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

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

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

CORAM: TOTTLE J

HEARD: 5-7 APRIL 2016 AND ON THE PAPERS

DELIVERED : 2 JUNE 2017

FILE NO/S: CIV 1245 of 2015

BETWEEN: HAMERSLEY IRON PTY LTD
Plaintiff
AND
FORGE GROUP POWER PTY LTD (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED)
Defendant

Catchwords:

Contract - Construction contract - Interpretation - Nature of contractual set-off - Whether contract provided for set-off or netting-off - Whether set-off operates before amounts are 'due' - Whether amounts became due and owing

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 contractual or equitable set-off available in insolvency - Requirements for statutory set-off in insolvency - Whether claims, debts or dealings are mutual - Whether set-off rights preserved in insolvency by Personal Property Securities Act 2009 (Cth) (PPSA) s 80(1) - Whether inconsistency between the effects of PPSA s 80(1) and Corporations Act s 553C to which PPSA s 258 applies

Personal Property Securities - PPSA - Meaning of 'account' for the purposes of the PPSA - Application of PPSA s 258 - Where contractor has entered general security agreement with lender - Where lender has registered security interest over contractor's personal property - Where contractor has gone into liquidation - Whether general security agreement effective in accordance with its terms creating charge over claims constituting property - Nature of registered security interest under PPSA - Whether PPSA security interest creates a proprietary interest - Whether attachment under PPSA s 19 creates a proprietary interest - Whether creation of a proprietary interest terminates mutuality of interest - Whether PPSA renders redundant pre-PPSA law relating to fixed and floating charges

Legislation:

Bankruptcy Act 1966 (Cth), s 58, s 82, s 83, s 84, s 85, s 86, s 87, s 88, s 89, s 90, s 91, s 92, s 93, s 94, s 96
Bankruptcy Act 1919 (UK), s 31
Corporate Law Reform Act (Cth)
Corporations Act 2001 (Cth), s 51C, s 436A, s 553, s 553A, s 553AA, s 553AB, s 553B, s 553C, s 553D, s 553E, s 555
Personal Property Securities Act 1988 (Alberta), s 10, s 12
Personal Property Securities Act 1988 (Saskatchewan), s 10, s 12
Personal Property Securities Act 1990 (Ontario), s 9, s 11
Personal Property Securities Act 1999 (NZ), s 16, s 95
Personal Property Securities Act 2009 (Cth), s 8, s 10, s 12, s 18, s 19, s 20, s 21, s 31, s 32, s 69, s 70, s 80, s 81, s 253, s 254, s 257, s 258, s 338, s 339, s 340, s 341
Personal Property Securities (Corporations and Other Amendments) Act 2010 (Cth)

Result:

Answer to the first preliminary question, 'yes'.
Answer to the second preliminary question, 'no'.

Category: A

Representation:

Counsel:

Plaintiff: Mr B Dharmananda SC & Mr D J Jackson
Defendant: Mr S K Dharmananda SC & Ms K F Banks-Smith SC

Solicitors:

Plaintiff: Holman Fenwick Willan
Defendant: Clayton Utz

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

Ansett Australia Ltd (subject to a deed of company arrangement) v Travel Software Solutions Pty Ltd [2007] VSC 326; (2007) 214 FLR 203
Attorney-General (NSW) v Brewery Employes Union of New South Wales [1908] HCA 94;(1908) 6 CLR 469
Bank of Montréal v Innovation Credit Union [2010] 3 SCR 3; 2010 SCC 47
Barker v The Queen [1983] HCA 18; (1983) 153 CLR 338
Beconwood Securities Pty Ltd v Australia & New Zealand Banking Group Ltd [2008] FCA 594; (2008) 66 ACSR 116
British Eagle International Air Lines Ltd v Compagnie Nationale Air France (1975) 1 WLR 758; [1975] 2 All ER 390
Caisse Populaire Desjardins de l'Est de Drummond v Canada [2009] 2 SCR 94; 2009 SCC 29
Commissioner of Inland Revenue v Stiassny [2012] NZCA 93; (2013) 1 NZLR 140
Credit Suisse Canada v 1133 Yonge Street Holdings Ltd (1998) 41 OR (3d) 632
Day & Dent Constructions Pty Ltd (in liq) v North Australian Properties Pty Ltd (provisional liquidator appointed) [1981] FCA 12; (1981) 54 FLR 277
Day & Dent Constructions Pty Ltd (in liq) v North Australian Properties Pty Ltd (provisional liquidator appointed) [1982] HCA 20; (1982) 150 CLR 85
Ex parte Stephens (1805) 11 Ves Jun 24; 32 ER 996
Future Revelation Ltd v Medica Radiology & Nuclear Medicine Pty Ltd [2013] NSWSC 1741; (2013) 283 FLR 122
GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50; (2003) 201 ALR 55
GM & AM Pearce and Co Pty Ltd v RGM Australia Pty Ltd [1998] 4 VR 888; (1997) 143 FLR 1
Greenview (Municipal District No 16) v Bank of Nova Scotia [2013] ABCA 302
Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609
Hiley v Peoples Prudential Assurance Co Ltd (in liq) [1938] HCA 40; (1938) 60 CLR 468
Horne v Chester and Fein Property Developments Pty Ltd [1987] VR 913
i Trade Finance Inc v Bank of Montréal [2011] 2 SCR 360; 2011 SCC 26
IATA v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151
Jones v Mossop (1844) 67 ER 506; 3 Hare 568
Lindholm, Re Opes Prime Stockbroking Ltd (administrators appointed) (receivers and managers appointed) [2008] FCA 1425; (2008) 68 ACSR 88
Marshall v Director-General, Department of Transport [2001] HCA 37; (2001) 205 CLR 603
McIntyre v Perkes (1990) 22 FCR 260
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104
Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439
National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785
Paganini v The Official Assignee (Unreported, NZCA, 22 March 1999)
Piccone v Suncorp Metway Insurance Ltd [2005] FCAFC 260; (2005) 148 FCR 437
Popular Homes Ltd v Circuit Developments Ltd [1979] 2 NZLR 642
Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liq) (receivers and managers appointed) [2017] NSWCA 8
R v Federal Business Development Bank [1988)] 1 WWR 1; 43 DLR (4th) 188
Re Amerind Pty Ltd (receivers and managers appointed) (in liq) [2017] VSC 127
Re Arcabi Pty Ltd (receivers and managers appointed) (in liq); Ex parte Theobald & Herbert [2014] WASC 310; (2014) 288 FLR 236
Re Bank of Credit and Commerce International SA (No 8) [1996] Ch 245
Re Gye & Perkes; Ex parte McIntyre (1989) 89 ALR 460
Re Langdon (in their capacities as the receivers and managers of Forge Group Ltd (in liq)) [2017] FCA 170
Re Maiden Civil (P&E) Pty Ltd; Albarran v Queensland Excavation Services Pty Ltd [2013] NSWSC 852; (2013) 277 FLR 337
Re Paddington Town Hall Centre Ltd (in liq) (1979) 41 FLR 239
Re Spectrum Plus Ltd (in liq) [2005] UKHL 41; [2005] 2 AC 680
Re Trivan Pty Ltd (1996) 134 FLR 368
Royal Bank of Canada v Radius Credit Union Ltd [2010] 3 SCR 38
Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd [2014] VSC 217; (2014) 285 FLR 267
Smith v Bridgend County Borough Council [2001] UKHL 58; [2002] 1 AC 336
Strategic Finance Ltd (in liq) v Bridgman [2013] NZCA 357; [2013] 3 NZLR 650
The Royal Bank of Canada v Sparrow Electric Corp [1997] 1 SCR 411
Walker Corporation v Sydney Harbour Foreshore Authority [2008] HCA 5; (2008) 233 CLR 259
Warehouse Sales Pty Ltd & Lewis and Templeton v LG Electronics Australia Pty Ltd [2014] VSC 644; (2014) 291 FLR 407
Westmex Operations Pty Ltd (in liq) & Ors v Westmex Ltd (in liq) (1994) 12 ACLC 106
Westmex Operations Pty Ltd v Westmex Ltd (1992) 8 ACSR 146
Wily v St George Partnership Banking Ltd (1999) 84 FCR 423

Text(s) cited:

A Duggan and D Brown, Australian Personal Property Securities Law (2nd ed, 2016)

C Wappett, B Whittaker and S Edwards (eds), LexisNexis, Personal Property Securities in Australia (at 29 March 2017)

D Pearce and R Geddes, Statutory Interpretation in Australia (8th ed, 2014)

E Tyler, P Young and C Croft, Fisher and Lighwood's Law of Mortgage (3rd Aust ed, 2014)

J Heydon, M Leeming and P Turner, Meagher, Gummow & Lehane's Equity: Doctrines & Remedies (5th ed, 2014)

L Gullifer (ed), Goode on Legal Problems of Credit and Security (5th ed, 2013)

N Seddon, R Bigwood and M Ellinghaus, Cheshire and Fifoot Law of Contracts (10th Aust ed, 2012)

R Derham, Derham on the Law of Set-off (4th ed, 2010)

S McCracken, The Banker's Remedy of Set-off (3rd ed, 2010)

S Worthington, Proprietary Interests in Commercial Transactions (1996)

S McCracken, J Bird, J Stumbles and G Tolhurst, Everett and McCracken's Banking and Financial Institutions Law (8th ed, 2013)

W Gough, Company Charges (2nd ed, 1996)

TABLE OF CONTENTS

Introduction

Structure of reasons

Part 1 - Overview

The facts
The contractual set‑off provisions
The General Security Agreement
The pleadings

Termination of the Contracts
Hamersley's claims
Hamersley's contractual and equitable set‑offs
Hamersley's set‑off in insolvency
Is cl 16.12 of the General Conditions a 'netting off clause'?
Does s 553C of the Corporations Act preclude Hamersley from relying on contractual and equitable set‑off?
Is there mutuality between Forge's claims and Hamersley's claims?
Had s 553C of the Corporations Act been engaged before ANZ acquired an interest in the Collateral?
Clause 1.8(a) of the GCs
Floating charge
Are Hamersley's rights to contractual and equitable set‑off preserved in equity or by statute?
The relief claimed by Hamersley
Forge's counterclaim and relief claimed by it

Preliminary questions

Assumptions

The PPSA

The origins of the PPSA and its aims

The relevance of decisions on equivalent legislation in other jurisdictions

The key provisions of the PPSA

Interests to which the PPSA does not apply
Security interest
Personal property and related terms
Security agreement and parties
Attachment and Perfection
Continuation of security interest in proceeds
Taking free rules
Transfers of interests in collateral
Part 7.4 Relationship between Australian laws
References to fixed and floating charges and circulating assets

Part 2 - The issues

Does cl 16.12 of the WAGC provide for amounts to be 'due' and owing to Forge, or does it provide a base for ‘netting off' such that the amounts are never in fact 'due' because they are subject to Hamersley's rights of set off?

