Amended defence and counterclaim, par 23(b)(iii); BB 165.

Cape Lambert

4.The sum of $1,283,559.61 certified for payment pursuant to the Cape Lambert Payment Certificate issued by Hamersley on 30 January 2014 (less than 15 business days before 11 February 2014).[38]

5.The amount of $8,577,829.63 for works claimed in respect of a progress claim issued by Forge on 6 February 2014 (but not certified).[39]

6.Amounts of $25,933,287.00 and US$19,335,939.00 realised by Hamersley on or about 18 February 2014 by (alleged) wrongful calls on performance securities under the Cape Lambert Contract.[40]

The pleas with respect to set‑off

[38] Amended statement of claim, par 45(b)(i); BB 142; amended defence and counterclaim, par 45(b)(i); BB 176.

[39] Amended defence and counterclaim, par 45(b)(ii); BB 176 - 177.

[40] Amended defence and counterclaim, pars 42(b)(i), 42(b)(ii), 45(b)(iv); BB 173 ‑ 174, 177.

1. Hamersley pleaded, amongst other things:

   1.Contractual rights to deduction.[41]

   2.Equitable set‑off.[42]

   3.Set-off under s 553C of the Corporations Act.[43]

   [41] Amended statement of claim, pars 10(q), 31, 35(c), 53; BB 129 - 130, 137, 139, 143.

   [42] Amended statement of claim, pars 32, 54; BB 138, 144; primary decision [43].

   [43] Amended statement of claim, pars 55 - 59; BB 144 - 145.

2. The Receivers pleaded, in effect, that some or all of the following matters precluded Hamersley from deducting or setting‑off its claims against Forge's claims:[44]

   1.Section 553C is a mandatory and exclusive code by reason of which the contractual deduction provisions in the Contracts are unenforceable, and equitable set‑off is unavailable.[45]

   2.Section 553C, which exclusively governs set‑off, is not applicable because of an absence of mutuality, in that:[46]

   (a)the charge created under the GSA is, and was at all material times, a security interest that had attached to the Collateral (as defined in the GSA), and, or alternatively;

   (b)the charge created pursuant to the GSA is, and was at all material times, a fixed charge; and

   (c)as a result, immediately on the creation of the GSA or at the time of attachment (being at the time the rights arose), Forge's claims or choses in action under the Contracts were not held by Forge as beneficial holder, or in the same interest as Hamersley.

Forge's prayer for relief

[44] Primary decision [73].

[45] Amended defence and counterclaim, pars 10(q)(ii), 10(t), 24(c), 29(a), 31(a), 35(a)(iii), 46(c), 51(a), 53(b); BB 154, 156, 166 ‑ 168, 178; primary decision [46].

[46] Amended defence and counterclaim, pars 56 - 58; BB 179 - 881.

1. The primary judge summarised Forge's counterclaim for declaratory relief to the following effect:[47]

   (i)s 553C of the Corporations Act is a mandatory and exclusive code as to set-off between an insolvent company and its creditors that took effect in this case from 11 February 2014;

   (ii)the contractual set-off provisions do not apply in the face of the operation of s 553C;

   (iii)Hamersley is not entitled to deduct or otherwise set off from monies otherwise due to Forge under the Contracts any debt or other monies due or any Claim to money it may have against Forge under or in connection with the Contracts by reason of an absence of mutuality; and

   (iv)Forge is entitled to the amounts admitted by Hamersley as being owed to Forge.

   In addition Forge seeks an account in respect of each of the securities realised by Hamersley.

   [47] Primary decision [71] - [72].

The preliminary questions and the answers given by the primary judge

1. The preliminary questions were to the following effect:[48]

   1.Assuming that Hamersley is otherwise entitled to the set‑offs it has pleaded, do any of the matters pleaded by Forge (summarised in [30] above), together or separately, preclude Hamersley from setting off its claims against Forge's claims?

   2.Is Hamersley entitled to set‑off its claims against Forge's claims?

   [48] Primary decision [73].

2. The primary judge determined the preliminary questions on the assumed and agreed basis that each party was entitled to the loss and damage it pleaded against the other.[49]

   [49] Primary decision [74].

3. The primary judge answered the first question in the affirmative and the second in the negative.[50]

   [50] Primary decision [405] - [407].

Grounds of Appeal

1. Hamersley alleged that the primary judge erred in law in:

   1.holding that the 'Collateral' the subject of the GSA included the sums claimed by Forge as distinct from the balance, if any, after taking into account the sums claimed by Hamersley;

   2.his treatment of s 80(1)(a) of the PPSA:

   (a)in concluding that Hamersley could not invoke s 80(1)(a) against the rights of the bank and the Receivers;

   (b)in concluding that s 80(1)(a) does not operate to make any right of the bank to make claims under the Contracts subject to the terms of those Contracts, and any equity, defence (including by way of set‑off), remedy or claim of Hamersley arising in relation to the Contracts, and further, in concluding that s 80(1)(a) does not apply in the liquidation of Forge; and

   (c)in failing to find that s 80(1)(a) applied to ensure that mutuality remained as between Forge's claims for payment under the Contracts and Hamersley's claims for breaches of the Contracts, despite the creation of a security interest in favour of the bank;

   3.concluding that the Securities Claims were not 'accounts' within the meaning of the PPSA, and thus subject to the operation of s 80(1)(a) of the PPSA;

   4.his treatment of s 553C of the Corporations Act:

   (a)in concluding that s 553C is an exclusive code, and:

   (i)that it applies to the exclusion of s 80(1)(a) of the PPSA; and

   (ii)that it leaves no room for any other basis for set‑off;

   (b)in concluding that, for the purposes of s 553C there was no mutuality between Forge's claims for payment under the Contracts and Hamersley's claims for damages for breaches of the Contracts; and

   (c)in failing to conclude that s 553C does not operate in relation to property the subject of the bank's security interest and, in its place, s 80(1)(a) of the PPSA operates so that Hamersley as an account debtor could rely on the contractual set‑off provisions of the Contracts;

   5.further, or alternatively, in concluding that:

   (a)section 19 of the PPSA resulted in there being no mutuality of interest for the purposes of the application of s 553C of the Corporations Act; and

   (b)the existence of the GSA prevented the application of s 553C.

Respondent's notice of contention

1. The Receivers contend that if Hamersley succeeds in any of grounds 2, 3 or 4, the primary judge's answers to each of the preliminary questions should be upheld on the basis that s 80 of the PPSA does not apply to Hamersley's contractual set-off rights as, on the proper construction of s 80 in the context of the PPSA as a whole, s 80 applies only to 'rights of a transferee of an account or chattel paper' and the GSA did not effect a transfer of an 'account' to the bank, nor a transfer of chattel paper.[51]

   [51] Respondent's notice of contention, pars 1 - 2; WB 56 (noting that this ground was not subject to argument before the primary judge, but contending that it is purely one of construction and so it is appropriate for it to be considered on appeal in the interests of justice).

General law observations

1. The parties approached the issues of the proper construction of the PPSA, and the Corporations Act, on the basis that the statutory instruments were to be construed in the context of the general law background including as to assignments, equitable set‑off and the general law distinction between fixed and floating charges.

2. The following general observations may be made as to the position under the general law.  They are not intended to be exhaustive, but rather sufficient for the purposes of the discussion of the issues raised in connection with the preliminary questions the subject of this appeal.

Assignments

1. Forge's claims against Hamersley are legal choses in action.[52]  Historically, legal choses in action were not directly assignable at law prior to the enactment of s 25(6) of the Judicature Act 1873 (UK) (Judicature Act).[53]  Prior to then, legal choses in action were only assignable in or with the assistance of equity.[54]

   [52] Torkington v Magee [1902] 2 KB 427.

   [53] In this State, see Property Law Act 1969 (WA) s 20.

   [54] Norman v Federal Commissioner of Taxation [1963] HCA 21; (1963) 109 CLR 9, 26 ‑ 27.

2. An assignment in equity depends upon there being a sufficient expression of an immediate intention by the assignor to impart the assignor's interest in the property, or some lesser interest carved out of it, to the assignee.[55]

   [55] Comptroller of Stamps (Victoria) v Howard-Smith [1936] HCA 12; (1936) 54 CLR 614, 622 ‑ 624; Smith v Perpetual Trustee Co Ltd [1910] HCA 39; (1910) 11 CLR 148, 158 ‑ 159; Norman (26).

3. As between assignor and assignee, an equitable assignment of the chose in action (unlike a legal assignment at law)[56] is effective without notice being given to the debtor/obligor.[57]

   [56] See, eg, in this State, Property Law Act 1969 (WA) s 20.

   [57] Howard-Smith (622); Hiley v People's Prudential Assurance Co Ltd (in liq) [1938] HCA 40; (1938) 60 CLR 468, 503 ‑ 504; McIntyre v Gye (1994) 51 FCR 472, 479; Heydon JD, Leeming MJ and Turner PG, Meagher, Gummow & Lehane's Equity:  Doctrines & Remedies (5th ed, 2015) [6-430].

4. However, from the assignee's point of view, the purpose of giving notice of the assignment to the debtor/obligor is, first, to bind the conscience of the debtor/obligor to require payment to the assignee - otherwise the assignee would be bound by any payments made by the debtor/obligor to the assignor[58] and secondly, to preserve its priority against other assignees of the chose in action.[59]

   [58] Tooth v Brisbane City Council [1928] HCA 20; (1928) 41 CLR 212, 222 ‑ 224.

   [59] Howard-Smith (622); Thomas v National Australia Bank Ltd [1999] QCA 525; [2000] 2 Qd R 448, 455; Dearle v Hall (1828) 3 Russ 1; 38 ER 475.

5. The assignee of a chose in action takes the chose (or the equitable interest in the chose),[60] subject to all the 'equities' that the debtor/obligor has against the assignor at the time of notice of the assignment, and subject also to all the infirmities and defects in the title of the assignor.[61]  It is a paramount rule that the assignee takes subject to the infirmities of his or her assignor's title.[62]

   [60] Edelman JJ and Elliot S, Two Conceptions of Equitable Assignment (2015) 131 Law Quarterly Review 228.

