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[2017] WASC 152
Supreme Court of WA
2017-06-02
Tottle J
Original judgment source is linked above.
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 and 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
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
Defendant : Mr S K Dharmananda SC & Ms K F Banks-Smith SC
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)
1 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 setoff 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.
2 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.
3 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.
4 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 nettingoff or a setoff;
(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 setoff or equitable setoff; and
(iii) was the mutuality of interest between Forge's claims and Hamersley's claims - required for setoff under s 553C of the Corporations Act 2001 (Cth) - brought to an end by the creation of a security interest over Forge's claims?
5 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.
7 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;
(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.
8 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 setoff 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.
9 In part 3, I answer the preliminary questions.
Part 1 - Overview The facts
10 The following account of the facts is taken from a statement of facts agreed by the parties.
11 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).
12 Forge commenced work under the Contracts in 2012.
13 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'.
14 The General Security Agreement was registered on the Personal Property Securities Register on 2 July 2013.
15 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.
16 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.
17 Although not recorded in the agreed facts, it is common ground that each Contract came to an end on 24 February 2014.
18 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.
19 I set out the claims each party has against the other in more detail in the course of reviewing the pleadings.
20 The agreed facts were supplemented by an agreed bundle of relevant documents.
21 At the centre of the dispute between the parties are contractual setoff 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:
16.12 Right 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.
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).
23 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.
24 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
25 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).
26 Clause 3.1(2) describes the nature of the Security Interest as follows:
(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.
27 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.
28 '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
29 'Control Event' includes the appointment of a receiver or controller to Forge's property.
30 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.
31 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.
32 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.
33 Clause 4 governs dealings with the Collateral as follows:
4.1 Restricted 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.
4.2 Permitted 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.
4.3 Revolving 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.
4.4 Inventory
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.
4.5 Notice 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.
34 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.
35 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]
36 Hamersley pleads that it was entitled to terminate the Contracts, both for repudiatory breach, and pursuant to contractual termination provisions in the GCs.[3]
37 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.
38 Hamersley pleads it is entitled to $12,195,000 by way of liquidated damages under the West Angelas Contract.[4]
39 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]
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]
42 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 setoff.[12]
43 By way of equitable setoff, 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]
(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.
45 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 nettingoff as Hamersley contends.
46 Forge responds to Hamersley's reliance on contractual and equitable setoff 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 setoff between an insolvent company and its creditors. Forge asserts s 553C operated with effect from 11 February 2014, and contends that the contractual setoff provisions are unenforceable and that Hamersley is not entitled to withhold payment, or to make the deductions or setoffs pleaded by it.
47 In its reply and defence to counterclaim Hamersley responds to Forge's plea that the contractual setoff 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 setoff provision only in so far as the provision is inconsistent with s 553C;[17]
(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]
49 Forge's defence to Hamersley's reliance on insolvency setoff 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]
50 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.
(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 setoff under s 553C is not available to Hamersley.
52 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 setoff 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.
53 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]
54 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]
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.
56 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.
57 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]
58 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 earmarked 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]
59 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]
60 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'.
61 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.
62 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]
63 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]
64 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 setoff rights and equitable setoff because:
(i) an assignee's entitlement is subject to equities, including rights of setoff; 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 setoff.
66 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]
68 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.
69 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]
70 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]
71 Forge counterclaims for declaratory relief to the following effect:
(i) s 553C of the Corporations Act is a mandatory and exclusive code as to setoff between an insolvent company and its creditors that took effect in this case from 11 February 2014;
(ii) the contractual setoff 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.
72 In addition Forge seeks an account in respect of each of the securities realised by Hamersley.
(i) Assuming that Hamersley is otherwise entitled to the setoffs 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]
74 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.
75 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)
76 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)
77 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]
78 Prior to the PPSA coming into force, amendments were made to the Corporations Act to accommodate new concepts introduced by the PPSA.[47]
79 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'.
80 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.
81 In essence, the purpose of the PPSA is to bring broadly and functionally defined security interests within a single, uniform national system.
82 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]
83 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
84 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]
85 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.
86 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'.
87 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.
88 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).
89 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.