The contractual framework
Summary of the parties' submissions

Hamersley's submissions
Forge's submissions

Clause 16.12 does not operate as a net‑off provision

Is Hamersley able to rely upon contractual rights of set-off or equitable set‑off or does s 553C of the Corporations Act constitute an exclusive code regulating set-off?

Introduction
Section 553C - context and legislative history
Summary of the parties' submissions
The authorities
Contractual set-off - the importance of construing the contractual terms relied upon
Section 553C of the Corporations Act constitutes an exclusive code displacing equitable and contractual set-off

Are Hamersley's contractual set-off rights preserved by s 80(1)?

Section 80 of the PPSA
Section 80(1) has no application in the liquidation of Forge

Section 80(1) not intended to amend s 553C regime
Hamersley's rights to be determined in liquidation of Forge

If s 80(1) of the PPSA is capable of operating as Hamersley contends is there an inconsistency between s 80(1) and s 553C of the Corporations Act to which s 258 of the PPSA applies with the result that s 553C prevails?

Summary of parties' submissions on s 258 of the PPSA
Section 258 of the PPSA and its context
Section 258 does not apply

Are Forge's claims accounts that have been transferred to ANZ?

Summary of parties' submissions on whether Forge's claims are accounts
Accounts and monetary obligations
Conclusion on whether Forge's claims are accounts

Was mutuality of interest between Forge's claims and Hamersley's claims brought to an end by the creation of a security interest over Forge's claims?

Summary of the submissions

Hamersley's submissions
Forge's submissions
The Department's submissions

The requirement of mutuality
Pre-PPSA law relating to fixed and floating charges over personal property
Section 8(1)(d) is of limited significance
Does Forge have any rights capable of constituting collateral over which ANZ could acquire a security interest - has the condition in s 19(2)(a) been satisfied?
The nature and consequences of the attachment rule in s 19 of the PPSA
Sections 18 and 19 of the Act
The language used in the text
'Attachment' has an established meaning
Context supports attachment connoting the creation of a proprietary interest

Department's submission about the nature of a 'security interest' under the PPSA
Conclusion that attachment creates a proprietary interest does not depend on the abolition of the distinction between fixed and floating charges
The floating charge is no longer required to take security over circulating assets
Attachment rule creates rights for all purposes
Canadian and New Zealand case law
Hamersley's submissions on the Canadian and New Zealand decisions
Differences in statutory texts
Distinguishing Canadian authorities on the ground that they did not concern a competition between a security interest and set-off rights does not limit the guidance provided
Propositions derived from the Canadian and New Zealand decisions
The views of the commentators
On the creation of a proprietary interest conferred by a security interest mutuality of interest ceases to exist
Forge's ability to deal with proceeds does not preserve mutuality of interest
The General Security Agreement created a charge that had attached to Forge's claims

Part 3 - Answers to preliminary questions

TOTTLE J:

Introduction

This action involves a contest between the rights of a secured creditor holding a security interest under the Personal Property Securities Act 2009 (Cth) (the PPSA) and the rights of set‑off of the debtor's counterparty. The secured creditor is ANZ, as defined later in these reasons. Forge is the debtor and it is in receivership and in liquidation. The plaintiff, Hamersley, is the counterparty.
Hamersley seeks to have claims arising from engineering contracts between it and Forge admitted in the winding up of Forge. Hamersley's case is that its claims far exceed the claims Forge has against it, and so it is entitled to set off its claims against Forge's claims and prove for the balance in the liquidation.
Forge's claims against Hamersley are, however, subject to a security interest under the PPSA. Forge's case is that Hamersley has no entitlement to set off and is obliged to pay Forge the debts and other monies due to Forge and Hamersley must prove in the liquidation without the benefit of any set-off.
The parties have sought answers to a number of preliminary questions. The questions are primarily concerned with the following three issues:
(i)does the contractual term on which Hamersley relies provide for a netting‑off or a set‑off;
(ii)as a person who wants to have a claim admitted in the liquidation of Forge, is Hamersley able to rely on contractual rights of set‑off or equitable set‑off; and
(iii)was the mutuality of interest between Forge's claims and Hamersley's claims - required for set‑off under s 553C of the Corporations Act 2001 (Cth) - brought to an end by the creation of a security interest over Forge's claims?
The Department of Employment of the Commonwealth of Australia (the Department) sought leave to intervene and file and serve written submissions with respect to the preliminary questions. I granted leave and was assisted by submissions subsequently filed by the Department.

Structure of reasons

These reasons are divided into three parts.
In part 1, I provide an overview comprising:
(i)a statement of the facts, the set-off provisions and the material provisions of the General Security Agreement;
(ii)a review of the pleadings;
(iii)the preliminary questions;
(iv)the assumptions made for the purposes of answering the preliminary questions; and
(v)a review of the origins of the PPSA, its aims and key provisions.
In part 2, I address the issues in the following order.
(i)Does the contractual set-off provision on which Hamersley relies provide for a netting off or a setting off?
(ii)Is Hamersley able to rely on contractual rights of set-off or equitable set‑off or does s 553C of the Corporations Act constitute an exclusive code displacing those rights? In the course of addressing this issue I will address subsidiary issues concerning the ambit of operation of s 80(1) of the PPSA.
(iii)Was mutuality of interest between Forge's claims and Hamersley's claims brought to an end by the creation of a security interest over Forge's claims? In the course of addressing this issue I will address the subsidiary issues arising from the operation of the attachment rule under the PPSA.
In part 3, I answer the preliminary questions.

Part 1 - Overview

The facts

The following account of the facts is taken from a statement of facts agreed by the parties.
In 2012 Hamersley and Forge entered into two contracts, the West Angelas Contract and the Cape Lambert Contract (the Contracts), pursuant to which Forge agreed to perform the engineering, procurement and construction of the West Angelas Power Station and the Cape Lambert Power Station. Each Contract incorporates a set of general conditions (GCs, and WAGC and CLGC respectively).
Forge commenced work under the Contracts in 2012.
On 2 July 2013 Forge entered into a facility agreement with the Australia and New Zealand Banking Group Ltd, and a General Security Agreement with ANZ Fiduciary Services Pty Ltd as trustee of the Forge Security Trust. I will refer to the ANZ entities as 'ANZ'.
The General Security Agreement was registered on the Personal Property Securities Register on 2 July 2013.
On 11 February 2014 the directors of Forge resolved to appoint joint and several administrators to Forge pursuant to s 436A of the Corporations Act.
On 11 February 2014, after the appointment of the administrators, ANZ appointed joint and several receivers and managers to Forge pursuant to the General Security Agreement.
Although not recorded in the agreed facts, it is common ground that each Contract came to an end on 24 February 2014.
On 18 March 2014 Forge's creditors resolved that Forge be wound up and that the administrators be appointed joint and several liquidators of Forge.
I set out the claims each party has against the other in more detail in the course of reviewing the pleadings.
The agreed facts were supplemented by an agreed bundle of relevant documents.

The contractual set‑off provisions

At the centre of the dispute between the parties are contractual set‑off provisions relied upon by Hamersley. In these reasons I will refer to the numbering of the clauses as set out in the WAGC.[1] Clause 16.12 of the WAGC is the provision on which Hamersley primarily relies. It provides:
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.
[1] Although there are minor variations in the clause numbers, the relevant clauses in the Cape Lambert Contract contain identical terms.
'Claim' is defined as:
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, expenditure, charge, compensation, payment, remedy, debt, lien, relief or payment or relief from any obligation under the Contract … whether under the Contract or otherwise at law or in equity (including under statute, in tort (including negligence) or for restitution).
Hamersley also relies upon cl 17.9 of the WAGC. It provides:
17.9 Other Termination Rights
If the Contract is terminated by [Hamersley], the Works have been taken out of [Forge's] hands pursuant to paragraph 17.3(a)(vi)(D) [Failure to remedy an Event of Default] or [Hamersley] exercises [its] Step-In Right pursuant to paragraph 17.3(a)(vi)(E) [Failure to remedy an Event of Default], [Hamersley] is, without limiting any other rights it has under the Contract or at law, entitled to:
(a)cease to make any further payments due and owing under the Contract at the date of termination and at any time thereafter;
(b)treat all sums of money otherwise due to [Forge] which may be in the hands of [Hamersley] as security for all money which had accrued to [Hamersley] at the date of termination of the Contract and for all Claims which [Hamersley] may sustain or incur in consequence of [Forge's] default or the termination of the Contract;
(c)recover from [Forge] any money paid in excess of [Forge's] entitlement for the Works satisfactorily executed in the period up to and including the date of termination of the Contract; and
(d)recover from [Forge] any Claims which [Hamersley] may have sustained or incurred on termination of the Contract.