   [61] Clyne v Deputy Commissioner of Taxation [1981] HCA 40; (1981) 150 CLR 1, 20 ‑ 21; Southern British National Trust Ltd (in liq) v Pither [1937] HCA 28; (1937) 57 CLR 89, 110; Redman v Permanent Trustee Co of New South Wales Ltd [1916] HCA 47; (1916) 22 CLR 84, 91 ‑ 92; Re Harry Simpson & Co Pty Ltd and the Companies Act (1963) 81 WN (Pt 1) NSW 207, 209; Edward Nelson & Co Ltd v Faber & Co [1903] 2 KB 367, 375; Roxburghe v Cox (1881) 17 Ch D 520, 526; Mangles v Dixon (1852) 3 HL Cas 702; 10 ER 278, 731.

   [62] Redman (92); Clyne (20).

6. The word 'equities' has a wide meaning in this context and it is not used in its technical sense.[63]  It is a general expression calculated to comprehend defences which would have been available to the debtor/obligor in an action brought against the debtor/obligor by the assignor, as well as set‑off and counterclaims.[64]

   [63] Clyne (20); Simpson (209).

   [64] Clyne (20).

7. The assignee takes subject to any defence or set‑off available to the debtor/obligor at the time when notice of the assignment is given, unless the right of set‑off is excluded by agreement between the assignor and the debtor/obligor.[65]

   [65] Clyne (20 - 21).

8. Further, claims that flow out of, and are inseparably connected with, the obligation the benefit of which is assigned, and do not involve any fresh transaction entered into by the assignor after notice of the assignment, may also be set‑off in equity against the assignee, at least insofar as they impeach the assignee's title.[66]

   [66] The Government of Newfoundland v The Newfoundland Railway Co (1888) 13 App Cas 199, 210, 212 ‑ 213, referred to with evident approval by Isaacs J in Tooth (223); Roadshow Entertainment Pty Ltd v (ACN 053006269) Pty Ltd (receiver and manager appointed) (1997) 42 NSWLR 462; Altarama v Camp (1980) 5 ACLR 513, 519 ‑ 520; see also Stoddart v Union Trust Ltd [1921] 1 KB 181, 188 - 189; Meagher, Gummow & Lehane [6‑500].  In McDonnell and East Ltd v McGregor (1936) 56 CLR 50, 59 ‑ 60, Dixon J treated Newfoundland as a case dealing with the question of whether an assignee of the contract could recover moneys arising under it without being met by a counterclaim, for breaches by the assignor of the same contract, rather than as a case of set‑off.  See also James v Commonwealth Bank of Australia (1992) 37 FCR 445, 461 ‑ 462; cf Bank of Boston Connecticut v European Grain & Shipping Ltd [1989] AC 1056, 1110 ‑ 1111. See also Derham R, Derham on the Law of Set‑Off (4th ed, 2010) [17.32].

9. Successive equitable assigns of an interest in personal property are governed by the particular rule in Dearle v Hall.[67]

   [67] Dearle v Hall (1828) 3 Russ 1; 38 ER 475; see also Meagher, Gummow & Lehane [8-100] - [8-215].

10. Future property, or an 'expectancy', is not property.  It cannot, therefore, be assigned at law, and can only be assigned in equity for consideration.[68]  Providing the consideration has been paid or executed, an equitable interest in the property vests in the assignee when the property is acquired by the assignor, and it is ascertained or identifiable.[69] If a company agrees to assign for executed consideration, future property and, before it acquires that property, is wound up, the subsequent acquisition of the property and its vesting in the assignee is not a 'disposition of property of the company' for the purposes of s 468(1) of the Corporations Act.[70]

Equitable set‑off

[68] Meagher, Gummow & Lehane [6‑195].

[69] Holroyd v Marshall (1862) 10 HL Cas 191; 11 ER 999; Palette Shoes Pty Ltd v Krohn [1937] HCA 37; (1937) 58 CLR 1, 27.

[70] Re Anroma Pty Ltd [1987] 2 Qd R 134; Meagher, Gummow and Lehane [6-320].

1. Equitable set‑off includes what has been described as substantive equitable set‑off, where the party seeking the benefit of the set‑off can show some equitable ground for being protected against the claimant's demand.[71]  Australian law in this regard has generally emphasised that the relevant equity must be of a character which impeaches the title to the claimant's demand.[72]  To that extent, there must be a connection between the two cross‑demands (which is not a requirement of legal set‑off).  On the other hand, equitable set‑off does not insist upon mutuality and it applies to both liquidated and unliquidated demands.[73]

Charges

[71] J & S Holdings Pty Ltd v NRMA Insurance Ltd (1982) 61 FLR 108, 127; Meagher, Gummow & Lehane [39‑050(d)] - [39.055].

[72] James; Lord v Direct Acceptance Corporation Ltd (receivers and managers appointed)(in liq) (1993) 32 NSWLR 362, 367; Hazcor Pty Ltd v Kirwanon Pty Ltd (1995) 12 WAR 62, 67; Walker v Secretary, Department of Social Security (1995) 56 FCR 354, 375; Roadshow Entertainment (481); Oswal v Commonwealth Bank of Australia [2013] WASCA 58 [11]; Norman; Re Forest Enterprises Ltd v FEA Plantations Ltd [2011] FCAFC 99; (2011) 195 FCR 97 [135] ‑ [163]; Equititrust Ltd v Franks [2009] NSWCA 128; (2009) 258 ALR 388 [61].

[73] Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439, 464 ‑ 465; Meagher, Gummow & Lehane [39‑060]; Derham [4.67] - [4.83].

1. In general terms, the essence of an equitable charge is a proprietary interest granted by way of security, without any transfer of title (outright title as opposed to an equitable interest), or possession, to the chargee.[74]  Specific property of the chargor is expressly or constructively appropriated to, or made answerable for, the payment of a debt or other obligation.[75]  The chargee is given the right to resort to that property for the purposes of having it realised and applied in or towards the payment of the debt.[76]  Thus, the equitable chargee (unlike the beneficiary of a trust) has remedies against the property itself, and not against the holder of the property.[77]

   [74] Re Bank of Credit and Commerce International SA (No 8) [1998] AC 214, 226 (BCCI No 8 Lords).

   [75] Sheahan v Carrier Air Conditioning Pty Ltd [1997] HCA 37; (1997) 189 CLR 407, 422 ‑ 423; Robertson v Grigg [1932] HCA 29; (1932) 47 CLR 257, 270 ‑ 271.

   [76] Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd [2000] HCA 25; (2000) 202 CLR 588 [6]. See also Swiss Bank Corporation v Lloyd's BankLtd [1982] AC 584, 594 ‑ 595; United Travel Agencies Pty Ltd v Cain (1990) 20 NSWLR 566, 569 ‑ 570.

   [77] Heydon JD and Leeming MJ, Jacobs' Law of Trusts in Australia (8th ed, 2016) [2.26] - [2.27].

2. A charge has been treated as, or equivalent to (at least for a number of purposes), a partial assignment of a chose in action - partial to the extent of the debt secured by the charge.[78]  An assignment by way of a charge is effective only in equity.[79]  An equitable chargee of a chose in action is in no better position than an equitable assignee so far as the chargee takes subject to the equities.[80]

Floating charges

[78] Durham Brothers v Robertson [1898] 1 QB 765, 769; Colonial Mutual General Insurance Co Ltd v ANZ Banking Group (New Zealand) Ltd [1995] 1 WLR 1140, 1144; G & M Aldridge Pty Ltd v Walsh [1999] VSCA 179; [1999] 3 VR 601 [26]. See also Grigg (265) and Bailey v New South Wales Medical Defence Union Ltd [1995] HCA 28; (1995) 184 CLR 399, 445 ‑ 446; Meagher, Gummow & Lehane [6‑065]. Cf Sykes EI and Walker S, The Law of Securities (5th ed, 1993) 17 ‑ 20; Turner PG, 'Assignment By Way of Charge' (2004) 24 Australian Bar Review 280.

[79] Bailey (446).

[80] Rother Iron Works Ltd v Canterbury Precision Engineers Ltd [1974] QB 1, 5 ‑ 6; George Barker (Transport) Ltd v Eynon [1974] 1 WLR 462, 467 ‑ 468, 473, 475; Re Diesels & Components Pty Ltd [1985] 2 Qd R 456, 461; Roadshow Entertainment (483); and see generally, Meagher, Gummow & Lehane [29‑205].

1. Floating charges are founded in contract, and their legal effect derives from the agreement between the parties.[81]

   [81] Fire Nymph Products Pty Ltd v Heating Centre Pty Ltd (in liq) (1992) 7 ACSR 365, 371.

2. The nature of the charge is not finally determined by what the parties call it.  Accordingly, labels such as 'fixed' or 'specific' cannot be decisive if the rights created by the charge, properly construed, are inconsistent with that label.[82] 

   [82] Deputy Commissioner of Taxation v Lai Corporation Pty Ltd (receivers and managers appointed) [1987] WAR 15, 25, 45; In re Spectrum Plus Ltd (in liq) [2005] 2 AC 680 [141].

3. A creditor who accepts a floating charge over a company's assets allows the business of the company to be carried on and the assets of the company which are subject to the floating charge to be altered by the efforts of the company and its employees.[83]  The distinguishing feature of a floating charge is that, given that the class of present and future assets that are charged are such as in the ordinary course of the company's business would be changing from time to time, the company is left at liberty, until one of the 'crystallising' events happens, to dispose freely, in the ordinary course of its business, of any property to which the charge attaches.[84]  Until then, the chargor is left free to use the charged asset and to remove it from the security.  The asset the subject of the floating charge is not finally 'appropriated' until then.[85]  The property charged remains 'liquid' until then.[86]

   [83] Stein v Saywell [1969] HCA 16; (1969) 121 CLR 529, 544.