90 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]
91 Section 8(2) relevantly provides:
Provisions of this Act that apply to interests mentioned in subsection (1)
applies in relation to the following interest mentioned in subsection (1):
92 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.
93 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:
(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.
94 Section 10 of the PPSA is a 'Dictionary' provision containing the following relevant definitions.
95 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.
96 After-acquired property means personal property acquired by the grantor after a security agreement is made.
97 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).
98 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.
99 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.
100 Secured party includes a person who holds a security interest for that person or another's benefit and includes a trustee.
101 Grantor is defined to include a person who has an interest in personal property to which a security interest is attached.
102 Account debtor means a person obligated under an account or chattel paper.
103 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.
104 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.
105 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.
106 I set out the full text of s 18 and s 19 later in these reasons.
107 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:
(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).
108 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]
109 Reference must also be made to s 31 and s 32 as they deal with attachment of a security interest in proceeds.
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.
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:
(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).
112 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:
(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.
113 Part 2.5 of the PPSA contains rules that set out when personal property may be bought or leased free of a security interest.
114 Part 2.7 of the PPSA contains provisions dealing with transfers of collateral. Section 79 reads:
(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.
115 As noted above, I consider s 80(1) in detail later in these reasons.
116 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.
117 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.
118 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.
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.
120 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:
(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.
121 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.
122 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.
123 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]
124 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.
125 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
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
126 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:
16.4 Payment 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.
16.5 Timing 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.
127 Reference should also be made to cl 16.6, which provides:
16.6 Delayed 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.
16.12 Right 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.
129 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.
130 Hamersley characterises the construction of the conditions for which it contends as amounting to '...not so much a setoff 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'.
131 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 setoff. 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 setoff 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 nettingoff or off-setting contemplated by the clause might be made.
132 Hamersley submits there was no temporal restriction on the exercise of its rights of setoff and that it had exercised those rights.
133 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]
134 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 setoff 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 setoff and that those rights were not selfexecuting. Thus, if the setoff 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 offset, no purpose was served by including the words 'Subject to SubClause 16.12 [Right of Setoff]' 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 nettingoff 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 setoff rights.
135 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 netoff provision
136 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]
137 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.
138 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 subclause 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.
139 As just noted, the payment obligation is 'subject to' the rights of setoff. Hamersley had a discretion, however, as to whether to exercise those rights. Clause 16.12 was not a selfexecuting mechanism and the setoff 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.
140 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 setoff - 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.
141 In short, neither the language used in cl 16.12 nor the context in which the clause appears in the GCs supports Hamersley's contention that the reference to the monies that would otherwise be due to Forge was intended to provide a base from which netting off could be made.
142 On its true construction cl 16 provides for amounts to be due and owing to Forge (debts) and cl 16.12 does not operate to convert them into a base for 'netting off' such that the amounts were never in fact due because they were subject to Hamersley's rights of setoff.
143 I do not accept Forge's further submission that the setoff rights in cl 16.12 could only be exercised in respect of monies claimed and certified for payment under the Contracts. Forge pleads that the amounts it claims in the amended defence and counterclaim by way of what it describes in its submissions as a quantum meruit claim are 'due to it'.[68] Although I accept that cl 16.12 must be read in its context - alongside cl 16.4 and cl 16.5 - I do not think that there is a sufficient textual basis to justify construing 'monies otherwise due' as being limited to amounts claimed and certified for payment. I consider that the reasonable business person would not interpret the words in such a limited way.
Is Hamersley able to rely upon contractual rights of set-off or equitable setoff or does s 553C of the Corporations Act constitute an exclusive code regulating set-off? Introduction
144 I deal with the following issues in this section:
(i) Does s 553C of the Corporations Act displace the operation of equitable and contractual setoff?
(iii) If s 80(1) is capable of operating as Hamersley contends, does that give rise to an inconsistency between s 80(1) of the PPSA and s 553C of the Corporations Act to which s 258 of the PPSA applies, with the result that s 553C prevails?
(iv) Are Forge's claims 'accounts', within the meaning of the PPSA, that have been transferred to ANZ?
145 Before turning to the issues I will set out s 553C and comment on the context in which it appears in the Corporations Act and its legislative history.