The General Security Agreement

The General Security Agreement uses the vocabulary of the PPSA. It defines Collateral as:
All the Grantor's present and after-acquired property but, subject to clause 3.9, excluding the Specified Joint Venture Shareholding, but including anything in respect of which the Grantor has at any time a sufficient right, interest or power to grant a Security Interest
By cl 3.1 Forge granted a security interest in the Collateral to ANZ. Security Interest is defined as including any 'Security Interest' as defined in the PPSA (this definition is recorded in a Common Terms Deed, the provisions of which are incorporated in the General Security Agreement).
Clause 3.1(2) describes the nature of the Security Interest as follows:
(2)This Security Interest is:
(a)a transfer by way of security of Collateral consisting of accounts and chattel paper as defined in the PPSA (unless they are not, or cease to be, Revolving Assets); and
(b)a charge over all other collateral. If for any reason it is necessary to determine the nature of this charge, it is a floating charge over Revolving Assets and a fixed charge over all other Collateral.
Clause 3.3 is concerned with the nature of the charge referred to in cl 3.1(2)(b) and provides:
To the extent that the charge in clause 3.1(2)(b) fails to take effect as a fixed charge in relation to any asset forming part of the Collateral or the PPSA Retention of Title Property then it takes effect as a floating charge in relation to the asset which automatically and immediately crystallises and becomes fixed if a Control Event occurs and is continuing in relation to that asset.
'Revolving asset' is defined as meaning any Collateral which is:
(a)inventory;
(b)a negotiable instrument, other than a negotiable instrument deposited with the Security Trustee at any time, for any reason; or
(c)money (including money withdrawn or transferred from an account with a bank or other financial institutions),
and in relation to which no Control Event has occurred, subject to cl 4.3
'Control Event' includes the appointment of a receiver or controller to Forge's property.
Clause 3.4 permits Forge to collect the proceeds of accounts. It provides:
The Grantor may collect the proceeds of any debts or other amounts now or in the future payable to the Grantor subject to using those proceeds as permitted under the Finance Documents.
Clause 3.5(1) allowed ANZ to require Forge to open and maintain a bank account, described as a Controlled Account, effectively conferring upon ANZ control over funds in that account.
Clause 3.6 provides that if a Control Event occurs and is continuing, Forge must immediately and until notified otherwise deposit in the Controlled Account any proceeds it receives in respect of, amongst other things, debts payable to Forge.
Clause 4 governs dealings with the Collateral as follows:
4.1Restricted dealings
The Grantor must not do, or agree to do, any of the following unless it is permitted to do so by clause 4.2 or another provision in a Finance Document:
(1)create or allow another interest in the Collateral including any Security Interest; or
(2)dispose, or part with possession, of any Collateral.
4.2Permitted dealings
The Grantor may do any of the following in the ordinary course of the Grantor's ordinary business unless it is prohibited from doing so by another provision in a Finance Document:
(1)create or allow any interest in, or dispose or part with possession of, any Collateral which is a Revolving Asset; or
(2)withdraw or transfer money from an account with a bank or other financial institution.
4.3Revolving Assets
If a Control Event occurs and is continuing in respect of any Collateral then automatically:
(1)that Collateral is not (and immediately ceases to be) a Revolving Asset;
(2)any floating charge over that Collateral immediately operates as a fixed charge; and
(3)any Collateral consisting of accounts and chattel paper as defined in the PPSA is transferred to the Security Trustee by way of security.
If any Collateral is not, or ceases to be, a Revolving Asset, and becomes subject to a fixed charge or transfer, under this clause the Security Trustee may give the Grantor a notice stating that, from a date specified in the notice, the collateral specified in the notice is a Revolving Asset, or becomes subject to a floating charge and is transferred back to the Grantor. This may occur any number of times.
4.4Inventory
Any inventory which is not a Revolving Asset is specifically appropriated to a security interest under this document. The Grantor may not remove it without the specific and express authority of the Security Trustee to do so.
4.5Notice may be given not to deal
Without limiting any other provision of this clause 4, the Security Trustee may at any time give a notice to the Grantor to the effect that the Grantor may not deal in the Collateral described in the notice.
Clause 7.2 provides that any right of Forge to deal with an asset forming part of the Collateral ceases if, while an Event of Default is continuing, the Secured Monies are declared due and payable or if the Security Trustee takes any step to enforce the security, or a Control Event occurs in relation to the asset.

The pleadings

Termination of the Contracts

With limited exceptions the substance of Hamersley's claims arising from the West Angelas Contract pleaded in [8] ‑ [32] of the amended statement of claim are identical in nature to its claims arising from the Cape Lambert Contract.[2]
[2] Amended statement of claim [33] ‑ [54].
Hamersley pleads that it was entitled to terminate the Contracts, both for repudiatory breach, and pursuant to contractual termination provisions in the GCs.[3]
[3] Amended statement of claim [12] ‑ [14] and [37] ‑ [39].
Hamersley says its entitlement to terminate arose from the appointment of the administrators, the withdrawal by Forge of its workforce from the sites on 12 February 2014, and the notification given to creditors by the receivers that they had not adopted the Contracts. Hamersley pleads it terminated the Contracts on 24 February 2014.

Hamersley's claims

Hamersley pleads it is entitled to $12,195,000 by way of liquidated damages under the West Angelas Contract.[4]
[4] Amended statement of claim [17].
Hamersley pleads that by reason of various clauses in the GCs it was entitled to step in and complete the work the subject of the Contracts and recover the cost of so doing from Forge, and that the cost of so doing in the case of the West Angelas Contract was $133,270,000,[5] and in the case of the Cape Lambert Contract, $252,580,000.[6]
[5] Amended statement of claim [18].
[6] Amended statement of claim [40].
Hamersley pleads it is entitled to losses and damages for breach of the West Angelas Contract in the sum of $114,820,000,[7] and losses and damages for breach of the Cape Lambert Contract in the sum of $120,710,000.[8]

Hamersley's contractual and equitable set‑offs

[7] Amended statement of claim [19].

[8] Amended statement of claim [41].

Hamersley pleads it is entitled to rely on cl 17.9 of the GCs as a basis for withholding payment of any amount payable to Forge.[9]
[9] Amended statement of claim [29] and [51].
Hamersley pleads it is entitled, by reason of cl 17.5(a) of the GCs, to recover from Forge the difference between the cost it incurred in completing the work under the Contracts and the amount it would have had to pay to Forge to complete the work; and that if the cost of completing the work was greater than the amount it would have had to pay Forge, it is entitled to recover the difference as a debt due by Forge to it.[10] Hamersley goes on to plead that it is entitled to deduct the amount for which Forge will become indebted to it from any money due or becoming due to Forge, with the result that '... save for any net amount determined as owing by force of cl 16.12 … Hamersley does not have and never had any liability to pay any amount …' to Forge under the Contracts.[11] As expressed in its submissions, Hamersley contends that cl 16.12 of the GCs provides a base for 'netting off', such that amounts identified are never in fact due to Forge because they are subject to Hammersley's rights of set‑off.[12]
[10] Amended statement of claim [30] and [52].
[11] Amended statement of claim [37].
[12] Amended statement of claim [32] and [54].
By way of equitable set‑off, Hamersley pleads it is entitled to set off the amounts for which Forge is liable to it for damages or debt against any amount for which it may be liable to Forge.[13]

Hamersley's set‑off in insolvency

[13] Amended statement of claim [32] and [54].

Hamersley pleads that:
(i)there have been mutual credits, mutual debts and mutual dealings between it and Forge within the meaning of those expressions in s 553C of the Corporations Act;
(ii)the winding up of Forge is taken to have commenced on 11 February 2014; and
(iii)any sum due from Hamersley to Forge is to be set off against the sum due from Forge to Hamersley, and the balance due to Hamersley is admissible to proof against Forge.

Is cl 16.12 of the General Conditions a 'netting off clause'?

Forge disputes Hamersley's construction of cl 16.12.[14] In its submissions, Forge develops its arguments as to why cl 16.12 does not operate as a base for netting‑off as Hamersley contends.

Does s 553C of the Corporations Act preclude Hamersley from relying on contractual and equitable set‑off?[15]

[14] Amended statement of claim [31] and amended defence and counterclaim [31].

[15] Amended defence and counterclaim [10(q)], [10(t)], [24(c)], [29(a)], [31(a)], [35(a)(iii)], [46(c)], [51(a)], [53(b)]; Hamersley's reply and defence to counterclaim [2(a)], [2(b)], [2(c)]; Forge's reply to defence to counterclaim [2(a)], [3(e)].

Forge responds to Hamersley's reliance on contractual and equitable set‑off with a plea termed 'Exclusive Operation of Section 553C'.[16] In essence, Forge pleads that s 553C of the Corporations Act is a mandatory and exclusive code, to be applied in accordance with and subject to its terms as to set‑off between an insolvent company and its creditors. Forge asserts s 553C operated with effect from 11 February 2014, and contends that the contractual set‑off provisions are unenforceable and that Hamersley is not entitled to withhold payment, or to make the deductions or set‑offs pleaded by it.
[16] Amended defence and counterclaim [10(q)], [10(t)], [24(c)], [29(a)], [31(a)], [35(a)(iii)], [46(c)], [51(a)] and [53(b)].
In its reply and defence to counterclaim Hamersley responds to Forge's plea that the contractual set‑off provisions are unenforceable by pleading that:
(i)when s 553C is engaged, it is mandatory and operates automatically to regulate dealings between an insolvent company that is being wound up and a person seeking to have a debt or claim admitted against the company and affects a contractual set‑off provision only in so far as the provision is inconsistent with s 553C;[17]
(ii)none of the contractual set‑off provisions upon which it relies is inconsistent with s 553C;[18] and
(iii)clauses 16.12 and 17.9 of the GCs are enforceable as between Hamersley and Forge and as between Hamersley and any chargee of Forge asserting a claim to payment of money due to Forge under the Contracts.[19]
[17] Reply and defence to counterclaim [2(a)].
[18] Reply and defence to counterclaim [2(b)].
[19] Reply and defence to counterclaim [2(b)].
In response to Hamersley's plea that Hamersley's contractual set‑off rights are not inconsistent with s 553C and are thus not rendered unenforceable by it, Forge pleads that s 553C covers the field such that once engaged, no contractual set‑off provision operates or is capable of operation.[20]

Is there mutuality between Forge's claims and Hamersley's claims?

[20] Reply to defence to counterclaim [2(a)].

Forge's defence to Hamersley's reliance on insolvency set‑off under s 553C of the Corporations Act rests on the proposition that the General Security Agreement operated to negate mutuality between the claims or debts of Hamersley and the claims or debts of Forge so that s 553C is not applicable.[21]
[21] Amended defence and counterclaim [56] - [58].
Forge says the General Security Agreement created a security interest that attached to Forge's rights under the Contracts from 2 July 2013 or, if the rights were not in existence on that date, from the date on which the rights arose.
In more detail, Forge pleads:
(i)the effect of cl 3.1(2)(a) of the General Security Agreement was that the security interest was a transfer by way of security of Collateral consisting of accounts and chattel paper as defined in the PPSA, unless they are not or cease to be Revolving Assets, and a charge over all other assets, and if for any reason it was necessary to determine the nature of the charge it was a floating charge over Revolving Assets and a fixed charge over all other Collateral;
(ii)Forge's rights under the Contracts are not Revolving Assets - as developed in Forge's submissions this is because they are not money or 'accounts';
(iii)the General Security Agreement created a security interest, alternatively, a fixed charge over Forge's rights under the Contracts; and
(iv)as a consequence, Forge says that its rights under the Contracts were not held by it beneficially or in the same interest as Hamersley, so that set‑off under s 553C is not available to Hamersley.

Had s 553C of the Corporations Act been engaged before ANZ acquired an interest in the Collateral?

Hamersley says s 553C of the Corporations Act was engaged immediately on the appointment of the administrators and that, at that time, ANZ had not acquired an interest in the Collateral. Upon this premise Hamersley contends that only the balance of any money due by Hamersley to Forge after making the set‑off required by s 553C formed part of the Collateral covered by the General Security Agreement.[22] In effect, Hamersley submits mutuality of interest was present when s 553C was engaged, that is, from the first moment of 11 February 2014, and it was not until the receivers were appointed later that day that it ceased to exist.
[22] Reply and defence to counterclaim [3(h)].
The matters Hamersley pleads as preserving mutuality of interest can be outlined by reference to the contentions pleaded in relation to two questions:
(i)did Forge have any rights over which it could grant security to ANZ, in particular, did cl 1.8(a) of the GCs in combination with cl 16.12 mean that Forge had nothing over which it could grant a security interest;[23] and
(ii)did the General Security Agreement create a floating charge over Forge's rights that had not crystallised as at the first moment of 11 February 2014?[24]

Clause 1.8(a) of the GCs

[23] Reply and defence to counterclaim [3(b)], [3(c)], [3(d)]; reply to defence to counterclaim [3(a)].