   [84] Stein (556).  See also Lai (23 ‑ 24), (53 ‑ 54); Fire Nymph (370 ‑ 371).

   [85] In re Spectrum [111].

   [86] Ferrier v Bottomer [1972] HCA 11; (1972) 126 CLR 597, 609.

4. Even if the charge purports to be a fixed charge over present and future book debts and contains restrictions on the chargor creating further charges over its debts or assigning or factoring them, if the chargor is left free to continue to collect the debts and use the proceeds without the consent of the chargee, the charge will ordinarily be construed as operating as a floating charge over uncollected debts as at the date of crystallisation.[87]  On the other hand, if, for example, the charge provides for the company to collect the debts as agent for the chargee and pay them into an account which is 'blocked' from use by the chargor without the consent of the chargee, and the account is operated in that way, the arrangement is not consistent with a floating charge.[88]

   [87] Agnew v Commissioner of Inland Revenue [2001] 2 AC 710 [17] ‑ [18], [24], [27] - [36], [45] - [49]; In re Spectrum [105] ‑ [111], [140], [147] ‑ [155].

   [88] Agnew [48]; In re Spectrum [140].

5. The essence of crystallisation is that the charge becomes fixed upon certain specific property, and the chargor's right as against the chargee to dispose of the property comes to an end.[89] 

   [89] Fire Nymph (373); Relwood Pty Ltd v Manning Homes Pty Ltd (No 2) [1992] 2 Qd R 197, 201.

6. The question of whether a floating chargee has a proprietary interest in the charged assets prior to crystallisation has been the subject of considerable debate.[90]  One line of authority is to the effect that a floating chargee, even prior to crystallisation, has a proprietary or equitable interest in the property charged, coupled with an implied licence to deal with the assets free of the charge in order to carry on its business until the charge is crystallised.[91]  Other authorities have described a floating charge as operating as an 'incomplete [equitable] assignment', which, upon crystallisation, becomes 'converted into a completed equitable assignment … of the assets charged'.[92]  Professor Worthington has observed that 'any theory describing the floating chargee's proprietary interest prior to crystallisation of the charge simply enables the rational resolution of a separate problem, the priority disputes between competing proprietary interest holders'.[93]

   [90] Many of the arguments are canvassed in Sheehan D, The Principles of Personal Property Law (2nd ed, 2017) 355 ‑ 360.

   [91] Wily v St George Partnership Banking Ltd [1999] FCA 33; (1999) 84 FCR 423, 430 ‑ 434. See also Re MargartPty Ltd (in liq) (1984) 9 ACLR 269, 272 (a 'beneficial interest in the property the subject of the charge'); Landall Holdings Ltd v Caratti [1979] WAR 97, 106 ‑ 108.

   [92] Hoverd Industries Ltd v Supercool Refrigeration and Air Conditioning (1991) Ltd [1995] 3 NZLR 577, 587; Eynon (467). 

   [93] Worthington S, Proprietary Interests in Commercial Transactions (Claredon Press, 1996) 81 ‑ 82.

7. Whatever may be the true character of the floating chargee's interest prior to crystallisation, importantly for present purposes, any right of set‑off (legal or equitable) accruing between the company and its debtor or creditor prior to crystallisation is not destroyed by the crystallisation, and may be asserted by or against the receiver as the case may be.  That is so even if the claim the subject of the asserted set‑off is only brought after crystallisation, and even if the party asserting the set‑off had prior notice of the floating charge and its potential to effect, at some future time, an assignment to the chargee.[94] The parties in this case accepted that a fixed charge, on the other hand, would preclude the application of insolvency set‑off under s 553C of the Corporations Act.  After the charge becomes fixed, there is an absence of mutuality for the purposes of insolvency set‑off.[95]

   [94] Biggerstaff v Rowatt's Wharf Ltd [1896] 2 Ch 93; Meagher, Gummow & Lehane [29‑210].

   [95] Re Parker (1997) 80 FCR 1, 17; Hoverd (585).  See also appeal ts 12, 166.

8. Equity may also, in effect, restrain the exercise of the right of legal set‑off after crystallisation.  Thus, equity may not permit a pre‑crystallisation debt owed by a company (first debt) to be set‑off against a post‑crystallisation receivable of the company (second debt).[96]  The better view is that that result does not follow because of an absence of mutuality on the basis that the second debt is beneficially owned by the secured creditor.  Rather, in such a case, whilst there is, undoubtedly, a right to legal set‑off, equity will intervene where the exercise of the legal right would be unconscientious.[97]

   [96] N W Robbie & Co Ltd v Witney Warehouse Co Ltd (1963) 1 WLR 1324.

   [97] See the discussion of N W Robbie in Meagher, Gummow & Lehane [29‑220]. See also Derham [17.03].

Fixed and floating charges, circulating assets, and the PPSA

1. The PPSA contains provisions dealing with references to fixed and floating charges in Commonwealth laws and security agreements (such as the GSA in this case).[98]  In particular, a reference in such instruments to a 'charge' over property is taken to be a reference to a security interest that has attached to a 'circulating asset' or to a security interest that has attached to personal property that is not a 'circulating asset'.[99]  A reference to a 'fixed charge' in such an instrument is taken to be a reference to a security interest that has attached to personal property that is not a 'circulating asset'.[100]  A reference to a 'floating charge' is taken to be a reference to a security interest attached to a 'circulating asset'.[101]

   [98] PPSA Pt 9.5.

   [99] PPSA s 339(3).

   [100] PPSA s 339(4).

   [101] PPSA s 339(5).

2. The PPSA recognises that such references in instruments are likely to have less relevance over time.[102] That is because the PPSA has its own rules for the enforcement of security agreements against grantors of security and third parties.[103] Thus, at least in general terms, there is no need to characterise the instrument as either a fixed or a floating charge for the purpose of determining priority disputes under the PPSA. The PPSA evidently seeks, amongst other things, to provide a 'rational resolution' to priority disputes whilst avoiding the entanglements of the theories under the general law as to the nature of a chargee's interest under a floating charge prior to crystallisation.[104] 

   [102] PPSA s 338.

   [103] PPSA s 19 and s 20.

   [104] Compare Professor Worthington's comments referred to in [56] above.

3. Under the PPSA, circulating assets are defined to include specified types of current assets.[105]  These include 'accounts' which, in general terms, include, relevantly, monetary obligations arising from the provision of services in the ordinary course of the business of providing services of that kind.[106]  An exception to this, which in broad terms is consistent with the pre‑PPSA law, is that an account is not a circulating asset if the secured party has 'control' of the account.[107]  'Control' for this purpose includes its ordinary meaning.[108]  'Control' also includes where the parties have agreed in writing that the amounts paid in discharge of the account must be deposited into a specified bank account controlled by the secured party.[109] 

   [105] PPSA s 340(1)(a) and s 340(5).

   [106] PPSA s 340(1)(a), s 340(5)(a) and definition of 'account' in s 10.

   [107] PPSA s 340(2).

   [108] PPSA s 341(1A)(a).

   [109] PPSA s 341(1A)(c), s 341(2)(a) and s 341(3).

4. In the case of assets other than the specified current assets, a 'circulating asset' is one where the secured party has given the grantor of the charge express or implied authority for any transfer of the personal property to be made in the ordinary course of the grantor's business, free of the security interest.[110] 

   [110] PPSA s 340(1)(b).

5. A circulating asset is an example of collateral within the exceptions to s 32(1) of the PPSA. In broad terms, the effect of s 32(1) of the PPSA is that (subject to the provisions of the PPSA) if collateral gives rise to proceeds, the security interest continues in the collateral itself in the hands of a transferee unless the secured party expressly or impliedly authorised the disposal of the collateral or agreed that the dealing would extinguish the security interest, and the security interest attaches to the proceeds unless the security agreement provides otherwise.

6. The Corporations Act has been amended, effectively in tandem with the PPSA, so that security interests, which have attached to 'circulating assets' under the PPSA where the grantor has title to the asset, are grouped together with floating charges, and called 'circulating security interests'. These amendments apply to various provisions in ch 5 of the Corporations Act (headed External Administration), including, amongst other things, the proof and ranking of claims in a winding up.[111] In other words, in ch 5 of the Corporations Act, a security interest that is a floating charge is treated in the same way as a security interest attached to a circulating asset under the PPSA where the grantor has title to the asset.

   [111] See Corporations Act s 51C, s 433, s 442B, s 443E, s 459C, s 561 and s 588FJ. Section 561 is in div 6 of pt 5.6 'Proof and ranking of claims'. See also the definition of 'floating charge' in s 9.

Set-off in insolvency

1. Provisions such as s 553C of the Corporations Act, which provide for a statutory set‑off in circumstances of mutuality, have a long history in the law of bankruptcy and insolvency.  There is a dispute as to whether its origins lay in equity, or whether the practice emerged from the interpretation and application of bankruptcy legislation in Elizabethan times.[112]  The earliest statutory insolvency set-off provision would appear to have been enacted in the United Kingdom in 1705, which applied where there appeared to be 'mutual credit given between' a person and a bankrupt.[113]  Provisions enacted after 1732 referred to both mutual credit and mutual debts,[114] while provisions enacted after 1869 referred to mutual credits, mutual debts or other mutual dealings'.[115]  Colonial bankruptcy legislation adopted the provision,[116] as did Commonwealth bankruptcy legislation enacted in 1924 and 1966.[117]  The Commonwealth bankruptcy provisions were applied to corporate winding up by State company laws.[118] Section 553C was introduced into the Corporations Law with effect from 1993,[119] and was included in the Corporations Act as enacted in 2001. 

   [112] Gye v Davies (1995) 37 NSWLR 421, 425; Coventry v Charter Pacific Corporation Ltd [2005] HCA 67; (2005) 227 CLR 234 [30].

   [113] 4 & 5 Anne c 17, s 11.

   [114] The first reference to mutual debts was introduced in 1732 by 5 Geo II c 30, s 28.