Section 553C - context and legislative history
553C Insolvent companies - mutual credit and set-off
(1) [Where mutual claims and debts admissible] Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:
(a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and
(b) the sum due from the one party is to be set-off against any sum due from the other party; and
(c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.
(2) [Where set-off not available] A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent.
147 Section 553C forms part of Subdivision A (Admission to proof of debts and claims) of Div 6 (Proof and ranking of claims) which in turn is found in Pt 5.6 (Winding up generally) of the Corporations Act.
148 Section 553 specifies the debts that may be proved in winding up and provides that subject to Div 6 and Div 8 (which deals with pooling), in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company.
149 Sections 553A, 553AA, 553AB and 553B set out rules that apply to certain categories of debt, or debts arising in certain specified circumstances.
150 Section 553D provides that debts or claims may be proved formally or informally.
151 Section 553E provides that, subject to Div 6, the rules in force under the Bankruptcy Act 1966 (Cth), in relation to the estates of bankrupt persons (except the rules in s 82 to s 94 (inclusive) and 96 of that Act), are to prevail and be observed in the winding up of an insolvent company. Accordingly s 86 of that Act, the insolvency set-off provision in the Bankruptcy Act 1966 (Cth), does not apply in the winding up of an insolvent company.
152 In GM & AM Pearce and Co Pty Ltd v RGM Australia Pty Ltd[69] Batt JA traced the legislative history that led to s 553C being incorporated into the Corporations Law and recorded that prior to 23 June 1993,[70] s 86 of the Bankruptcy Act 1966 applied in the winding up of an insolvent company. Batt JA observed:[71]
Provisions equivalent or substantially equivalent to s 553C have, as the appellant submitted, been part of the law of corporate and personal insolvency for very many years indeed and it would require clear words in the new section to abrogate the principles embodied in them as expounded in Gye v McIntyre. But, as the cases there cited show, those principles were not new, but of considerable antiquity. The phrase descriptive of the person who has had mutual dealings with the insolvent company that is used in s 553C(1), in my view, not only lacks the requisite clarity of indication of intention to abrogate or alter the principles, but on its true construction has the same or virtually the same meaning as the long-standing and well-understood corresponding description found in s 86(1). The change in language seems merely to be a modernising elegant - or rather inelegant - variation. In short, I see no reason to adopt a different interpretation of the description in s 553C(1) from the interpretation of the description in s 86(1).
153 Batt JA also observed that when s 553C operates the original claims and cross-claims cease to exist and are replaced by a balance. If the balance is in the creditor's favour then this is the amount for which it may prove in the winding up.
154 Before leaving the statutory provisions it is helpful to refer to s 555 of the Corporations Act, which embodies the pari passu rule and provides that, except as otherwise provided by the Act, all debts and claims proved in winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately.
155 Forge relies on a number of decisions that provide support for the view that the insolvency set-off provisions displace equitable and contractual set-off with the result that neither equitable nor contractual set-off can be raised in an insolvency. Forge argues that the issue was settled by the decision of the Full Federal Court in Day & Dent Constructions Pty Ltd (in liq) v North Australian Properties Pty Ltd (provisional liquidator appointed)[72] in which all three members of the Court in separate judgments expressed the view that equitable set-off could not be relied upon outside the insolvency set-off provision.
156 Forge submits that once it was put into liquidation Hamersley's rights to payment were governed only by the rules applicable in liquidation, that is, it must lodge a proof of debt and receive a distribution from Forge's assets. Forge argues that to allow Hamersley to stand outside the liquidation and assert equitable or contractual set-off rights would enable it to obtain a better share of Forge's assets than it would receive in the winding up. Forge submits that this would be contrary to the pari passu rule.
157 Hamersley submits the law is not settled and that s 553C does not displace equitable or contractual set-off. It relies on the views expressed by Dr Derham that, as a matter of principle, bankruptcy or liquidation should not preclude the application of equitable set-off. The argument proceeds that as the traditional ground for an equitable set-off is impeachment of title, if a debtor's title to sue was impeached before bankruptcy so should the title of the trustee in bankruptcy given that the trustee takes the debtor's property subject to all clogs and fetters affecting it in the hands of the debtor. On that basis, similar reasoning should apply in company liquidation.[73] Dr Derham cites a number of authorities that are said to support the continued application of equitable set-off after bankruptcy or liquidation,[74] principally Popular Homes Ltd v Circuit Developments Ltd,[75] Re Trivan Pty Ltd,[76] Westmex Operations Pty Ltd v Westmex Ltd,[77] and Murphy v Zamonex Pty Ltd,[78] to which I will refer in more detail in reviewing the authorities later in these reasons.