[24] Reply and defence to counterclaim [3(d)], [3(e)], [3(h)]; reply to defence to counterclaim [3(b)].

Hamersley pleads that cl 1.8(a) of the GCs prohibited Forge from assigning the whole or any part of the Contracts or any benefit or interest in or under either of them, save that Forge was permitted to assign its right to any moneys due or to become due under either Contract as security in favour of a bank or financial institution.[25]
[25] Reply and defence to counterclaim [3(b)], [3(c)].
Clause 1.8(a) provides:
1.8 Assignment
(a)[Forge] must not assign (including transfer or otherwise dispose of or cease to own) the whole or any part of the Contract or any benefit or interest in or under the Contract. However, [Forge] may:
(i)assign the whole or any part of the Contract with the agreement of [Hamersley], at the sole discretion of [Hamersley]; and
(ii)as security in favour of a bank or financial institution, assign its right to any moneys due or to become due under the Contract.
As developed in the reply and defence to counterclaim at [3(f)(ii)], and as explained in its submissions, Hamersley does not contend that the Contracts prohibited a transfer by way of security of accounts and book debts due under the Contracts. Instead, it makes the following contentions:
(i)that only any net balance after taking into account its claims is due to Forge, and so only the net balance could be taken by way of security; and
(ii)as there was no net balance due in Forge's favour, its claims against Hamersley did not form part of the Collateral.
In response, Forge pleads that if cl 1.8(a) of the WAGC is to be interpreted as alleged by Hamersley, then the clause is unenforceable against any third party and only binding on Forge to the extent of making it liable in damages for breach of contract pursuant to s 81 of the PPSA.[26]

Floating charge

[26] Reply to defence to counterclaim [3(a)].

Next, Hamersley pleads that Forge's rights under the Contracts (whenever they arose) were the subject of a floating charge that did not operate to terminate Forge's beneficial interest in the rights because:
(i)the rights were not exclusively ear‑marked or separated for the benefit of ANZ;
(ii)pursuant to cl 3.4 of the General Security Agreement, Forge was entitled to collect the proceeds of debts or other amounts payable to it;
(iii)until a Control Event occurred Forge was permitted to use payments made under the Contracts in the ordinary course of its business by reason of cl 3.1, cl 3.3, cl 3.4, cl 3.6, cl 4.4(2), cl 4.3, cl 4.5, cl 7.2 of the General Security Agreement; and
(iv)alternatively, the rights consisted of Revolving Assets.[27]
[27] Reply and defence to counterclaim [3(d)], [3(e)], [3(f)(i)].
In the further alternative, Hamersley contends that any moneys due or to become due were Revolving Assets and - by implication because it is not pleaded expressly - therefore not the subject of a charge.[28]
[28] Reply and defence to counterclaim [3(f)(iii)].
Forge responds by pleading that its claims for money due to it are choses in action and not Revolving Assets, and further, that the claims do not fall within the definition of 'account'.
The plea that Forge's claims were Revolving Assets was not pursued in Hamersley's submissions and both parties accept that the claims were not Revolving Assets.
Forge contends that an account as defined in the PPSA requires the existence of a monetary obligation, which is an existing legal obligation to pay a certain sum on an ascertainable date, that relevantly arises from providing a service.[29]
[29] Reply to defence to counterclaim [3(c)], [3(d)].
Forge pleads that if no fixed charge arose over Forge's rights under the Contracts and there was only a floating charge over those rights, then by virtue of the provisions of the PPSA and in particular s 12, s 18 and s 19, the security interest created destroyed mutuality as between Forge and Hamersley after Forge entered into the General Security Agreement.[30]

Are Hamersley's rights to contractual and equitable set‑off preserved in equity or by statute?

[30] Reply to defence to counterclaim [3(b)].

Hamersley pleads that even if s 553C of the Corporations Act is not engaged to produce a balance in its favour, ANZ's rights under the General Security Agreement remain subject to its contractual set‑off rights and equitable set‑off because:
(i)an assignee's entitlement is subject to equities, including rights of set‑off; and
(ii)s 80(1)(a) of the PPSA provides that the right of a transferee of an account or chattel paper (including a secured party or receiver) are subject to the terms of the contract between the account debtor (in this case Hamersley) and the transferor (Forge) and any equity, defence, remedy or claim arising in relation to the contract, including a defence by way of set‑off.

Forge responds to Hamersley's plea that it was entitled to rely upon the doctrine of equitable estoppel by pleading that once s 553C is engaged, there is no capacity for the doctrine of equitable estoppel to operate.[31]
[31] Reply to defence and counterclaim [3(e)].
In response to Hamersley's reliance on s 80(1)(a) of the PPSA, Forge pleads that the provision is not applicable to the extent to which s 553C applies because of the operation of s 258 of the PPSA.[32]
[32] Reply to defence to counterclaim [3(f)].
Further, Forge pleads that s 80 of the PPSA only applies to accounts that have been transferred and says that its claims are not accounts.[33]

The relief claimed by Hamersley

[33] Reply to defence to counterclaim [3(f)(ii)].

Relevantly, the relief sought by Hamersley flowing from the paragraphs of the amended statement of claim to which I have referred in the outline above includes declarations:
(i)that pursuant to s 553C of the Corporations Act Hamersley is not liable to make any payment to Forge under the West Angelas Contract or the Cape Lambert Contract;
(ii)as to the balance of the account between Hamersley and Forge, that is admissible to proof against Forge pursuant to s 553C; and
(iii)that Hamersley is otherwise not liable to pay Forge any amount under the West Angelas Contract and/or the Cape Lambert Contract.

Forge's counterclaim and relief claimed by it

By way of counterclaim, Forge pleads that its entitlements under the Contracts and its claims arising from Hamersley's recourse to securities are as follows:
(i)$458,190.50, being an amount certified as payable by Hamersley to Forge under the West Angelas Contract but unpaid;[34]
(ii)$7,019,752.17, being an amount claimed by the Receivers as due to Forge under the West Angelas Contract;[35]
(iii)$9,224,372.10 and US$5,440,160, being amounts realised by Hamersley by wrongful calls on performance securities provided under the West Angelas Contract;[36]
(iv)$1,283,559.61, being an amount certified as payable by Hamersley to Forge pursuant to the Cape Lambert Contract but unpaid;[37]
(v)$8,577,829.63, being an amount claimed by the Receivers as due to Forge under the Cape Lambert Contract;[38] and
(vi)$25,933,287 and US$19,335,939, being amounts realised by Hamersley by wrongful calls on performance securities provided under the Cape Lambert Contract.[39]
[34] Amended defence and counterclaim [11(a)(iv)(E)], [23(b)].
[35] Amended defence and counterclaim [23(b)].
[36] Amended defence and counterclaim [23(b)].
[37] Amended defence and counterclaim [36(b)(v)(C)].
[38] Amended defence and counterclaim [45(b)].
[39] Amended defence and counterclaim [45(b)].
Forge 'reserves its rights to claim payment of any and all amounts payable to it by Hamersley under the terms of the West Angelas Contract and the Cape Lambert Contract'.[40]
[40] Amended defence and counterclaim [59(b)].
Forge counterclaims for declaratory relief to the following effect:
(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.

Preliminary questions

The preliminary questions are as follows:
(i)Assuming that Hamersley is otherwise entitled to the set‑offs pleaded in paragraphs [29], [30], [31], [32], [51], [52], [53], [54], [56], [57] and [58] of the amended statement of claim,[41] do any of the matters pleaded in paragraphs [10(q)], [10(t)], [24(c)], [29(a)], [31(a)], [35(a)(iii)], [46(c)], [51(a)], [53(b)], [56] and [58] of the amended defence and counterclaim and paragraphs [2(a)], [3(a)], [3(b)], [3(c)], [3(d)], [3(e)] and [3(f)] of the reply to defence to counterclaim (either together or separately) preclude Hamersley from setting off its Claims against the Forge Claims?
(ii)Is Hamersley entitled by any of the matters pleaded in paragraphs [29], [30], [31], [32], [51], [52], [53], [54], [56], [57] and [58] of the amended statement of claim and paragraphs [2(a)], [2(b)], [2(c)], [3(a)], [3(b)], [3(c)], [3(d)], [3(e)] and [3(f)], [3(h)] and [3(i)] of the reply to defence to counterclaim (either together or separately) to set off its Claims[42] against the Forge Claims?[43]

Assumptions

[41] The preliminary questions were originally formulated by reference to the statement of claim and defence and counterclaim prior to those pleadings being amended but the relevant paragraphs were not affected by the amendments.

[42] Hamersley's 'Claims' are the claims pleaded in pars [17], [18], [19], [40] and [41] of the amended statement of claim.

[43] Forge's Claims are the claims pleaded in pars [17(a)(iv)(E)], [23(b)], [36(b)(v)(C)], [45(b)] and [59(b)] of the amended defence and counterclaim.

For the purposes of determining the preliminary questions I have been asked to assume that Hamersley is otherwise entitled to the sums and damages pleaded in [17], [18], [19], [40] and [41] of the amended statement of claim, and that Forge is otherwise entitled to the sums and damages pleaded in [11(a)(iv)(E)], [23(b)], [36(b)(v)(C)], [45(b)] and [59(b)] of the amended defence and counterclaim.