   [115] Reference to other mutual dealings was first made in s 39 of the Bankruptcy Act 1869 (UK).

   [116] See Insolvent Ordinance 1856 (WA) s 41 and Bankruptcy Act 1871 (WA) s 41.

   [117] Bankruptcy Act 1924 (Cth) s 82 and Bankruptcy Act 1966 (Cth) s 86.

   [118] See, eg, Companies Act 1943 (WA) s 269(1) and Corporations Law s 553(2).

   [119] By Corporate Law Reform Act 1992 (Cth) s 92.

2. Section 553C of the Corporations Act provides:

   553CInsolvent companies - mutual credit and set-off

   (1)[Where mutual claims and debts admissible] Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:

   (a)an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and

   (b)the sum due from the one party is to be set off against any sum due from the other party; and

   (c)only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.

   (2)[Where set-off not available] A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent.

Mutuality

1. In Gye v McIntyre,[120] the High Court said that mutuality in the Bankruptcy Act1966 (Cth) in this context involves three considerations. First, the credits, debts, or claims arising from the other dealings must be between the same persons.  Secondly, the benefit or burden of the credits, debts, or claims arising from the other dealings, must lie in the same interests.  It is the equitable and beneficial interests of the parties which must be considered.  Thirdly, the requirement of mutuality is that the credits, debts, or claims arising from other dealings must be commensurable.  That means they must ultimately sound in money. 

   [120] Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609.

2. It is established that the relevant time at which mutuality is to be assessed is the commencement of the winding up in insolvency,[121] which in this case is taken to be when administrators were appointed on 11 February 2014.[122]  However, the credits, debts or claims need not be vested, liquidated, or enforceable at the relevant date.  Providing they exist as contingent at that date, and are of a kind which will ultimately mature into pecuniary demands susceptible to set‑off, the requirement of s 553C may be satisfied in relation to them.[123] 

   [121] Hiley (480 - 481, 487, 490, 495 - 496).

   [122] Corporations Act s 446A(1)(a), s 446A(2)(a), s 513B(b) and s 513C(b).

   [123] Gye v McIntyre (623 - 624); Day & Dent Constructions Pty Ltd (in liq) v North Australian Properties Pty Ltd [1982] HCA 20; (1982) 150 CLR 85, 91, 99, 104.

3. In Hiley, Rich J said that the requirements of the relevant provision do:[124]

   not mean that at the time when the winding up commences there must exist claims which then and there can be made the subject of account and set‑off … Rights must be invested in the creditor and in the company which, without any new transaction, grow in the natural course of events into money claims capable of forming items in an account or capable of settlement by set off.  (emphasis added)

   [124] Hiley (487).  See also Hiley (491 ‑ 492) (Starke J).

4. Also in Hiley, Dixon J said:[125]

   It is enough that at the commencement of the winding‑up mutual dealings exist which involve rights and obligations whether absolute or contingent of such a nature that afterwards in the events that happen they mature or develop into pecuniary demands capable of set‑off.  (emphasis added)

   [125] Hiley (497).

5. The dealings must be 'genuinely mutual as a matter of substance':  Gye v McIntyre.[126]

The burden or benefit must lie in the same interest

[126] Gye v McIntyre (619).

1. The contentious issue in this appeal concerns the second of the criteria of mutuality referred to by the High Court in Gye v McIntyre (see [67] above). 

2. An early case which considers this aspect of mutuality is Forster v Wilson,[127] decided in 1843.  In that case the defendants, who carried on business as ironmongers, were indebted to a partnership trading as the Tweed Bank.  The defendants received promissory notes of the Tweed Bank, which were categorised into a number of different classes.  Relevantly, notes in the sixth and seventh classes were received from customers in payment of antecedent debts, on condition that the debt be reduced by only so much as the defendants received for the notes.   Notes in the eighth and ninth classes were received by the defendants on the basis that the defendants would pay only so much as the defendants received for the notes from the assignees of the bank. 

   [127] Forster v Wilson (1843) 12 M & W 191; 152 ER 1165.

1. The assignees of the bankrupt partners of the Tweed Bank sought to recover the debt owed by the defendants to the bank, and the defendants sought to set‑off the amounts they were owed under the promissory notes.  Parke B, delivering the judgment of the court, observed that the object of the relevant provision of the 1825 Act[128] was:

   [T]o do substantial justice between the parties, where a debt is really due from the bankrupt to the debtor to his estate; and the Court of King's Bench, in construing this clause … have held that it did not authorize a set-off, where the debt, though legally due to the debtor from the bankrupt, was really due to him as a trustee for another, and, although recoverable in a cross action, would not have been recovered for his own benefit. (emphasis added) (204)

   [128] 6 Geo IV c16, s 50.

2. The court held that the defendants could set‑off the notes in the sixth and seventh classes, but not the eighth or ninth classes.  The latter classes were excluded on the basis that the notes:

   [W]ere held by the defendants, not on their own account, but as trustees for those persons [who handed the defendants the notes], because the defendants could gain nothing in any event by the notes, but all the money they should receive upon them would be received to the use of the persons who transferred them. (204)

3. Forster v Wilson was applied by Lord Cairns LJ in Ex parte Cleland; In re Davies.[129]  In that case, Davies had been ordered to pay Cleland's costs of legal proceedings, which had been taxed.  Davies entered into a deed under the Bankruptcy Act 1861 (UK).  Davies sought to set‑off the taxed costs against a debt which Cleland owed to Davies.  Cleland had not paid the costs to his solicitor.  After quoting the passage from Forster v Wilson set out at [74] above, Lord Cairns held that a set‑off was not available as:

   The costs, though recoverable in the name of Cleland, and though ordered to be paid to Cleland by name, are paid to him, not for his own benefit, for he could not take the money and spend it; but are to be paid to him subject to the lien of his solicitor, and are, therefore, to be held by him, either in whole or in part, as a trustee for his solicitor. (emphasis added) (813)

   [129] Ex parte Cleland; In re Davies (1867) LR 2 Ch 808.

4. Both Forster v Wilson and Ex parte Cleland were applied by the English Court of Appeal in In re City Life Assurance Co Ltd.[130] In the latter case, the holder of a life insurance policy for £1,000 had mortgaged the policy to the issuing company in order to secure a loan of the same amount. The issuing company went into compulsory liquidation. Before doing so, it had equitably assigned the mortgage to a third party, without notice to the policy holder. The question arose as to whether the policy holder could set‑off the amount due to him under the policy against his mortgage debt. Pollock MR held that the bankruptcy set‑off clause did not apply 'when the credits or debts or dealings are not between the same persons, or where one of the persons was acting in a different capacity from that in which the dealings with the other were incurred'. After quoting the passage set out at [74] above, Pollock MR held that the assignment of the mortgage meant that there was no mutuality which would enable the policy holder to set‑off, as between him and the liquidator, the sums due under the policy.[131]

   [130] In re City Life Assurance Co Ltd [1926] 1 Ch 191.

   [131] In re City Life Assurance Co (216 - 217).

5. Forster v Wilson and In re City Life Assurance Co were both cited by the High Court in Gye v McIntyre, in the course of explaining the policy and operation of s 86 of the Bankruptcy Act.  After referring to Parke B's identification of the object of the provision, the court observed:

   Where there are genuine mutual debts, credits or other dealings, it would be unjust if the trustee in bankruptcy could insist upon having 100 cents in the dollar upon the whole of the debt owed to the bankrupt but at the same time insist that the bankrupt's debtor must be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him. It was to prevent such injustice that the 'mutual credits' and 'mutual debts', and later 'mutual dealings', provisions were introduced into bankruptcy legislation. To the extent necessary to achieve that legislative purpose of 'substantial justice' to the parties, it is established by authority that a provision such as s. 86 of the Act should be given 'the widest possible scope'.

   On the other hand, 'substantial justice' requires that the operation of set-off in bankruptcy be confined within limits which protect the creditors of the bankrupt from being disadvantaged by a set-off being allowed in circumstances where debts, credits or other dealings have not been genuinely mutual as a matter of substance, such as where beneficial ownership is not the same. (citations omitted) (emphasis added) (618 ‑ 619)

6. It should be noted that, in this passage, a difference in beneficial ownership is given as an example of where mutuality may be absent, rather than a criterion of operation of the provision.  After referring to a presently irrelevant issue the court continued:

   Thus, it is established by the cases that set-off under a provision such as s. 86 is not available in circumstances where the beneficial entitlement and liability in respect of the countervailing credits and debits do not correspond: see, e.g., In re City Life Assurance Co.; Hiley v. Peoples Prudential Assurance Co. Ltd. (citations omitted) (619)

7. The cited passage of In re City Life Assurance Co is that in which the passage of Parke B's reasons in Forster v Wilson set out at [74] above is quoted. The reference to Hiley[132] is to the following passage from the judgment of Dixon J:

   In the second place, the equitable or beneficial interest of the parties in the mutual debts, credits or dealings must be considered and not merely the dry legal right. A set-off will be allowed between a debt owing by C to a liquidating company and a debt owing by it to B, if B as creditor holds the chose in action as bare trustee for C. Correspondingly, a set-off will be refused between a debt owing by B to a liquidating company and a debt owing by it to B, if B as creditor hold the chose in action as bare trustee for C. (citations omitted) (497)

   [132] Hiley (497).

8. In Hiley, an insurance company issued a policy of insurance to Hiley in the amount of £1,000.  Hiley subsequently borrowed £1,000 on security of a mortgage of the policy.  Before going into liquidation, the company transferred its mortgage to a second company, which in turn transferred the mortgage to a bank.  Although absolute in form, each of the transfers was by way of security.  A compromise of a dispute as to the validity of the transfers resulted in the mortgage being returned to the insurance company which issued the policy.  The majority of the court held that the requirement of mutuality was satisfied.