158 In further support of its argument that it should be permitted to rely upon its contractual set-off rights, Hamersley contends the authorities upon which Forge relies are all concerned with situations in which s 553C applies. Hamersley accepts that where s 553C applies - that is where a set-off meets the requirements of the section - the authorities support the principle that there can be no reliance on a contractual set-off provision. But Hamersley argues that the authorities do not establish that there can be no reliance on a contractual set-off provision where the requirements of the section are not met, for example where there is no beneficial mutuality.
159 National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd[79] concerned the question of whether parties could contract out of the insolvency set-off provision (s 31 of the Bankruptcy Act 1914 (UK)) rather than whether an equitable set-off might be raised. The majority held that there could be no contracting out of the insolvency set-off provision. The views expressed by their Lordships on the purpose of the insolvency set-off provision are instructive. The judgments of the majority (Viscount Dilhorne, Lord Simon of Glaisdale and Lord Kilbrandon) emphasised that the provision regulated matters of public interest and not merely the private rights of the contracting parties. Lord Simon of Glaisdale (who agreed with the reasoning of Viscount Dilhorne) expressed the public interest point by describing the insolvency set-off provision as laying down:[80]
a code of procedure whereby bankrupts' estates (and, by reference, insolvent companies) are to be administered in a proper and orderly way; this is a matter in which the commercial community generally has an interest...
160 Lord Kilbrandon used similar language stating:[81]
the terms of section 31 are mandatory in the sense that not only do they lay down statutory directives for the administration of claims in bankruptcy but they also make it impossible for persons effectively to contract, either before or after an act of bankruptcy has occurred, with a view to the bankruptcy being administered otherwise than in accordance with the statutory directives.
161 Lord Cross of Chelsea dissented on the basis that the provision was specifically for the benefit of the creditor of the bankrupt and the creditor could contract to forego that benefit.[82] Lord Cross also emphasised that the rationale for the insolvency set-off provision was to prevent the injustice of a creditor with an entitlement to set-off having to pay in full what he owed while only receiving a dividend on what the bankrupt owed to him.
162 Halesowen was followed by Needham J in Re Paddington Town Hall Centre Ltd (in liq).[83]
163 Hamersley relies on Popular Homes Ltd v Circuit Developments Ltd in which Barker J permitted the plaintiff to raise an equitable set-off of damages for breach of contract against monies owed by the plaintiff under the terms of a mortgage to the first defendant, which was in liquidation. On the facts, Barker J held that the set-off could not be brought within the insolvency set-off provision because the requirement for beneficial mutuality could not be satisfied but that an equitable set-off was available.
164 The assistance that can be derived from Barker J's judgment on the issue of whether a claim for set-off could be made outside of the insolvency set-off provision is limited as the question does not appear to have been raised in argument. In the absence of argument on the point, Barker J appears to have assumed that equitable set-off was available. The approach taken by Barker J in allowing an equitable set-off to be raised is inconsistent with the views expressed by the Court of Appeal in New Zealand in Paganini v The Official Assignee,[84] to which I refer later.