The PPSA

The origins of the PPSA and its aims

The origins of the PPSA and the extent of the reforms brought about by it are described by Professors Duggan and Brown in Australian Personal Property Securities Law as follows:[44]
The Australian PPSA is based in part on Canadian legislation, and also on Art 9 of the United States Uniform Commercial Code. It is similar to the New Zealand PPSA, which preceded the Australian reforms by 10 years or so, though the New Zealand statute adheres more closely to the Canadian model. In common with the PPSA family at large, the Australian PPSA applies to every transaction which in substance creates a security interest, without regard to the actual form the parties choose, and it addresses every aspect of secured lending, including formal requirements for security agreements, publication of security interests, priority between competing claims to collateral and remedies for default. At each of these stages, the statute enacts a more or less common set of rules for all secured transactions. There are special rules for certain cases, but these rule variations are dictated by considerations of policy and business convenience rather than by matters of form. (footnotes omitted)
[44] A Duggan and D Brown, Australian Personal Property Securities Law (2nd ed, 2016) [1.41]
In the course of tracing the evolution of the proposed reforms, Professors Duggan and Brown contrast a draft Bill included in the Australian Law Commission Report No 64: Personal Property Securities, published in 1993, with the PPSA in the following terms:[45]
In contrast to the ALRC draft Bill published 16 years earlier, the PPSA does substantially track Canadian law. Like the New Zealanders before them, the Australian drafters took the Saskatchewan PPSA as a model. On the other hand, there are many more departures from the model in the Australian PPSA than there are in the New Zealand version. The differences are at the level of both drafting and policy. The 2008 Exposure Draft Bill was more dramatically different from the Saskatchewan model. Following the recommendations made by the Senate Standing Committee on Legal and Constitutional Affairs, however, the Bill was substantially redrafted to remove some of its more idiosyncratic features. (footnotes omitted)
[45] Australian Personal Property Securities Law [1.50].
Whilst 'modelled on the New Zealand, Canadian and US legislation' the PPSA takes '… into account some of the unique circumstances surrounding Australian consumer law, [and] commercial practices'.[46]
[46] Replacement Explanatory Memorandum, Personal Property Securities Bill 2009 (Cth) 11; Commonwealth, Parliamentary Debates, House of Representatives, 24 June 2009, 6962 (Mr R McClelland, Attorney-General).
Prior to the PPSA coming into force, amendments were made to the Corporations Act to accommodate new concepts introduced by the PPSA.[47]
[47] Personal Property Securities (Corporations and Other Amendments) Act 2010 (Cth).
In Warehouse Sales Pty Ltd & Lewis and Templeton v LG Electronics Australia Pty Ltd[48] Sifris J described the effect of the changes brought about by the PPSA as representing '…a paradigm shift from established principles of secured transactions law that developed over many years in relation to security over personal property' the aim of which was to provide '…a simplified, unified, coherent and comprehensive regime relating to security over personal property'. Sifris J described the key features of the PPSA as including '…the unitary concept of a security interest and a priority regime determined by the registration of such interests' (emphasis supplied) that assimilated or recharacterised '…all types of security interest, including retention of title arrangements, to a simple concept where the purpose and economic effect is essentially the same'.
[48] Warehouse Sales Pty Ltd & Lewis and Templeton v LG Electronics Australia Pty Ltd [2014] VSC 644; (2014) 291 FLR 407 [27] - [32].
In Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liq) (receivers and managers appointed),[49] Ward JA, with whom Bathurst CJ and Beazley P agreed, said:
[T]he 'mischief' that the PPSA was intended to address was the uncertainty and complexity of the various statutory and common law regimes applicable to security interests in personal property.
[49] Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liq)(receivers and managers appointed) [2017] NSWCA 8 [83].
In essence, the purpose of the PPSA is to bring broadly and functionally defined security interests within a single, uniform national system.
The PPSA applies to all security interests, regardless of form, which are defined as '… any interest arising under a transaction that in substance secures payment or performance of an obligation'.[50]
[50] Re Langdon (in their capacities as the receivers and managers of Forge Group Ltd (in liq)) [2017] FCA 170 [27] - [28] (Gilmour J); cf PPSA s 12.
Additionally, the PPSA was intended to '… more closely align Australia's secured transactions law with that in other jurisdictions', and to '… increase the confidence of international investors and creditors in Australia's secured transactions law'.[51]

The relevance of decisions on equivalent legislation in other jurisdictions

[51] Commonwealth, Parliamentary Debates, House of Representatives, 24 June 2009, 6960 (Mr R McClelland, Attorney-General).

When construing a statute, resort may be had to the approach taken to the construction of statutes enacted in other jurisdictions intended to achieve the same result, that is statutes in pari materia.[52]
[52] D Pearce and R Geddes, Statutory Interpretation in Australia (8th ed, 2014) [3.36]; cf Walker Corporation v Sydney Harbour Foreshore Authority [2008] HCA 5; (2008) 233 CLR 259 [31] (Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ) quoting Marshall v Director-General, Department of Transport [2001] HCA 37; (2001) 205 CLR 603 [62] (McHugh J).
In the course of interpreting the PPSA, Australian courts have been guided by the decisions in Canada and New Zealand on equivalent legislation. In Re Maiden Civil (P&E) Pty Ltd; Albarran v Queensland Excavation Services Pty Ltd,[53] Brereton J observed:
The Commonwealth Parliament, in enacting legislation that was modelled on the New Zealand and Canadian legislation, should be taken to have intended the same approach, which was by then well-established in Canada and New Zealand, to apply.
[53] Re Maiden Civil (P&E) Pty Ltd; Albarran v Queensland Excavation Services Pty Ltd [2013] NSWSC 852; (2013) 277 FLR 337 [32].
His Honour cited with approval cases from both Canada and New Zealand in the course of his judgment resolving a priority dispute. Subsequently, in Future Revelation Ltd v Medica Radiology & Nuclear Medicine Pty Ltd[54] Brereton J relied on Canadian case law in determining whether a defect in a financing statement was 'seriously misleading'.
[54] Future Revelation Ltd v Medica Radiology & Nuclear Medicine Pty Ltd [2013] NSWSC 1741; (2013) 283 FLR 122 [5] - [6].
In Re Arcabi Pty Ltd (receivers and managers appointed) (in liq); Ex parte Theobald & Herbert,[55] Sanderson M referred to Brereton J's observations in Maiden Civil and in the course of addressing issues concerning the operation of the PPSA referred to the Canadian and New Zealand case law.
[55] Re Arcabi Pty Ltd (receivers and managers appointed) (in liq); Ex parte Theobald & Herbert [2014] WASC 310; (2014) 288 FLR 236 [14].
Similarly, in Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd[56] one of the issues was whether a claim to a proprietary interest in the personal property of a party by way of equitable relief could constitute a security interest for the purposes of s 12 of the PPSA. There, Ross J followed the approach to the construction of s 12 of the PPSA that the Canadian Supreme Court had adopted in i Trade Finance Inc v Bank of Montréal[57] to the equivalent provision in the Ontario PPSA (s 2).
[56] Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd[2014] VSC 217; (2014) 285 FLR 267.
[57] i Trade Finance Inc v Bank of Montréal [2011] 2 SCR 360; 2011 SCC 26.
Acknowledging that I must take care to give primacy to the statutory text and be alive to differences between the PPSA and comparable legislation, I will follow, though not 'slavishly', the approach adopted in the authorities to which I have referred, and I will be guided by the approach taken by the courts in Canada and New Zealand to the interpretation of the personal properties securities legislation in their jurisdictions. I appreciate that the various statutes are not identical, but the underlying policy is the same and the same broad structure and concepts are employed.

The key provisions of the PPSA

Interests to which the PPSA does not apply

Section 8(1) provides that the PPSA does not apply to various specified interests, except as provided for by subsection (2) or (3). These interests include '… any right of set-off or right of combination of accounts (within the ordinary meaning of the term 'accounts')'.[58]
[58] PPSA s 8(1)(d).
Section 8(2) relevantly provides:

Provisions of this Act that apply to interests mentioned in subsection (1)

Item

Despite subsection (1), the
following provision:

applies in relation to the following interest mentioned in subsection (1):

…

…

…

2

section 80

a right of set-off (see
paragraph (1)(d)).

I refer to s 80(1) in more detail later in these reasons. In summary, read with s 80(2), s 80(1) provides that the rights of a transferee of an account or chattel paper are subject to the account debtor's contractual rights, including set-off rights, and other defences unless the account debtor has agreed not to assert defences to claims arising out of the contract.

Security interest

The central concept around which the PPSA is structured is that of a 'security interest'. This is defined in s 12 in functional terms rather than by reference to traditional forms of security. Section 12(1) and (2) provide:
12Meaning of security interest
(1)A security interest means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).
…
(2)For example, a security interest includes an interest in personal property provided by any of the following transactions, if the transaction, in substance, secures payment or performance of an obligation.
(a)a fixed charge;
(b)a floating charge;
(c)a chattel mortgage;
(d)a conditional sale agreement (including an agreement to sell subject to retention of title);
(e)a hire purchase agreement;
(f)a pledge;
(g)a trust receipt;
(h)a consignment (whether or not a commercial assignment);
(i)a lease of goods, (whether or not a PPS lease);
(j)an assignment;
(k)a transfer of title;
(l)a flawed asset arrangement.

Personal property and related terms

Section 10 of the PPSA is a 'Dictionary' provision containing the following relevant definitions.
Personal property means property (including a licence) other than land or a right, entitlement or authority that is granted under a law of the Commonwealth, a State or a Territory, and declared not to be personal property for the purposes of the PPSA.
After-acquired property means personal property acquired by the grantor after a security agreement is made.
Collateral means personal property to which a security interest is attached, and in relation to a registration with respect to a security interest, including personal property described by the registration (whether or not a security interest is attached to the property).
Account is a particular form of intangible personal property. I set out the complete definition when I come to deal with the issue of whether Forge's claims are accounts. For present purposes it is sufficient to note that the defining characteristic of an account is that it is a monetary obligation arising from disposing of property, or granting a right, or providing 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). Certain categories of personal property that might otherwise have fallen within the definition of account are excluded. It is only necessary to mention one of these categories: 'chattel paper'. Subject to presently irrelevant exceptions, 'chattel paper' is defined, essentially, as one or more documents that evidence both a monetary obligation and a security interest in, or lease of, specific goods, or a security interest in specific intellectual property or a specific intellectual property licence.

Security agreement and parties

Security agreement means an agreement or act by which a security interest is created, arises or is provided for, or writing evidencing such an agreement or act.
Secured party includes a person who holds a security interest for that person or another's benefit and includes a trustee.
Grantor is defined to include a person who has an interest in personal property to which a security interest is attached.
Account debtor means a person obligated under an account or chattel paper.

Attachment and Perfection

Attachment and perfection are key concepts. Part 2.2 of the PPSA sets out some general principles about security interests and the rules that govern these concepts. Section 18 sets out general rules about security agreements and security interests. Most significantly for the purposes of this case it states that a security agreement is effective in accordance with its terms and that a security interest in after-acquired property attaches without specific appropriation.
The PPSA distinguishes between the enforceability of a security interest against the grantor and its enforceability against third parties. Section 10 provides that 'attaches' has the meaning given in s 19.
Section 19 states the rules applicable to the enforceability of a security interest against the grantor. It sets out when a security interest attaches to collateral. Determining the correct construction of the rules governing attachment in s 19 and the consequences that flow from the application of those rules is a critical issue in this case.