9. The decision of Parke B in Forster was also cited with approval by the plurality in Coventry v Charter Pacific Corporation Ltd.[133]

   [133] Coventry v Charter Pacific Corporation Ltd [2005] HCA 67; (2005) 227 CLR 234 [31].

10. In Mathieson’s Trustee v Burrup Mathieson & Co,[134] in the course of considering whether an equitable claim could be set-off against a legal debt, Clauson J observed:

    On principle it appears to me that the mere fact that the debt is an equitable debt, and not a legal debt, has no bearing at all on the question whether it is available for the purpose of set-off under s. 31. The Bankruptcy Act, as I understand it, is an Act regulating the proceedings of a Court which has always been a Court of equity, proceeding on equitable principles, recognizing equitable debts, subject of course to such infirmities as are sometimes present, but drawing no distinction between equitable and legal rights for purposes of administering the estate of the bankrupt. I think, at this time of day, it would be very unfortunate, if it were held that a Court of Bankruptcy is in any way fettered by any such distinctions, except so far as any Court of equity is fettered by the fact that certain infirmities may in certain circumstances attach to equitable rights as compared with corresponding legal rights. Accordingly I decide that this set-off claimed by the defendants is a good set-off and is operative to overtop the claim which has been made by the plaintiff in his action. (569)

    [134] Mathieson's Trustee v Burrup Mathieson & Co [1927] 1 Ch 562, 569. This decision is cited without demur in Gye v McIntyre (633) and Hiley (497).

11. The above cases demonstrate that in deciding whether mutuality exists, equitable or beneficial interests must be considered, and that a difference in beneficial ownership may lead to a conclusion that mutuality is lacking.  However, in our view, that is but an example of a situation in which mutuality may be lacking.  The existence of a trust or other equitable interests is not made the criterion for operation of the provision.  The critical issue in assessing mutuality is not the source of the relevant parties' rights (the common law, equity or statute) but the content of those rights.  The critical question is that which was identified by Parke B in Forster v Wilson, subsequently cited in the later cases.  The question is whether, at the commencement of the liquidation, the debt sought to be used as a set‑off by the creditor of an insolvent party would have been recovered 'for his own benefit', or vice versa. 

12. In this context, it should be observed that a secured debt may be the subject of (statutory) insolvency set‑off.  Insolvency set‑off is not necessarily confined to unsecured debts.[135] 

    [135] Hiley (498).

13. Focussing on whether the payments are received for the relevant person's own benefit explains why, under the general law, fixed charges generally destroyed mutuality while floating charges did not.  Where, for example, the insolvent's receivables are subject to a floating charge, mutuality for the purposes of insolvency set‑off subsists prior to crystallisation.[136]  That is because, as a matter of substance, the chargor may collect the receivable and use the proceeds for its own benefit.  It is not required to collect the receivable and apply the proceeds for the benefit of the chargee.  On the other hand, once the charge becomes fixed, there is an absence of mutuality for the purposes of insolvency set‑off.[137]  That is because, in substance, the receivable is being recovered for the benefit of the chargee, and not the insolvent chargor.  In that way, property which is subject to a floating charge may be used by the security grantor for its own benefit while property which is the subject of a fixed charge may not. 

    [136] See [57] above.

    [137] See [57] above.

14. Therefore, the critical question when assessing mutuality is not the classification of a charge over receivables as fixed or floating, but whether the chargor has the right to use payments received for its own benefit.

Credits, debts and mutual dealings

1. In Gye v McIntyre, the High Court observed that the words 'credits' and 'debts' will ordinarily represent the outcome of dealings, rather than the dealings themselves.  Accordingly, 'dealings' of themselves (as opposed to their outcome) do not commonly represent credits or debts capable of mutual set‑off.  That being so, the requirement of mutuality in respect of 'other … dealings' is directed not so much to the relationship between the dealings as such, but to the relationship between the claims which have arisen from them.  The High Court said:[138]

   There will, for the purposes of s 86, be mutual dealings at the date of the sequestration order if there existed at that date 'dealings' which involve the bankrupt and the other party and which were capable of giving rise to, and subsequently did give rise to, 'mutual' claims between them in the sense in which the word 'mutual' used in s 86.  (emphasis added)

The nature of the set-off

[138] Gye v McIntyre (623).

1. The chapeau to s 553C of the Corporations Act refers to 'a person who wants to have a debt or claim admitted against the company'. Hamersley, through its counsel, acknowledges that there is no pleading, evidence, submission or finding that it wishes to prove in the liquidation of Forge.[139]  However, it has been held that reference to such a person includes a person who, but for any statutory set‑off, would be entitled to prove in the winding up.[140]  That reflects the approach which has been taken in relation to similar language in bankruptcy legislation.[141]  Therefore, the fact that Hamersley has not sought to prove in the liquidation is not itself an impediment to the application of s 553C.

   [139] Appeal ts 110 - 111.

   [140] See G M & A M Pearce and Co Pty Ltd v RGM Australia Pty Ltd [1998] 4 VR 888, 890; Mine & Quarry Equipment International Ltd v McIntosh [2005] QCA 186; (2005) 54 ACSR 1 [6].

   [141] Gye v McIntyre (621).

2. As to the nature of the set‑off, in the Federal Court in McIntyre v Perkes; McIntyre v Gye,[142] Gummow and von Doussa JJ observed, with reference to the terms 'an account shall be taken' and 'only the balance of the account may be claimed in the bankruptcy, or is payable to the trustee in the bankruptcy, as the case may be' in s 86(1) of the Bankruptcy Act:

   [T]he form in which s 86(1) is expressed may suggest that the right of set-off it confers (like that provided for in the Statutes of Set-off) is procedural rather than substantive in character. It is true that s 86 of the Bankruptcy Act, like its predecessors, is directed to a particular procedure, the taking of an account. …

   However, the closing words of s 86(1)(c) indicate that where there is a balance payable to the trustee, only that part of the sum due from the creditor of the bankrupt 'is payable' to the trustee.  This gives the result of the account substantive effect.  Thus, under the antecedent law in the United Kingdom, it was long ago held that the set-off provided for in the bankruptcy statutes might be pleaded by the creditor, as defendant by way of confession and avoidance of an action at law which was brought by the assignee in bankruptcy to satisfy the bankrupt's claim and for the benefit of the bankruptcy administration.  (emphasis added)

   [142] McIntyre v Perkes; McIntyre v Gye (1990) 22 FCR 260, 270.

3. It is not necessary, however, for the parties to take any steps towards the taking of an account, as the statutory set‑off in insolvency is treated as self‑executing.  In Gye v McIntyre, the High Court said:[143]

   Section 86 is a statutory directive ('shall be set off') which operates as at the time the bankruptcy takes effect. It produces a balance upon the basis of which the bankruptcy administration can proceed. Only that balance can be claimed in the bankruptcy or recovered by the trustee. If its operation is to produce a nil balance, its effect will be that there is nothing at all which can be claimed in the bankruptcy or recovered in proceedings by the trustee. The section is self-executing in the sense that its operation is automatic and not dependent upon 'the option of either party'. … [I]it would be wrong to attribute to the legislature the illogical intent that a directive which was intended to be otherwise automatic in its operation and to apply in circumstances where set-off produced a nil balance should not operate at all unless and until either the bankrupt's creditor saw fit to exercise the option of lodging a formal proof of debt or the trustee in bankruptcy instituted proceedings for recovery of a debt due to the bankrupt.

   [143] Gye v McIntyre (622).  See also Handberg v Smarter Way (Aust) Pty Ltd [2002] FCA 469; (2002) 20 ACLC 856 [30], [46], [55].

4. The self‑executing nature of the set‑off was considered by Hoffmann LJ in MS Fashions Ltd v Bank of Credit and Commerce International SA (in liq):[144]

   Certain principles as to the application of these provisions have been established by the cases.  First, the rule is mandatory ('the mandatory principle').  If there have been mutual dealings before the winding up order which have given rise to cross‑claims, neither party can prove or sue for his full claim.  An account must be taken and he must prove or sue (as the case may be) for the balance.  Secondly, the account is taken as at the date of the winding up order ('the retroactivity principle').  This is only one manifestation of a wider principle of insolvency law, namely, that the liquidation and distribution of the assets of the insolvent company are treated as notionally taking place simultaneously on the date of the winding up order:  see In re Dynamics Corporation of America [1976] 1 WLR 757, 762, per Oliver J. Thirdly, in taking the account the court has regard to events which have occurred since the date of the winding up ('the hindsight principle').  The hindsight principle is pervasive in the valuation of claims and the taking of accounts in bankruptcy and in winding up.  A good example of the principle being applied outside the context of set‑off is In re Northern Counties of England Fire Insurance Co; Macfarlane's Claim (1880) 17 Ch D 337, in which the value of a claim under a fire insurance policy was determined by reference to the loss suffered in a fire which occurred a month after the insurance company had been wound up.

   In reading the cases, the interaction of these principles has to be borne in mind.   [Counsel] said that the right of set‑off under [the relevant statutory mutual dealings provision] was procedural and that the mutual credits and debits … retain their separate existences until such time as the account is taken in the context of the director filing either a proof or a defence to a claim by the liquidator.  This is of course true in the … sense that no account will be taken until something happens which makes it necessary to apply [the relevant statutory mutual dealings provision] and to take one.  But that cannot in my judgment affect the substantive rights of the parties which, whatever the context in which the question may subsequently arise, are treated as having been determined by an account taken at the date of the winding up.  (emphasis added)

   [144] MS Fashions Ltd v Bank of Credit and Commerce International SA (in liq) [1993] Ch 425, 432 - 433.

5. In other words, the (insolvency) statutory set‑off, where it applies, is treated as having occurred as from the date of the sequestration order or other relevant date.  His Lordship in Stein v Blake[145] made observations to similar effect, with reference to the reasoning of the High Court in Gye v McIntyre,[146] which have since been adopted in Australia.[147]

The object of insolvency statutory set-off

[145] Stein v Blake [1995] 2 WLR 710.

[146] Stein (715 - 718). 