165 In Day & Dent the appellant had borrowed money from a finance company, Esanda, and at the appellant's direction the money was paid to the respondent. The respondent guaranteed the debt and repaid it to Esanda after the appellant went into liquidation. The appellant sued the respondent to recover the money borrowed by it and paid to the use of the respondent. The respondent sought to set-off the payment it had made to Esanda in answer to the appellant's claim. The respondent relied on all forms of set-off: the insolvency set-off provision in s 86 of the Bankruptcy Act 1966 (Cth) (rendered applicable to companies by the Companies Ordinance (NT) then in force); set-off under the Statutes of Set Off; and, equitable set-off. Forster and MacGregor JJ dismissed the appeal holding that the respondent was entitled, by reason of the insolvency set-off provision, to set off the amount paid to Esanda against the appellant's claims, even though the payment was made after the commencement of the winding up. Sheppard J dissented on the ground that at the commencement of the liquidation the appellant's liability to the respondent was only contingent and thus there was not a debt to which the insolvency set-off regime applied. Each member of court expressed views to the effect that the insolvency set-off provision left no room for the operation of equitable set-off. Forster J said:[85]
It is my view that the question of equitable set-off does not arise nor any rights which may accrue under the Statutes of Set-Off which are a part of the law of the Northern Territory notwithstanding that they have been repealed in the United Kingdom. The law concerning cross-claims between a company in liquidation and its creditors is to be found exclusively in the provisions of the Bankruptcy Act applied by virtue of s 291(2) of the Companies Act (see Re Daintrey; Ex parte Mant [1900] 1 QB 546, 567 (Bigham J); [1895-9] All ER Rep 657, 670).
The respondent also relies upon an entitlement of the defendant to an equitable set-off. ... In some circumstances, therefore, one could argue that an equitable set-off may have a wider operation than does s 86. Nevertheless, the wording of the section and its history seem to me to be intended to, and, in fact, provide a code; the word 'due' has a certain quality of adaptability which ought to allow scope for an argument which would afford the same result as would an equitable remedy.
166 Sheppard J gave the issue detailed consideration as follows:[87]
I turn to the question of equitable set-off. There is first a question as to whether there can be any equitable right to a set-off independent of that provided for in s 86 of the Bankruptcy Act. It would seem that Lord Evershed MR was of the view that no such right existed. I refer to the passage from his judgment in Re A Debtor [1956] 1 WLR 1226, 1236; [1956] 3 All ER 225, 232. That view would appear to have been agreed in by Jenkins LJ. Nevertheless what his Lordship said was obiter.
...
We were referred to no case in which equitable principles have been applied independently of the section. None is referred to in any of the bankruptcy or equity texts at which I have looked since we reserved our decision. All that I have found are the dicta earlier cited which would suggest that the position is governed entirely by the provisions of the bankruptcy legislation. Since the object of that legislation was to deal fairly with all, it is to be expected that the courts would not lightly engraft upon its terms additional circumstances or situations in which a set-off might be permitted. For those reasons I have reached the conclusion that it is not permissible for the respondent to rely independently on any rules of equity. It is accordingly unnecessary for me to reach a conclusion upon the question of whether, if this were not a case involving the winding up of the appellant, equity would require the appellant to allow the set-off of the appellant's indebtedness to the respondent. Plainly the case, but for the winding up of the appellant, would be one within the Statutes of Set-off, both claims being for liquidated amounts.
167 Hamersley submits that the weight to be attached to Day & Dent is diminished because the views expressed by Forster and MacGregor JJ were obiter as they had each decided that the insolvency set-off provision applied, and thus it was unnecessary for them to deal with the issue of the availability of equitable set-off, while Sheppard J was in dissent. Whilst that may be so, the observations of the members of the Full Court in Day & Dent constitute the most comprehensive consideration of the issue in any Australian authority and are highly persuasive. The decision in Day & Dent was affirmed on appeal to the High Court but the appeal did not involve any question touching upon the availability of equitable set-off to creditors of an insolvent company.[88]
168 In McIntyre v Perkes[89] the Full Court of the Federal Court held that the appellant was entitled to set-off a mortgage debt judgment due to her by the respondents against her liability under a judgment for damages for deceit. The respondents had each entered into a composition with the appellant's creditors under Pt X of the Bankruptcy Act 1966 (Cth). At first instance, Hill J did not allow a set-off on the basis that the claim in deceit and the mortgage debt were not '... so intertwined in a manner that could properly be described as mutual'.[90] In the course of their joint judgment, Gummow and von Doussa JJ made the following observations about the history of the relationship between the bankruptcy statutes and equitable set-off at 271 - 272:
What was the relationship between the bankruptcy statutes and equitable set-off? An equitable debt, such as a legacy, or an obligation to account in equity for breach of equitable duty, although not sufficient for the Statutes of Set-Off, was sufficient for the bankruptcy statutes: Jeffs v Wood [1723] EngR 15; (1723) 2 P Wms 128; 24 ER 668; Ryall v Rowles [1749] EngR 177; (1749) 1 Ves 374; 27 ER 1074. Furthermore, despite contrary doubts expressed in this court in Day & Dent Constructions [1981] FCA 12; (1981) 34 ALR 595, 636 - 637, there were cases where the Lord Chancellor would direct the commissioners to admit a set-off arising in equity, but otherwise outside the bankruptcy statutes. This was so at least where it was necessary to do so in order to unravel the consequences of fraud practised upon the claimant by the bankrupt: Ex parte Stephens [1805] EngR 113; (1805) 11 Ves 24; 32 ER 996. But in that decision, Lord Eldon LC emphasised his special position as a judge exercising both statutory jurisdiction in bankruptcy and equitable jurisdiction. This Court as a court of bankruptcy is also a court of equity as to matters with which it is otherwise invested with jurisdiction: see Elna Aust Pty Ltd v International Computers (Aust) Pty Ltd (1987) 14 FCR 461, 466; 74 ALR 232. It is unnecessary to decide whether such a jurisdiction as that exercised by Lord Eldon in Ex parte Stephens still subsists today.