I set out the full text of s 18 and s 19 later in these reasons.
Section 20 sets out the rules applicable to the enforceability of security interests against third parties. It provides that a security interest is enforceable against a third party only if the security agreement has attached to the collateral, and one of the following applies:
(i)the secured party possesses the collateral;
(ii)the secured party has perfected the security interest by control; or
(iii)a security agreement covers the collateral in the manner stipulated in s 20(2).
It is unnecessary to examine the requirements for perfection in detail. For the purpose of understanding the scheme established by the PPSA it is sufficient to note that perfection provides the optimal level of protection offered by the PPSA. Attachment and enforceability against third parties are necessary conditions of perfection.[59] Perfection may be achieved by registration of a 'financing statement', by possession of the collateral or by control of over certain kinds of collateral.[60]

Continuation of security interest in proceeds

[59] PPSA s 21(1).

[60] PPSA s 21(2).

Reference must also be made to s 31 and s 32 as they deal with attachment of a security interest in proceeds.
Section 31(1) defines 'proceeds' as follows:
proceeds of collateral to which a security interest is (or is to be) attached means identifiable or traceable personal property of the following types, subject to subsections (2) and (3):
(a)personal property derived directly or indirectly from a dealing with the collateral (or proceeds of the collateral);
(b)a right to an insurance payment or other payment as indemnity or compensation for loss of, or damage to, the collateral (or proceeds of the collateral);
(c)a payment made in total or partial discharge or redemption of the collateral (or proceeds of the collateral), if the collateral (or proceeds) consists of any of the following:
(i)chattel paper;
(ii)intangible property;
(iii)an investment instrument;
(iv)an intermediated security;
(v)a negotiable instrument;
(d)if the collateral is intellectual property (or an intellectual property licence - in addition to any other proceeds, the right of a licensor of the property (whether or not the property is itself a licence) to receive payments under any licence agreement in relation to the collateral;
(e)if the collateral is an investment instrument or intermediated security - any of the following:
(i)rights arising out of the collateral;
(ii)property collected on the collateral;
(iii)property distributed on account of the collateral.
Note:In section 140 (distribution of proceeds received by secured party) proceeds has its ordinary meaning, so this definition does not apply.
Subsections 31(2) and (3) read:
Whether proceeds are traceable
(2)Proceeds are traceable whether or not there is a fiduciary relationship between the person who has a security interest in the proceeds, as provided in section 32, and the person who has rights in or has dealt with the proceeds.
Restrictions to proceeds in which grantor has a transferable interest
(3)However, personal property is proceeds only if:
(a)either:
(i)the grantor has an interest in the proceeds; or
(ii)the grantor has the power to transfer rights in the proceeds to the secured party (or to a person nominated by the secured party); and
(b)the interest in the proceeds does not arise because of the operation of paragraph 140(2)(f).
Section 32 is concerned with the attachment of a security interest in proceeds. Section 32(1) provides for the continuation of security in collateral and attachment to proceeds and it reads:
(1)Subject to this Act, if collateral gives rise to proceeds (by being dealt with or otherwise), the security interest:
(a)continues in the collateral, unless:
(i)the secured party expressly or impliedly authorised disposal giving rise to the proceeds; or
(ii)the secured party expressly or impliedly agreed that a dealing giving rise to the proceeds would extinguish the security interest; and
(b)attaches to the proceeds, unless the security agreement provides otherwise.

Taking free rules

Part 2.5 of the PPSA contains rules that set out when personal property may be bought or leased free of a security interest.

Transfers of interests in collateral

Part 2.7 of the PPSA contains provisions dealing with transfers of collateral. Section 79 reads:
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.
As noted above, I consider s 80(1) in detail later in these reasons.
Section 81 provides that contractual restraints on assignment are unenforceable. It states:
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.

Part 7.4 Relationship between Australian laws

I refer to the provisions of Pt 7.4 of the PPSA in greater detail later in these reasons. For present purposes it is sufficient to note that the PPSA is not intended to operate as a code, but concurrently with the laws of the Commonwealth, States and Territories, and the general law (the principles and rules of the common law and equity), to the extent to which the law is capable of operating concurrently with the PPSA. In certain instances other laws will prevail over the PPSA, and in other instances the provisions of the PPSA will prevail over other laws.

References to fixed and floating charges and circulating assets

Part 9.5 of the PPSA contains special rules dealing with references to charges and fixed and floating charges in the laws of the Commonwealth and in security agreements.
Section 338 states that the rules:
are expected to have less relevance over time, as the scheme provided for by this Act provides an alternative to reliance on those techniques for security interest transactions.
Section 339(1) provides that the section applies to a reference to a charge, a fixed charge, or a floating charge, over property in a law of the Commonwealth, or in a security agreement if:
(i)the charge has attached to personal property;
(ii)title to the personal property to which the charge has attached is in the grantor; and
(iii)the charge is a security interest to which the PPSA applies.
Section 339(4) provides that a reference to a fixed charge over property is taken to be a reference to a security interest that has attached to personal property that is not a circulating asset.
Section 339(5) provides that a reference to a floating charge is taken to be a reference to a security interest that has attached to a circulating asset.
The term circulating asset is defined in detailed terms in s 340. Section 341 contains definitions of 'control' and 'inventory' as used in s 340. In summary an asset is a circulating asset if (subject to certain exceptions) it falls within one of the categories specified in s 340(5) (accounts arising in the ordinary course of business and certain current assets),[61] or if the asset is the subject of a trading power.[62]
[61] PPSA s 340(1)(a).
[62] PPSA s 340(1)(b).
In the Corporations Act a 'security interest' within the meaning of the PPSA is defined as a 'PPSA security interest'. 'Security interest', 'secured party' and 'circulating asset' have the same meaning as in the PPSA when those terms are referred to in Pt 1.2 Div 6A of the Corporations Act.
Section 51C of the Corporations Act defines 'circulating security interest' as follows:
In this Act:
circulating security interest means a security interest that is:
(a)a PPSA interest, if:
(i)the security interest has attached to a circulating asset within the meaning of the Personal Property Securities Act 2009; and
(ii)the grantor (within the meaning of that Act) has title to the asset; or
(b)a floating charge.

Part 2 - The issues

The contractual framework

Clause 16 of the GCs provides for a three step process for payment of the Contract Price. The first step was for Forge to submit a monthly Progress Claim to Hamersley;[63] the second step was for Hamersley to give Forge a Payment Certificate showing its opinion of the money due from it to Forge pursuant to Forge's Progress Claim;[64] the third step was for Hamersley to make payment.[65] Clauses 16.4 and 16.5 provide:
[63] GCs cl 16.2.
[64] GCs cl 16.4.
[65] GCs cl 16.5.
16.4Payment Certificate
(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 anything 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), the Employer 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 Employer or Contractor, 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)the Employer'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 SubClause 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 must be made into a bank account, nominated by [Forge], in the Country.
Reference should also be made to cl 16.6, which provides:
16.6Delayed Payment
(a)If a party does not receive payment in accordance with the Contract, that Party will be entitled to receive from the other Party financing charges compounded monthly on the amount unpaid during the period of delay.
(b)These financing charges must be calculated at the Default Rate and paid in Local Currency.
(c)The relevant Party will be entitled to this payment without formal notice and without prejudice to any other right or remedy.
Clause 16.12 provides:
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.

Summary of the parties' submissions

Hamersley's submissions

Hamersley submits that the payment provisions constituted an agreement between Hamersley and Forge that no money would be due to Forge under any Progress Claim if any money was due to Hamersley, or Hamersley had any Claim (as defined) against Forge pursuant to which money would be due to Hamersley, and Hamersley exercised its rights under cl 16.12. Hamersley submits that it had exercised those rights and accordingly it was not required to pay anything to Forge.
Hamersley characterises the construction of the conditions for which it contends as amounting to '…not so much a set‑off but an agreement that, in that event [that is, if Hamersley exercised its contractual rights], only a net balance is due to or from Forge'.
Hamersley's submissions emphasise that cl 1.8 of the GCs permitted Forge to assign its rights to any money 'due or to become due' to make the point that if no money was due there was nothing to assign. Hamersley contends it is significant that its obligation to make payment of the amount of money due in a Payment Certificate was expressed to be subject to the rights of set‑off. Hamersley argues that the use of the word 'otherwise' in cl 16.1 - 'The Employer may deduct from monies otherwise due to the Contractor' - supports its construction that if the set‑off rights were invoked no money would be due to Forge. Hamersley contends that the reason for referring to 'monies otherwise due' in cl 16.12 was to give a base from which the netting‑off or off-setting contemplated by the clause might be made.
Hamersley submits there was no temporal restriction on the exercise of its rights of set‑off and that it had exercised those rights.
Hamersley submits the construction of these payment provisions for which it contended - that cl 16.12 had the effect of negating the existence of a pre-existing debt - was the same as the construction of regulation 9 of the IATA Clearing House Regulations favoured by the majority of the High Court in IATA v Ansett Australia Holdings Ltd.[66]

Forge's submissions

[66] IATA v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151.

Forge submits that the amount certified as money due in a Payment Certificate became due at the time a Payment Certificate was issued subject to any amounts deducted by Hamersley in the exercise of its set‑off rights. As provided by cl 16.5, payment had to be made within 15 Business Days of the issue of the Payment Certificate. Forge makes the point that cl 16.12 conferred a discretion on Hamersley to exercise its rights of set‑off and that those rights were not self‑executing. Thus, if the set‑off rights were not exercised the money was due and Hamersley was required to make payment. Forge makes a related point, namely that if Hamersley's construction was correct and money did not become due until amounts due to Hamersley had been netted off or off‑set, no purpose was served by including the words 'Subject to Sub‑Clause 16.12 [Right of Set‑off]' as they appear in cl 16.4(a) and cl 16.5(a). Forge argues that construing the words 'monies otherwise due' as they appear in cl 16.12 as providing a netting‑off base was not a construction that a reasonable business person would adopt as it would produce uncertainty as to what was due to Forge at any particular time with resulting commercial inconvenience. Money apparently certified as due by a Payment Certificate issued under cl 16.4(a) would, on Hamersley's construction, not actually be due even if Hamersley had not exercised its set‑off rights.
Forge also develops a submission to the effect that cl 16.12 '…has nothing to say or to operate against in respect of choses of action representing an entitlement to be paid for work done'. This submission is directed to Forge's claims in restitution for the benefit of construction work completed by Forge up to the time Hamersley terminated the Contracts. Forge submits no money obligation arises in respect of works completed under the Contracts prior to a claim and certification in respect of those works and as there is no money presently due under the Contracts, cl 16.12 has no relevant operation.