[147] Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550, 567 ‑ 568; G M & A M Pearce (890, 896 ‑ 899); Handberg [55] - [56]; Krishell Pty Ltd v Nilant [2006] WASCA 223; (2006) 32 WAR 540 [111] ‑ [212]. See also Keay AR, McPherson's Law of Company Liquidation (2nd ed, 2009) [12.025] 808.

1. In Gye v McIntyre,[148] the High Court said, with reference to the relevant statutory provisions in the Bankruptcy Act:

   Putting s 86 to one side, the other sections in the Division deal with the quantification of provable debts, the procedure for their admission to proof and the special situation which arises when a provable debt is secured.

   …

   It has often been pointed out that the object of set-off in bankruptcy is, in the words of Parke B in Forster v Wilson, 'to do substantial justice between the parties, where a debt is really due from the bankrupt to the debtor to his estate'.  Where there are genuine mutual debts, credits or other dealings, it would be unjust if the trustee in bankruptcy could insist upon having 100 cents in the dollar upon the whole of the debt owed to the bankrupt but at the same time insist that the bankrupt's debtor must be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him.  It was to prevent such injustice that the 'mutual credits' and 'mutual debts', and later 'mutual dealings', provisions were introduced into bankruptcy legislation … To the extent necessary to achieve that legislative purpose of 'substantial justice' to the parties, it is established by authority that a provision such as s 86 of the Act should be given 'the widest possible scope' …

   On the other hand, 'substantial justice' requires that the operation of set‑off in bankruptcy be confined within limits which protect the creditors of the bankrupt from being disadvantaged by a set-off being allowed in circumstances where debts, credits or other dealings have not been genuinely mutual as a matter of substance, such as where beneficial ownership is not the same or where, after bankruptcy or notice of an act of bankruptcy, a debtor of the bankrupt has bought up liabilities of the bankrupt at a discount for the purpose of setting them off against his own indebtedness … Thus, it is established by the cases that set-off under a provision such as s 86 is not available in circumstances where the beneficial entitlement and liability in respect of the countervailing credits and debits do not correspond: see, eg, In re City Life Assurance Co; Hiley v Peoples Prudential Assurance Co Ltd.  (footnotes omitted) (emphasis added)

   [148] Gye v McIntyre (618 ‑ 619).

1. The opening line of s 78 explains the intended generality of the operation of pt 2.7. Prima facie, it means that pt 2.7 deals with transfers (whether by way of security or outright) of interests in 'collateral', ie, interests in personal property to which a security interest attaches. It would apply to an account assigned to secure the performance of an obligation (s 12(2)(j)), or transferred to a transferee outright (s 12(3)(a)), where the assignee's or transferee's interest is 'attached' under s 19(2).

2. The second paragraph of s 78 addresses the question left in some doubt under the general law, as to the effect of a prohibition against assignment or transfer.[263]

   [263] See, eg, the discussion in Tolhurst GJ, The Assignment of Contractual Rights (2nd ed, 2016) [6.82] 252 ‑ 258.

3. In this regard s 79 of the PPSA provides:

   79Transfer of collateral despite prohibition in security agreement

   (1)If collateral would be able to be transferred (including by sale, by creating a security interest or under proceedings to enforce a judgment) but for a provision in a security agreement prohibiting the transfer or declaring the transfer to be a default, the collateral may be transferred, despite the provision:

   (a)by consent between the grantor and the transferee; or

   (b)by operation of law.

   …

   (2)A transfer mentioned in subsection (1) does not prejudice the rights of the secured party under the security agreement or otherwise, including the right to treat a prohibited transfer as an act of default.  (emphasis added)

4. The effect of s 79 is, relevantly for present purposes, that if personal property to which a security interest is attached (collateral) would be able to 'transferred' (including by outright assignment or by assignment by the creation of a further security interest in it), but for a provision in a security agreement prohibiting it, the property to which the security interest is attached may be transferred:

   (a)by consent between the grantor (of the original security interest), and the transferee (or assignee); or

   (b)by operation of law,

   but that does not prejudice the secured party under a security agreement from treating the transfer as an act of default.

5. The ordinary meaning of the third paragraph of s 78 is that the rights of the transferee of an account (whether an assignee under s 12(2)(j) or otherwise under s 12(1), or an outright transferee under s 12(3)(a)) are subject to the rights between the account debtor (the person obligated under the account - for convenience 'obligor') and the transferor (in this context, and relevantly for present purposes, the person to whom the obligation is owed - for convenience the 'obligee'), and certain general law claims between the obligor and the obligee.

6. In this regard, s 80(1), (2), (7) and (8) of the PPSA provide:

   80Rights on transfer of account of chattel paper--rights of transferee and account debtor

   Rights of transferee subject to contractual terms and defences

   (1)The rights of a transferee of an account or chattel paper (including a secured party or a receiver) are subject to:

   (a)the terms of the contract between the account debtor and the transferor, and any equity, defence, remedy or claim arising in relation to the contract (including a defence by way of a right of set-off); and

   (b)any other equity, defence, remedy or claim of the account debtor against the transferor (including a defence by way of a right of set‑off) that accrues before the first time when payment by an account debtor to the transferor no longer discharges the obligation of the account debtor under subsection (8) to the extent of the payment.

   (2)Subsection (1) does not apply if the account debtor makes an enforceable agreement not to assert defences to claims arising out of the contract. 

   …

   Payment by account debtor after transfer

   (7)If an account or chattel paper is transferred, the account debtor may continue to make payments under the contract to the transferor:

   (a)until the account debtor receives a notice that:

   (i)states that the amount payable or to become payable under the contract has been transferred; and

   (ii)states that payment is to be made to the transferee; and

   (iii)identifies the contract (whether specifically or by class) under which the amount payable is to become payable; or

   (b)after receiving a notice under paragraph (a) (other than a notice from the transferor), if:

   (i)the account debtor requests the transferee to provide proof of the transfer; and

   (ii)the transferee fails to provide proof before the end of 5 business days after the day of the request.

   (8)Payment by an account debtor to a transferee in accordance with a notice under paragraph (7)(a) (including in the circumstances described in paragraph (7)(b)) discharges the obligation of the account debtor to the extent of the payment.  (emphasis added)

7. The parenthesised words in the chapeau of s 80(1) '(including a secured party or a receiver)' tend to confirm that the provision applies, not only to outright transferees, but also to a transferee under a transaction which, in substance, secures payment or performance of an obligation. The term 'secured party' is defined to include, in effect, a trustee where the holders of the obligations guaranteed or provided under a security agreement are represented by a trustee.[264]  The word 'receiver' is not defined, but in the context of 'a law about security interests in personal property',[265] the word 'receiver' in the phrase 'a secured party or a receiver' would ordinarily be understood to refer to a receiver and manager appointed by the secured party to take control of and realise the property for the benefit of the secured party.  The phrase '(including a secured party or a receiver)' is inapt to refer to an outright assignee. 

   [264] Like ANZFS in this case.

   [265] PPSA s 3, 'Overview'.

8. The operation of s 80 in these respects is, in broad terms, not dissimilar to the general law position. As noted earlier, a floating chargee takes subject to the equities prior to the crystallisation of the charge.[266]

   [266] See [58] above.

9. The fourth paragraph of s 78 (in general terms and relevantly for present purposes) is to the effect that a modification of the contract (or substituted contract) between the obligor and the obligee is effective against the transferee in certain situations, even after notice of the transfer. In that regard, it displaces the general law principle.[267] Section 80(3) ‑ (6) provides:

   [267] Brice v Bannister (1878) 3 QBD 569, 581.

   Effect of modification or substitution of contract on transferee

   (3)Unless the account debtor has otherwise agreed, a modification of, or substitution for, the contract between the account debtor and the transferor is effective against the transferee (including a secured party or a receiver) if:

   (a)the account debtor and the transferor have acted honestly in modifying or substituting the contract; and

   (b)the manner in which the modification or the substitution is made is commercially reasonable; and

   (c)the modification or substitution does not have a material adverse effect on:

   (i)the transferee's rights under the contract; or

   (ii)the transferor's ability to perform the contract.

   Note: For the meaning of modification, see section 10.

   (4)Subsection (3) applies:

   (a)to the extent that a transferred right to payment arising out of the contract has not been fully earned by performance; and

   (b)even if there has been notice of the transfer to the account debtor.

   (5)If a contract has been modified or substituted in the manner described in subsection (3), the transferee obtains rights that correspond to the rights of the transferor under the contract as modified or substituted.

   (6)Nothing in subsections (3) to (5) affects the validity of a term in a transfer agreement that provides that a modification or substitution mentioned in subsection (3) is a breach of contract by the transferor.  (emphasis added)

10. The fifth paragraph of s 78 is, relevantly for present purposes, to the effect that a term in a contract between the obligor and the obligee that imposes certain restrictions on the transfer of an account binds the obligee to the extent of making the obligee liable in damages for breach of contract, but is unenforceable against third parties. It means, in effect (where it applies), that the obligor cannot control, by a clause prohibiting assignment of the chose, the obligee's right to transfer or assign the chose. It does not apply to a term prohibiting the transfer of the whole of an account, for currency, that arises from the grant of a right under a construction contract.[268] 

    [268] The term 'construction contract' is not defined in the PPSA, but it presumably includes a building contract.

11. In this regard, s 81 provides:

    81Rights on transfer of account or chattel paper--contractual restrictions and prohibitions on transfer

    Scope

    (1)This section applies to a term in a contract if:

    (a)the contract is between an account debtor and a transferor; and

    (b)the term restricts or prohibits transfer of any of the following for currency due or to become due:

    (i)the whole of an account that is the proceeds of inventory;

    (ii) the whole of an account that arises from granting a right (other than a right granted under a construction contract), or providing services (other than financial services), in the ordinary course of the business of granting rights or providing services of that kind (whether or not the account debtor is the person to whom the right is granted or the services are provided);

    (iii) the whole of an account that is the proceeds of an account mentioned in subparagraph (ii);

    (iv) chattel paper.