169 Hamersley submits that the views expressed by Gummow and von Doussa JJ cast 'significant doubt' on the decision in Day & Dent. This overstates the effect of what was said by Gummow and von Doussa JJ. Their observations were themselves obiter dicta and went no further than raising the possibility that an equitable set-off might be raised if there was fraud. This possibility arose from the decision in Ex parte Stephens,[91] but as their Honours said, it was unnecessary to decide the point. As discussed below, the Court of Appeal in England gave detailed consideration to Ex parte Stephens in Re Bank of Credit and Commerce International SA (No 8)[92] and held Ex parte Stephens did not support the existence of any equitable right of set-off in bankruptcy wider than the statutory right.
It has often been pointed out that the object of set-off in bankruptcy is, in the words of Parke B in Forster v Wilson 'to do substantial justice between the parties, where a debt is really due from the bankrupt to the debtor to his estate'. Where there are genuine mutual debts, credits or other dealings, it would be unjust if the trustee in bankruptcy could insist upon having 100 cents in the dollar upon the whole of the debt owed to the bankrupt but at the same time insist that the bankrupt's debtor must be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him. It was to prevent such injustice that the 'mutual credits' and 'mutual debts', and later 'mutual dealings', provisions were introduced into bankruptcy legislation: see, eg, In re Daintrey; Ex parte Mant; Day & Dent Constructions Pty Ltd v North Australian Properties Pty Ltd. To the extent necessary to achieve that legislative purpose of 'substantial justice' to the parties, it is established by authority that a provision such as s 86 of the Act should be given 'the widest possible scope': see, eg, per Mason J, Day & Dent Constructions, quoting Lord Esher MR in Eberle's Hotels and Restaurant Company v Jonas.
On the other hand, 'substantial justice' requires that the operation of set-off in bankruptcy be confined within limits which protect the creditors of the bankrupt from being disadvantaged by a set-off being allowed in circumstances where debts, credits or other dealings have not been genuinely mutual as a matter of substance, such as where beneficial ownership is not the same or where, after bankruptcy or notice of an act of bankruptcy, a debtor of the bankrupt has bought up liabilities of the bankrupt at a discount for the purpose of setting them off against his own indebtedness: see, eg, Day & Dent Constructions. Thus, it is established by the cases that set-off under a provision such as s 86 is not available in circumstances where the beneficial entitlement and liability in respect of the countervailing credits and debits do not correspond: see, eg, In re City Life Assurance Co; Hiley v Peoples Prudential Assurance Co Ltd. (footnotes omitted)
a statutory directive ('shall be set off') which operates as at the time the bankruptcy takes effect. It produces a balance upon the basis of which the bankruptcy administration can proceed. Only that balance can be claimed in the bankruptcy or recovered by the trustee. If its operation is to produce a nil balance, its effect will be that there is nothing at all which can be claimed in the bankruptcy or recovered in proceedings by the trustee. The section is self-executing in the sense that its operation is automatic and not dependent upon 'the option of either party': see, per Lord Selborne LC, In re Deveze; Ex parte Barnett. Indeed, the traditional and better view would appear to be that the statutory rule of set-off contained in s 86 will, where the requirements of the section are satisfied, prevail over a contrary agreement of the parties: see, eg, Mersey Steel and Iron Co v Naylor Benzon & Co; Victoria Products Ltd v Tosh & Co Ltd; Rolls Razor Ltd v Cox; National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd. It is, however, unnecessary to pursue that particular question. Even if one were to accept the dissenting view of Lord Cross of