Clause 16.12 does not operate as a net‑off provision

I approach the question of construction upon which the resolution of this question depends by considering what a reasonable business person would have understood the relevant contractual provisions to mean.[67]
[67] Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104.
Although both parties referred to the decision in IATA (a decision to which I refer in greater detail when considering the ambit of the operation of s 553C of the Corporations Act) in the context of this issue the relevance of the decision is limited. For present purposes, I note the emphasis placed by Gleeson CJ at [13] and the plurality at [52] on focussing on the construction of the relevant contract documents.
The language employed in cl 16.4(a), cl 16.5 and cl 16.12 is clear and it does not support Hamersley's position. By their express terms, cl 16.4(a) and cl 16.5(a) impose an obligation on Hamersley to pay the money which it considers is due to Forge within 15 Business Days of the issue of a Payment Certificate. It is significant that cl 16.4(a) not only refers to Hamersley's opinion of money due by it to Forge, or vice versa, but also provides that subject to sub‑clause 16.12 payments due must not be withheld. In my view the clauses operate to create a debt that Hamersley must pay within 15 Business Days.
As just noted, the payment obligation is 'subject to' the rights of set‑off. Hamersley had a discretion, however, as to whether to exercise those rights. Clause 16.12 was not a self‑executing mechanism and the set‑off did not apply automatically; the right to be paid the 'money due' was unaffected unless and until Hamersley exercised its rights. If Hamersley did not exercise those rights, payment had to be made. Hamersley did not exercise its rights before the administrators were appointed.
The operation of cl 16.4(a) and cl 16.5(a) provide the context in which the words 'monies otherwise due' in cl 16.12 must be construed. A reasonable business person would take those words to be a reference to 'monies due' - that is a debt which would be due by Hamersley to Forge unless Hamersley exercised its rights of set‑off - and not as a base for netting off. I reach that conclusion primarily because it reflects the ordinary and natural meaning of 'monies due'. Such a construction also provides certainty as to what is due by Hamersley to Forge. Without this certainty, it would be impossible for the delayed payment provision in cl 16.6 to operate effectively and this is an additional reason why the clause should not be construed as a base for netting off.

In New Zealand the Personal Property Securities Act 1999 (NZ) (PPSA (NZ)) has been interpreted such that the concept of the crystallisation of floating charges is not relevant under the scheme established by that Act. Commissioner of Inland Revenue v Stiassny[183] involved a question of whether a payment made by receivers of a partnership to the Commissioner out of the funds realised by the sale of the partnership assets was a debtor-initiated payment for the purposes of s 95 of the PPSA (NZ) (the equivalent provision in the PPSA is s 69). The court considered a submission that under the general law of property the proceeds of the sale of partnership assets belonged to the secured creditors. As the proceeds were not sufficient to meet the debts due to the secured creditors, it was argued that the partnership held no legal or equitable interest in the fund realised upon the sale of the assets and thus there could be no debtor-initiated payment as no debt was owed by secured creditors to the Commissioner. The submission was developed by reference to the principle that on crystallisation of a floating charge over its assets, a company has only an equity of redemption in the fund realised upon sale of the assets.
[183] Commissioner of Inland Revenue v Stiassny [2012] NZCA 93; (2013) 1 NZLR 140.
Randerson J, giving the judgment of the court, rejected the reliance placed by the receivers on the principles developed in the context of floating charges observing:[184]
issues relating to the crystallisation of floating charges and title to the funds in dispute have little or no bearing on priority issues under the PPSA. Care should be taken not to import pre-PPSA language and concepts into the interpretation of the PPSA.

Hamersley's submissions on the Canadian and New Zealand decisions

[184] PPSA [155].

I do not accept Hamersley's submission that the differences between the various personal property securities statutes enacted in Canada and New Zealand are such that useful guidance on the construction of the PPSA cannot be derived from the authorities to which I have referred. Nor do I accept Hamersley's submission that the guidance provided by those authorities is limited because none of the decisions involved a contest between the rights conferred by a security interest and set-off rights.

Differences in statutory texts

There are differences between the legislation enacted in each of the jurisdictions.
In Sparrow the court considered the effect of s 12 of the Alberta PPSA (PPSA (Alb)). Section 12 of the PPSA (Alb) has a number of features in common with s 19 of the PPSA. Like s 19 of the PPSA, s 12(1) of the PPSA (Alb) uses the words 'attach' and 'attachment', provides that a security interest attaches when value is given and the debtor (grantor) has rights in the collateral or power to transfer rights in the collateral, and is expressed to apply unless the parties have agreed to postpone the time of attachment. There are two points of difference. First, s 12 of the PPSA (Alb) provides that it applies to a security interest 'in the nature of a floating charge'. Second, s 12 of the PPSA (Alb) has an additional pre-requisite for attachment - that the security agreement must be enforceable within the meaning of s 10 and s 12(1)(c) of the PPSA (Alb).[185]
[185] It is unnecessary to refer to s 10 of the PPSA (Alb) in any detail. It is sufficient to note that it provides that a security interest is enforceable against third parties upon the signing of a security agreement, provided it contains a proper description of the collateral.
In Innovation Credit and Radius the court considered the effect of the attachment rule in s 12 of the PPSA (Sask) which is in identical terms to s 12 of the PPSA (Alb) save that it does not include a reference to a security interest 'in the nature of a floating charge'.
i Trade and Credit Suisse involved security interests under the Ontario PPSA (Ont). The attachment rule in the PPSA (Ont) is contained in s 11 and it specifies the same statutory pre-requisites for attachment as are contained in the Alberta and Saskatchewan statutes and, like the Alberta provision, the rule is expressed to apply to 'a security interest in the nature of floating charge'.
The differences between the attachment rule in the Canadian provincial statutes and s 19 of the PPSA are not sufficiently material to constitute a basis for concluding that the decisions of the Supreme Court of Canada and intermediate appeal courts on the correct construction of the attachment rule in those statutes are not helpful in construing s 19 of the PPSA.
I add that the absence in the Canadian provincial statutes of express provisions to the effect that they do not apply to set-off rights is not a basis for distinguishing the Canadian cases for two reasons. First, the significance that might otherwise be attached to the absence of an express provision to the effect that the legislation does not apply to set-off rights is diminished because bare rights of set-off do not constitute a 'security interest' and a court would approach the construction of the legislation with this in mind (this being the approach adopted by both the majority and the minority in Supreme Court of Canada in Caisse Populaire Desjardins de l'Est de Drummond v Canada).[186] Second, for the reasons I have given above, I consider s 8(1)(d) of the PPSA is of limited import and thus of limited significance in construing the attachment rule.

Distinguishing Canadian authorities on the ground that they did not concern a competition between a security interest and set-off rights does not limit the guidance provided

[186] Caisse Populaire Desjardins de l'Est de Drummond v Canada [2009] 2 SCR 94; 2009 SCC 29.

Gonthier J's reasoning in Sparrow sets out the legal principles applicable to, and the consequences flowing from, attachment of a security interest in collateral. In Sparrow, Innovation Credit and Radius the court held that the proprietary interest conferred by an attached security interest was recognised under the general law for the purposes of competition between a PPSA security interest and an interest that existed outside the legislation. Whilst it may be accepted that these decisions can be distinguished from the present case on the ground that none of them involved a contest between a PPSA security interest and set-off rights, this does not undermine the guidance they provide. On the contrary, if a proprietary interest in personal property arising from an attached security interest is recognised for the purposes of a contest with other forms of statutory security in the same collateral - including, as in Sparrow, a security interest specifically exempted from the application of the PPSA - I see no reason why the proprietary interest should not be recognised for the purposes of a contest between a PPSA security interest and rights of set-off.

Propositions derived from the Canadian and New Zealand decisions

The following propositions may be derived from the Canadian and New Zealand authorities in relation to security interests created under the legislation enacted in those jurisdictions.
First, the security interest is fixed in nature and upon satisfaction of the statutory requirements governing attachment, the secured party acquires a proprietary interest in the collateral.
Second, the concept of crystallisation is no longer relevant.
Third, the secured party's statutory interest in collateral acquired on attachment is recognised not only for the purposes of determining priority between interests regulated by the legislation, but because it is a statutory interest, it is recognised at law for the purposes of determining disputes between security interests covered by the personal property security legislation and interests that exist outside of the legislation.
Fourth, parties can make security agreements that operate in a manner that achieves a similar commercial outcome as that achieved by a floating charge.
As I have already noted, these propositions provide guidance only as to the correct construction of the attachment rule in s 19 of the PPSA.
Caution must be exercised in drawing guidance from propositions about the nature of a security interest under equivalent legislation when those propositions may not be sustained by reference to the text of the PPSA. I have reservations about whether the characterisation in Sparrow of a security interest as a 'fixed and specific charge subject to a licence to sell the inventory' can be supported by the text of the PPSA or, indeed, whether it is necessary to characterise a security interest under the PPSA in this way given s 31 and s 32 of the PPSA.
That said, given the origins of the PPSA, Parliament may be taken to have intended the attachment rule in s 19 of the PPSA to operate in the same manner as the attachment rule in equivalent legislation in Canada and New Zealand has been held to operate: on satisfaction of the statutory conditions for attachment, the secured party acquires a statutory interest that is proprietary in nature; the security interest has this characteristic for all purposes; and, the requirement for a crystallising event is no longer relevant.