    Statutory restriction on contracts

    (2) The term in the contract:

    (a) is binding on the transferor, but only to the extent of making the transferor liable in damages for breach of contract;

    (b) is unenforceable against third parties.  (emphasis added)

12. Read in the context of pt 2.7 and in the context of the PPSA as a whole, the bank's security interest in Forge's claims are subject to s 80(1)(a) of the PPSA. To this extent, ground 2 should be upheld and Forge's notice of contention, referred to below, should be dismissed.

Forge's notice of contention

1. By its notice of contention, Forge contends that s 80 of the PPSA, within the suite of provisions in pt 2.7 of ch 2, applies only to an outright transfer of an account under s 12(3)(a), and has no application to the security interest granted by Forge by way of charge over its claims. It submits, in effect, that:

   1.Forge's claims became subject to the security interest and charge in after‑acquired property that attached without specific appropriation by the grantor, and 'thus' Forge's claims were not transferred to the bank.

   2.The language of 'transfer' in s 80 picks up, and is intended to apply only to, outright transfers under s 12(3)(a).

   3.Had s 80(1) been intended to operate upon an assignment by way of security, different language like that used in relation to liens in the PPSA would have applied. Section 80(1)(b) and (c) exclude liens (in general terms) arising under statutory and general law. The table in s 8(2) refers, as an exception, to s 73, which, in turn, refers expressly to priority over a 'security interest'. It is said, in effect, that the absence of a reference to 'security interest' in s 80(1) is telling.

   4.The reference to a 'receiver' in the chapeau of s 80(1) is no more than a reference to someone who receives a security interest pursuant to a transaction that is a 'transfer'.

2. Forge also refers to and relies on In re Printz.[269]

   [269] In re Printz (2012) 478 BR 876.

3. Forge's submissions cannot be accepted. As to the first point, the attachment to after‑acquired property in the case of a transfer of an account in a transaction which secures the payment or the performance of an obligation does not cease to be a 'transfer' within the meaning of s 12(2)(j). As to the second point, as indicated above in [204], 'transfer' is wide enough to comprehend an assignment by way of security.

4. As to the third point, s 73 creates a priority regime between, in effect, security interests under the PPSA and non‑consensual security interests arising under the general law, or Commonwealth, or State law. The starting point for s 73 is different from that relating to the transfer of an account. By s 12(3)(a), the transfer of an account is effectively deemed to be a 'security interest' under the PPSA. Moreover, Forge's submission overlooks the point that in relation to transfers of an account, where the PPSA wishes to make clear that it is not speaking of an outright transfer, it adds the words 'that does not secure payment or performance of an obligation'.[270] The outright transfer of an account pursuant to s 12(3)(a) is more of an 'add‑on', which enlarges the operation of the PPSA so as to apply also, where indicated, to transfers or assignments which do not secure the payment or performance of an obligation. As to the fourth point, that submission involves a misreading of the word 'receiver' in this context.

   [270] PPSA s 109(1)(a) and s 268(1)(a).

5. In the case of Printz, CNH made loans to Mr and Mrs Printz.  Mr and Mrs Printz gave CNH security over specific crops, and the proceeds from those crops.  They also they granted CNH a security interest in their present and after‑acquired receivables.  Trainor purchased crops from Mr and Mrs Printz.  Mr and Mrs Printz delivered the crops in accordance with the contracts.  However, Trainor withheld part of the purchase price (Crop Receivable), and applied those moneys to debts which Mr and Mrs Printz owed Trainor.  CNH sought, in effect, a declaration that its security interest in the Crop Receivable (owed to Mr and Mrs Printz from the purchase price) took priority over any interest of Trainor.[271] 

   [271] Printz (878 - 879).

6. Trainor defended CNH's claim on the basis, amongst other things, that it had a contractual right of set‑off against Mr and Mrs Printz of which it had the benefit, as against CNH, through the operation of the equivalent (in very general terms) of s 80(1) of the PPSA. The court held that the s 80(1) equivalent applied not only to outright assignments, but also to assignments by way of security.[272]  To that extent, the case is against Forge. 

   [272] Printz (886).

7. The court also held that the s 80(1) equivalent applied only to assignments of existing receivables and, accordingly, CNH's charge (for want of a better word) of after‑acquired receivables did not operate as an assignment of the Crop Receivable for the purposes of the s 80(1) equivalent. The court referred to previous authority to that effect. The case to this extent provides some support for Forge's contention. However, it appears that the result in Printz was also significantly influenced by two further considerations.  The court considered it to be important that the crop purchase contracts, by their terms, precluded Mr and Mrs Printz from assigning their rights under the crop contracts.  The court also regarded it as significant that Trainor had actual knowledge of CNH's security interest at the time that it entered into the purchase contracts.[273]

   [273] Printz (886 - 887).

8. Further, in Bank of Waunakee v Rochester Cheese Sales Inc[274] (a case referred to in Printz), the court also considered the operation of the relevant equivalent (in very general terms) of s 80(1) of the PPSA. In that case, a company (RCS) was in the business of purchasing and reselling cheese. Another company (Kase) was also in a similar business. The two companies shared a business relationship. There were transactions between the two companies in March to early June 1988 under which Kase owed RCS $97,482. On 10 June 1988, it was agreed that the cross‑demands would be set‑off, and that RCS would pay Kase the balance of $22,643, which it did. Some months earlier, a bank had lent $1.434 million to Kase, and had perfected a security interest in Kase's inventory and accounts receivable. Kase went into insolvency in due course. The bank claimed against RCS the amount of the receivable that had been the subject of the set‑off, $97,482. RCS resisted the bank's claim on the basis of the equivalent (in general terms) of s 80(1) of the PPSA. The bank contended that the s 80(1) equivalent had no application to its charge (for want of a better word). The court found against the bank. The court held that the s 80(1) equivalent applied. The court noted that 'in other states, the courts and the [PPSA equivalent] have made no distinction between a party with a security interest in a debtor's accounts receivable and party who is an assignee of a debtor's accounts receivable'.[275]  The court did not, in terms, refer to the receivables being after‑acquired property, but that would appear to be the case on the facts.

   [274] Bank of Waunakee v Rochester Cheese Sales Inc, 906 F 2d 1185 (7^th Cir, 1990).

   [275] Rochester (1190).

9. The cases referred to ultimately provide no definitive guidance to the operation of s 80(1)(a) of the PPSA. For the reasons given earlier, s 80(1)(a) applies to the bank's security interest in respect of Forge's claims.

Hamersley's reliance on contractual set-off

1. This part of the reasons deals with Hamersley's reliance on contractual set‑off and ground 1 of the appeal.

2. Hamersley described ground 1 in these terms:[276]

   The [judge's] decision is inconsistent with the terms of the Contracts, in that it does not give effect to the provisions which have the effect that Forge's entitlements are those, if any, remaining after taking into account the amounts to which Hamersley is entitled.  The 'Collateral' the subject of the GSA was the end result, after setting off Forge's claims against Hamersley against Hamersley's claims against Forge.  (emphasis in original)

   [276] Appellant's written submissions, par 9; WB 9.

3. Hamersley's submissions appeared to have as their focus Hamersley's rights of contractual deduction under General Condition 16.12 of the West Angelas Contract and its equivalent in the Cape Lambert Contract.

4. The following provides, in general terms, a broad outline of the most relevant contractual provisions.[277] 

Contractual terms

[277] It is sufficient, for present purposes, to refer to the terms of the West Angelas Contract.

1. The Contract is a lump sum contract.  The 'Employer' in the Contracts is Hamersley and the 'Contractor' is Forge.  By cl 1 and cl 2 of the Formal Instrument Agreement, the Contractor agrees to carry out the Work under the Contract in accordance with the Contract and the Employer agrees to pay a lump sum Contract Price.[278]

   [278] GB 285.

2. By GC 12 (read with the definition of Acceptance in GC 1.1), the separable parts of the works are to be completed in accordance with the Contract by its specified dates.[279]  By GC 13, the Contractor must pay liquidated damages for each day there is a delay in achieving Acceptance of the works.[280] 

   [279] GB 287, 358 - 360. 

   [280] GB 360.

3. By GC 16.1, the Employer must pay for the works on the basis of the Contract Price, subject to adjustments in accordance with the Contract.[281]

   [281] GB 367.

4. The Contract contains a number of provisions by which the Contract Price may be adjusted.  There are procedures for the Contractor to make claims which may result in an increase to the Contract Price.[282]  In relation to certain types of claim by the Contractor, there is a procedure by which the Employer is first required to make a determination under GC 3.5 which, if favourable to the Contractor, results in the additional costs claimed being added to the Contract Price.[283]  By GC 3.5(d), if the Contractor is unhappy with the determination by the Employer, the matter may go to Dispute Resolution in accordance with GC 22.  The Contract also provides for reductions to the Contract Price in specified circumstances and subject to the Employer making a determination to that effect under GC 3.5.[284]  The Contract Price may also be adjusted (upwards or downwards) with respect to variations in accordance with the Employer's determination under GC 3.5.[285]

   [282] See, eg, GC 2.7(c), (e), GC 4.23(c), GC 4.24, GC 7.3(f), GC 8.9(a).

   [283] See, eg, GC 4.23(d), GC 7.3(g), GC 8.9(b).

   [284] See, eg, GC 14.5(b)(ii).

   [285] See, eg, GC 15.6.

1. The Contract Price (as adjusted) is payable in accordance with the provisions of GC 16.  In broad terms, GC 16 requires Progress Claims to be submitted to the Employer, the certification by the Employer of its opinion as to the amount due to the Contractor (or to the Employer) pursuant to the Progress Claim, and payment within a specified number of days of certification, subject to specified rights of deduction by the Employer under GC 16.12.  The relevant provisions are set out in [245] below. 