Chelsea in National Westminster Bank, to the effect that the otherwise automatic operation of a provision such as s 86 may be excluded by an antecedent agreement, it would be wrong to attribute to the legislature the illogical intent that a directive which was intended to be otherwise automatic in its operation and to apply in circumstances where set-off produced a nil balance should not operate at all unless and until either the bankrupt's creditor saw fit to exercise the option of lodging a formal proof of debt or the trustee in bankruptcy instituted proceedings for recovery of a debt due to the bankrupt. (footnotes omitted)
171 Hamersley also relies upon Murphy v Zamonex Pty Ltd. There, a company had contracted as trustee of a unit trust to advance funds for a property development. Some funds were advanced. The trustee company became insolvent and was wound up. A new trustee was appointed and it sued to recover the funds advanced by the former trustee. Giles J allowed an equitable set-off of the defendant's cross claim for damages for misleading and deceptive conduct against the new trustee's debt claim.
172 The decision does not assist Hamersley, however, because the set-off was not raised within the context of the liquidation of the former trustee so the claims were not within the ambit of the insolvency set-off provision.
173 Hamersley relies upon Westmex Operations Pty Ltd (in Liq) & Ors v Westmex Ltd (in liq)[96] in which the Court of Appeal in New South Wales was concerned with a dispute between the liquidators of the subsidiaries in a group of companies and the liquidators of the parent company about the availability of set-offs arising from the terms of deeds of cross-guarantee entered into by the parent and the subsidiaries. Handley JA (with whose reasons Clarke and Sheller JJA agreed) said at 110:
If equitable set off is available only the net balance after applying that set off can be proved in any liquidation. Moreover it seems that the cross-claims are within s 86 of the Bankruptcy Act 1966 as applied to the administrations of insolvent companies by s 438 of the former Code which was in force at the relevant times. (emphasis supplied)
In any event I cannot see how set off on some basis can be avoided once both companies are insolvent and in liquidation.
174 Once again the decision is of limited assistance. It is apparent that there was some uncertainty as to whether equitable set-off was available but it was unnecessary to explore the issue because set-off under the insolvency set-off provision was available. There is no discussion of the authorities or the principles that bear upon the issue to be decided in this action.
175 In Re Bank of Credit and Commerce (No 8) SA the Court of Appeal was concerned with the operation of rule 4.90 of the Insolvency Rules (the English equivalent of s 553C). Delivering the judgment of the court Rose LJ observed:[97]
The operation of the rule is mandatory, automatic and immediate on the bankruptcy or liquidation taking place: Halesowen Presswork & Assemblies Ltd v National Westminster Bank Ltd [1972] AC 785; Stein v Blake [1995] UKHL 11; [1996] 1 AC 243.
Rose LJ considered a submission made by the appellants that:[98]
there exists a non-statutory equitable right of set-off in bankruptcy which is wider than the statutory right, and rely on Ex parte Stephens [1805] EngR 113; (1805) 11 Ves 24 and Jones v Mossop [1844] EngR 803; (1844) 3 Hare 568 in support of this proposition, as well as in support of other submissions founded upon the surety's right to pay off the principal debt. Ex parte Stephens is a difficult case ... It merits re-examination.
Whatever be the true position, however, it is clear that Ex parte Stephens [1805] EngR 113; (1805) 11 Ves 24 provides no assistance to the present appellants. The case is no authority for the existence of any equitable right of set-off in bankruptcy wider than the statutory right.
Once insolvency supervenes, rule 4.90 of the Insolvency Rules 1986 requires set-off in the situations in which it is applicable and public policy forbids it where it is not.