The views of the commentators

The commentary supports the conclusion that attachment of a security interest under s 19 of the PPSA creates a proprietary interest in the collateral, and that crystallisation is an irrelevant concept under the PPSA.
Professor McCracken has identified three general propositions about the nature and attributes of a secured interest (a PPSI) to be derived from the Act, namely:[187]
(i)a PPSI is a fixed form of security;
(ii)a PPSI is or at least resembles a charge; and
(iii)a PPSI is statutory and hence legal in nature.
[187] S McCracken 'The Personal Property Security: Identifying Some Essential Attributes' (2014) 30 Law in Context 146, 150.
As to the first proposition Professor McCracken observed:[188]
The first proposition seems evident from the Australian legislation itself; more specifically, from the terms of s 19, which sets out the circumstances in which a security interest attaches to collateral. Attachment represents the moment at which the PPSI becomes enforceable against the grantor and hence the mechanism by which the PPSI confers on the secured party an interest in the collateral …
Section 19(2) of the Australian Act makes very clear that the PPSI generally attaches simply on the satisfaction of two criteria. Firstly, the grantor must have rights in the collateral (or the power to transfer such rights). Secondly, either value must be given for the PPSI by the secured party or alternatively the grantor must do some act by which the PPSI arises. Nothing else is required. The PPSI is fixed at that moment. Where property is property in which the Grantor has existing rights at the date of a security agreement, the PPSI will thus be fixed at the moment of that agreement. Such a conclusion assumes of course the absence of any agreement to defer attachment. On that same assumption, where the property is acquired after the agreement, the PPSI will be fixed on the date of the acquisition of that property when the grantor obtains rights in that property. The Act does not require any form of 'crystallising event', such as would have been necessary at general law under a floating charge. (footnotes omitted)
[188] 'The Personal Property Security: Identifying Some Essential Attributes' 153.
In Everett and McCracken's Banking and Financial Institutions Law, the 'Impact of Attachment' is described as follows:[189]
As PPSA, s 19(2) provides that the security interest attaches to the property on satisfaction of the two criteria, the interest is necessarily a fixed interest as from that time. The provision of us renders the equitable concept of a floating charge irrelevant. Although it is possible for the secured party and the grantor to agree that a security interest should attach at a later time, this does not equate to the floating charge security where the secured party could be protected as a matter of contract from the date of the secured agreement but the interest only became fixed on a subsequent crystallising event.
The fact that the security interest is fixed in nature has ramifications for subsequent dealings with the collateral, in particular sales of goods by the grantor. Generally, the PPSA enables dealings in collateral by two distinct mechanisms:
•by providing that a security interest in collateral which gives rise to proceeds should not continue in the collateral where the secured party has either authorised the disposal or agreed that a dealing would extinguish the security interest (see s 32(1)(a); …); or
•by enabling a third party, generally a buyer or lessee, to take free of a security interest which has continued in the collateral in specified situations (see Pt 2.5; …). (footnotes and in-text references omitted)
[189] S McCracken, J Bird, J Stumbles and G Tolhurst, Everett and McCracken's Banking and Financial Institutions Law (8th ed, 2013) 511.
In Personal Property Securities in Australia,[190] the learned authors observe:
Given the broad functional definition of 'security interest' it might be argued that the PPSA could potentially include interests that are not proprietary in nature. However, when the objectives of the legislation and its various provisions are considered, it seems the better interpretation is that a security interest involves the secured party having a proprietary right or interest in the relevant property that is exercisable against not only the grantor but also against third parties with subsequent interests in the property.
[190] Personal Property Securities in Australia [1.2200].
The learned authors go on to comment on what they describe as 'the demise of the fixed and floating charge' as follows:[191]
The PPSA does not distinguish between 'fixed' and 'floating' security interests and there is no ongoing relevance for related concepts such as 'crystallisation'. However, it is open to the secured party and the grantor to agree the circumstances in which collateral can be disposed of by the grantor. In addition, the extinguishment rules will protect third party transferees where applicable. These rules apply even in the absence of provisions in a security agreement allowing certain property to be disposed of by the grantor in the ordinary course of business.
Under the PPSA all security interests are effectively 'fixed', to use the traditional parlance, but the terms of the relevant security agreement or the application of the extinguishment rules may enable a third party transferee to take free of the security interest. The extinguishment rules do not generally affect priority contests as between secured parties.
Because other legislation and security agreements continue to refer to 'charges', 'fixed charges' or 'floating charges', the PPSA includes provisions which explain how these terms are to be interpreted in the PPSA environment. While documents that are drafted as charges and which include crystallisation provisions may still provide effective security, they will be interpreted subject to the PPSA and it is expected these forms of documentation will fade away over time. (footnotes omitted)
[191] Personal Property Securities in Australia [1.2450].
Professors Duggan and Brown in Australian Personal Property Securities Law express the view that:[192]
The PPSA abolishes the floating charge concept. This does not mean that it is no longer possible to take a security interest in circulating assets. On the contrary, the statute expressly contemplates the possibility. Post-PPSA, a security interest in circulating assets, such as inventory or accounts, takes effect as a fixed security interest coupled with an express or implied licence for the grantor to deal with the assets in the ordinary course of business. The security interest attaches to each item of new collateral as the grantor acquires it, becomes unattached when the grantor disposes of the assets in the ordinary course of business and attaches simultaneously to the disposal proceeds. (footnotes omitted)
[192] Australian Personal Property Securities Law [1.36]; see also [4.44]–[4.54].
In Fisher and Lightwood's Law of Mortgage, after referring to the authorities commenting on the requirement imposed upon a holder of a floating charge to take some 'further' step to crystallise the charge, the authors comment:[193]
Under the PPSA, the need to take a further 'step' is removed; the secured party unequivocally has a proprietary interest in the subject of the collateral the moment it is acquired by the grantor: cf Wily v St George Partnership Banking Ltd (1999) 30 ACSR 204 at 209.
[193] E Tyler, D Young and C Croft, Fisher and Lightwood's Law of Mortgage (3rd Aust ed, 2014) [5.35].
In 'Circulating Security Interests Under the Personal Property Securities Act 2009 (Cth) Compared to Floating Charges'[194] Mr Lionel Meehan observes that the PPSA causes circulating security interests to attach immediately even to circulating assets and effectively recreates floating charges in respect of personal property as circulating security interests but strengthened such that they attach immediately to circulating assets without appropriation. Mr Meehan concludes:[195]
Each key element of the former floating charge over personal property is re-created under the PPSA under the guise of a circulating security interest. Modern economies cannot function without some form of floating or circulating security.
The rights of secured parties under circulating security interests are strengthened (when compared to floating charges) by the PPSA recognising immediate attachment to circulating assets (which comprise, for the most part, after-acquired property) without appropriation. This should assist secured parties in priority disputes where circulating assets have been disposed of by a grantor in an unauthorised manner, for example, outside of the ordinary course of business.

On the creation of a proprietary interest conferred by a security interest mutuality of interest ceases to exist

[194] L Meehan, 'Circulating Security Interests Under the Personal Property Securities Act 2009 (Cth) Compared to Floating Charges' (2011) 22 JBFLP 322.

[195] 'Circulating Security Interests Under the Personal Property Securities Act 2009 (Cth) Compared to Floating Charges' 329.

In the light of my conclusion that an equitable interest in the collateral is not a necessary condition for the creation of a security interest under the PPSA and that the security interest is proprietary in nature, the question arises whether that interest is sufficient to bring an end to mutuality of interest. This question arises because, as I have noted, the authorities make it clear that mutuality of interest is determined by reference to equitable interests. In my view, when attention is focussed on the rationale that underpins the mutuality principle - that one person's money should not be used to pay another's debts - a statutory proprietary interest of the nature conferred by a security interest under the PPSA is sufficient to destroy mutuality of interest for set-off purposes.

Forge's ability to deal with proceeds does not preserve mutuality of interest

Hamersley's submission that mutuality of interest was preserved because Forge was able to deal with the Collateral in the ordinary course of its ordinary business draws support from the pre-PPSA law principle that before crystallisation a floating charge had no effect on rights of set-off and the injustice of allowing a company to trade whilst being immune from the normal incidents of trading was thus avoided.
For the reasons I have set out above, the PPSA has introduced a fundamental change. Attachment conferring a propriety interest on a secured party occurs on satisfaction of the conditions set out in s 19(2) of the PPSA (absent an agreement that it should occur at a later time). A secured party may expressly or impliedly agree that a dealing giving rise to proceeds will extinguish the security interest in the collateral and that the security interest will attach to the proceeds.[196] In the light of the changes brought about by the PPSA, the principle for which Hamersley contends has no room to operate because the secured party acquires a proprietary interest in the Collateral before the occurrence of a 'crystallising' event.
[196] PPSA s 32(1).

Hamersley's submission draws attention to the potential injustice to a trade creditor/account debtor who may be deprived of set-off rights by a company granting a security interest over its accounts. Under the pre-PPSA law, courts were astute to avoid this potential injustice by construing those charges which conferred a trading power on chargors as floating charges with the result that the chargees' proprietary interest in collateral did not arise until crystallisation and thus mutuality of interest was preserved for set-off purposes. Under the PPSA regime, this potential injustice is ameliorated by s 80(1) of the PPSA, albeit subject to the limitation to which I have referred earlier in these reasons. Whether the protection afforded to account debtors by s 80(1) is adequate may well be a matter for debate.

The General Security Agreement created a charge that had attached to Forge's claims

As indicated earlier, even if I am wrong in concluding as a matter of statutory construction that a security interest under the PPSA confers a proprietary interest on the secured party, I consider that the General Security Agreement operated to create a charge over Forge's claims that had attached pursuant to s 19 of the PPSA, thereby conferring a proprietary interest on ANZ by way of an equitable assignment of the Collateral. On the creation of that proprietary interest mutuality between Forge's claims and Hamersley's claims ceased to exist. My reasons can be stated quite shortly.
First, Forge's claims are not Revolving Assets, relevantly in the context of the definition in the General Security Agreement, money.
Second, the General Security Agreement is effective in accordance with its terms.[197]
[197] PPSA s 18(1).
Third, cl 3.1(2)(b) provides that the Security Interest is a charge over all Collateral other than Revolving Assets.
Before leaving the subject of the General Security Agreement I record that Hamersley advanced submissions that traversed the detailed provisions of the General Security Agreement in support of its case that the charge created by the General Security Agreement should be characterised as a floating charge.
Forge's response was that it was unnecessary to determine the character of the charge created by the General Security Agreement because ANZ acquired a proprietary interest in Forge's claims by reason of the attachment rule in the PPSA and the concept of crystallisation was no longer relevant. No doubt out of an abundance of caution, Forge responded to Hamersley's submissions on the characterisation issue with detailed submissions of its own.
I intend no disrespect to the parties' extensive and detailed submissions on the characterisation of the charge created by the General Security Agreement but in my view it is not necessary to engage in the analysis undertaken by the parties. The charge attached in accordance with s 19(2) of the PPSA whether or not the charge is characterised as a floating charge under the pre-PPSA law. On attachment ANZ acquired a proprietary interest in Forge's claims and this put an end to the mutuality of interest between Hamersley's claims and Forge's claims.

Part 3 - Answers to preliminary questions

As appears from the reasons I have given, I consider that the answer to the first preliminary question is 'yes'.
The matters identified in my reasons as precluding Hamersley from setting off its claim against the Forge claims are the matters pleaded in paragraphs [10(q)], [10(f)], [24(c)], [29(a)], [31(a)], [35(a)(iii)], [46(c)], [51(a)], [53(b)] (the Exclusion Operation of s 553C pleas); the matters pleaded in [56] -[58] (the lack of mutuality of interest - s 553C is not applicable plea) in the amended defence and counterclaim; and the matters pleaded in [2(a)] and [3(a)] (Exclusive Operation of s 553C pleas) in the reply to defence to counterclaim.
The answer to the second preliminary question is 'no'.
I will hear the parties as to costs.

Provisions of this Act that apply to interests mentioned in subsection (1)
Item	Despite subsection (1), the following provision:	applies in relation to the following interest mentioned in subsection (1):
…	…	…
2	section 80	a right of set-off (see paragraph (1)(d)).