2. The Employer may, without prejudice to its other rights or remedies, terminate the Contract under GC 17.  The Employer's rights of termination arise where, amongst other things, an Event of Insolvency occurs.  An Event of Insolvency is defined to include the appointment of administrators.  By GC 17.3, the Employer has a range of rights or remedies consequential upon termination, including taking over the works.[286]  By GC 17.10, termination of the Contract operates without prejudice to any rights accrued to either party prior to termination.[287]

   [286] See also GC 17.4 ‑ 17.9.

   [287] GB 378.

3. By GC 19.6, subject to certain specified exceptions, the Contractor's total liability to the Employer under or in connection with the Contract does not exceed the Contract Price.  The exceptions include where there is fraud, deliberate fault or reckless misconduct, and the Contractor's obligation to pay liquidated damages for delay.[288]

   [288] GB 382.

4. There are Dispute Resolution provisions in GC 22.2 ‑ 22.12.  By GC 22.4, the parties' obligations under the Contract continue despite the existence of a Dispute.[289]  By GC 22.12, the referral of a matter under GC 22 does not affect the obligations of the parties under the Contract.[290]

GC 16.4, 16.5 and 16.12

[289] GB 395 - 396.

[290] GB 396.

1. GC 16.4, 16.5 and 16.12 provide:[291]

   [291] GB 369 - 370, 372.

   16.4Payment Certificates

   (a)[Hamersley] must, within 15 Business Days after receiving a Progress Claim and supporting documents, assess the Progress Claim and give to [Forge] a Payment Certificate showing [Hamersley's] opinion of the money due from [Hamersley] to [Forge] (or vice versa) pursuant to the Progress Claim and the reasons for any difference with supporting particulars.  Subject to Sub-Clause 16.12 [Right of Set Off], payments due must not be withheld, except that:

   (i)if any thing supplied or work done by [Forge] is not in accordance with the Contract, the cost of rectification or replacement may be withheld until rectification or replacement has been completed in accordance with the Contract;

   (ii)if [Forge] was or is failing to perform any work or obligation in accordance with the Contract, and had been so notified by [Hamersley], the value of this work or obligation may be withheld until the work or obligation has been performed in accordance with the Contract; or [sic]

   (b)Without limiting paragraph 16.4(a)(a) [sic], [Hamersley] may, at any time, issue a Payment Certificate (including for the purpose of making any correction or modification that should properly be made to any amount previously considered due) whether or not at a time otherwise provided for the issuing of certificates under the Contract and the [Hamersley] or [Forge], as the case may be, must pay the amount so certified within 10 Business Days of that certificate.

   (c)Payment does not indicate or evidence:

   (i)[Hamersley's] acceptance, approval, consent or satisfaction with the work (including any admission or evidence that such work has been executed satisfactorily); or

   (ii)the value of such work,

   but is payment on account only.

   16.5Timing of Payments

   (a)Subject to paragraph 16.5(b) and except as otherwise stated in Sub­-Clause 16.12 [Right of Set Off], [Hamersley] shall pay to [Forge]:

   (i)the amount which is due in respect of each Progress Claim, other than the Final Progress Claim, as set out in the relevant Payment Certificate within 15 Business Days after issuing such certificate; and

   (ii)any final amount due, as set out in the Final Certificate, within 30 Business Days after issuing such certificate under Sub-Clause 16.8 [Final Progress Claim].

   (b)Payment of any such amount due must be made into a bank account, nominated by [Forge], in the Country.

   …

   16.12Right of Set Off

   [Hamersley] may deduct from monies otherwise due to [Forge]:

   (a)any debt or other monies due; and

   (b)any Claim to money which [Hamersley] may have against [Forge] whether for damages (including liquidated damages) or otherwise,

   under or in connection with the Contract.  (emphasis added)

2. GC 1.1 defines 'Claim' as:[292]

   [292] GB 288.

   Claim means any claim, notice, demand, suit, account, action, proceeding, arbitration, litigation (including reasonable legal costs), investigation or judgment of any nature, absolute or contingent, liquidated or unliquidated, whether known or unknown, whether directly or indirectly, or whether in law, contract, tort, negligence, statute (including strict liability) or any claim for any liability, damages, losses, costs, expenses, expenditure, charge, compensation, payment, remedy, debt, lien, relief or payment, or relief from any obligation under the Contract including:

   …

   (b)adjustment to the Contract Price or any other amount payable under or in connection with the Contract;

   …

   whether under the Contract or otherwise at law or in equity (including under statute, in tort (including negligence) or for restitution). 

The primary judge's findings

1. The primary judge found that Hamersley's rights under GC 16.12 were not only exercisable in respect of moneys claimed and certified for payment.[293]  The primary judge also found that GC 16.12 is not a 'self‑executing'[294] mechanism for set‑off.  His Honour found that Forge's rights to be paid money due under the Contracts were unaffected by Hamersley's contractual rights to set-off under GC 16.12, unless and until Hamersley exercised those set-off rights.  His Honour found that Hamersley did not exercise its rights to set-off before the administrators were appointed.[295] His Honour found that s 553C of the Corporations Act operates to exclude any form of contractual set‑off.[296]

The parties' submissions

[293] Primary decision [143].

[294] Primary decision [139].

[295] Primary decision [139].

[296] Primary decision [210].

1. Hamersley contends, in effect, that Forge's contractual rights against Hamersley, over which the bank took security under the GSA, are subject to Hamersley's rights against Forge under the Contract and, in particular, Hamersley's right of deduction under GC 16.12.[297]  Hamersley contends that the primary judge failed to have due regard to the operation of GC 16.12 with respect to 'Claims', and that payment was on account only.[298]  Hamersley does not challenge the primary judge's finding to the effect that GC 16.12 is not a 'self‑executing' mechanism for set‑off. 

   [297] Appellant's written submissions, pars 13 - 16; WB 10 - 11.

   [298] Appellant's written submissions, pars 18 - 23; WB 11 - 13.

2. Forge contends, in effect, that the primary judge was correct for the reasons his Honour gave.  Forge also appears to contend that there could be no subsequent deduction under GC 16.12 against a Payment Certificate that had been issued. [299]  Forge says that GC 16.12 operates on the basis that the deduction by Hamersley has to occur effectively upon the issue of the Payment Certificate itself under GC 16.4(a).  Forge submits that if a subsequent debt or other monies due or a Claim were to arise which Hamersley would seek to deduct, Hamersley must issue a revised Payment Certificate under GC 16.4(b) and effectuate the deduction that way.[300]  Forge emphasises that cashflow is the 'life-blood' of contractors.[301] 

Disposition

[299] Appeal ts 157 - 160.

[300] Appeal ts 160.

[301] Respondent's written submissions, pars 16 - 17; WB 36.

1. It is unnecessary to determine, for present purposes, the full scope and effect of GC 16.12 in the context of its operation of the contract as a whole.  Insofar as GC 16.12 operates as a set‑off,[302] it can have no application given that, as we have found, s 553C of the Corporations Act applies.  That provision requires a once‑and‑for‑all final account to be taken of the parties' claims arising from their mutual dealings.  For the reasons given earlier, where s 553C applies to the circumstances of the case, it applies exclusively to other rights of set‑off.  On this basis, we would dismiss ground 1.

   [302] The provision in GC 16.12 is very similar to the provision considered by the Victorian Court of Appeal in Golf Australia Holdings Ltd v Buxton Construction Pty Ltd [2007] VSCA 200 [18], [23].

2. Further, insofar as ground 1 alleges that if the bank could recover Forge's claims for its own benefit, GC 16.12 would operate to bring about a permanent reduction or extinguishment of Forge's claims to the extent of the amount deducted, we would reject that contention.  GC 16.12, where it applies, only operates as a provisional deduction, effectively pending resolution of the underlying disputes.[303]

   [303] Golf [18], [23]; SL Sethia Liners Ltd v Naviagro Maritime Corporation (The 'Kostas Melas') [1981] 1 Lloyd's Rep 18, 26.

3. It is strictly unnecessary to deal with Forge's submission referred to in [249] above.  Nevertheless, for the following reasons, it seems to us that the point has no substance.

4. The phrase 'otherwise due to the Contractor' in the chapeau of GC 16.12 is evidently designed to refer to, at least, an amount certified by the Employer as, in its opinion, 'due' for payment to the Contractor under GC 16.4 which is payable under GC 16.5.  In other words, it applies, at least, to an amount certified as due under a Payment Certificate under GC 16.4 which has become payable under GC 16.5.  GC 16.12 does not operate on the basis that any deduction under that clause has to be made either at the point of issuing a Payment Certificate under GC 16.4(a), or not at all.  GC 16.4(a) makes it plain that payment of a Payment Certificate may not be withheld except as specified in subpars (i) and (ii), but may be the subject of contractual adjustment under GC 16.12.  The consideration that cashflow is the 'life-blood' of the Contractor cannot serve as a basis for contradicting the plain words of the clause.  GC 16.4(b) is expressed to be without limitation to GC 16.4(a).  Further, the right under GC 16.4(b) may be exercised independently of the exercise of the right under GC 16.12, and vice versa:  GC 1.20.  GC 16 read as a whole does not operate to require, in effect, any deduction under GC 16.12 to be the subject of, and effectuated only by, a revised Payment Certificate issued under GC 16.4(b).

Conclusion

1. Leave to appeal should be granted.

2. The appeal should be upheld to the extent indicated in relation to grounds 2, 3, 4 and 5.

3. The notice of contention should be dismissed.

4. On the basis of these reasons, and subject to hearing from the parties, we would answer the preliminary questions for present purposes as follows:

   1.As to question 1, the matters pleaded by Forge do not, together or separately, preclude s 553C of the Corporations Act from operating to set‑off Hamersley's claims against Forge's claims. The application of s 553C of the Corporations Act to Hamersley's claims and Forge's claims precludes Hamersley from setting off those claims otherwise than as provided by that section.

   2.As to question 2, yes, under s 553C of the Corporations Act.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

CL
ASSOCIATE TO THE HONOURABLE JUSTICE MURPHY

21 SEPTEMBER 2018