176 Before leaving In re Bank of Credit and Commerce SA (No 8) I make two observations.
177 First, Dr Derham argues for a different interpretation of Ex parte Stephens than that given by the Court of Appeal, and argues that Ex parte Stephens is authority for the proposition that an equitable set-off may be raised outside the insolvency set-off provisions where there is fraud.[101] Even if such an exception exists (and for the reasons I give later, I do not think that equitable set-off can be raised outside of s 553C of the Corporations Act), that exception is not engaged in this case as no fraud is alleged.
178 Second, the Court of Appeal's reference to public policy at 272 must be considered in the light of the observations of the plurality in IATA on the limitations of the operative effect of public policy as distinct from the consequences flowing from the operation of the relevant statutory provisions. It is convenient to depart from a chronological review and consider the High Court decision in IATA on which both parties placed reliance.
179 Although the ambit of operation of s 553C was not central to the decision in IATA, its importance for present purposes is two-fold. First, as noted earlier, the majority judgments emphasise the need to consider the precise effect of the contractual provisions in question (do they give rise to debts that constitute property or lesser forms of legal obligation?). Second, as intimated, the judgment of the plurality identifies the limits on the role to be played by public policy in the context of the pari passu principle. In essence, if a contractual provision is not rendered void or unenforceable by particular statutory provisions, public policy cannot be relied upon to achieve that which could not be achieved by the statute itself.
180 The facts of IATA were as follows. Ansett was a party to a Multilateral Interline Traffic Agreement of which the IATA Clearing House Regulations formed part. The agreement established a clearing house system between airlines for the settlement of debits and credits at the end of each month. Airlines with a credit balance at the end of each month received a payment from IATA (the Clearing House) and those with debits had to pay IATA. Administrators were appointed to Ansett and its creditors resolved that Ansett should enter into a Deed of Company Arrangement. Ansett claimed that airlines seeking payment for services provided to Ansett needed to make a claim in accordance with the provisions of the Deed and that conversely those airlines to which Ansett had provided services were indebted to it.
181 The relevant regulation, regulation 9(a), provided:
With respect to transactions between members of the Clearing House which are subject to clearance through the Clearing House ... no liability for payment and no right of action to recover payment shall accrue between members of the Clearing House. In lieu thereof members shall have liabilities to the Clearing House for balances due by them resulting from a clearance or rights of action against the Clearing House for balances in their favour resulting from a clearance and collected by the Clearing House from debtor members in such clearance.
182 Ansett's case rested upon three propositions. First, correctly construed in context, regulation 9(a) created a debtor and creditor relationship between Ansett and each of the airlines to which it provided, or from which it received, services. Second, regulation 9(a) was void as being contrary to public policy as it was an attempt to contract out of the pari passu distribution of Ansett's property. Third, Ansett maintained that even if, contrary to the first proposition, regulation 9(a) was construed in the manner contended for by IATA, that is that no debtor-creditor relationship arose between members, the regulation was still void as contrary to public policy.
The leading judgment for the majority in the House of Lords was given by Lord Cross of Chelsea, with whom Lord Diplock and Lord Edmund-Davies agreed. Lord Cross, after reviewing the detailed terms of the contract (which did not include what are now said to be the critical words of reg 9(a)), concluded, as a matter of construction, that British Eagle had a legal right to payment from Air France, which could properly be called a debt, even though it could not bring legal proceedings against Air France but was obliged to use the Clearing House system to obtain payment. Having reached that conclusion as a matter of construction, Lord Cross then dealt with the argument that the Clearing House system impermissibly conflicted with, or attempted to by-pass, the insolvency laws by subjecting the property of British Eagle (the debt owed to it by Air France) to the claims of the Clearing House. His Lordship came to that argument having first decided that there was property of British Eagle in the form of a debt (or an innominate form of liability not materially different from a debt) owed by Air France. Upon that premise, his Lordship concluded that the Clearing House procedures attempted to achieve a distribution of British Eagle's property which ran counter to the principles of the insolvency legislation. The procedures, he said, provided for a distribution of the property of the insolvent company different from that prescribed by law. This was contrary to public policy and the rules of general liquidation must prevail; not the rules of some special 'mini liquidation'.
184 Gleeson CJ commented on the fact that following the decision in British Eagle the regulations were amended saying:[104]
The purpose of the amendment made to reg 9(a) was to remove the premise upon which the reasoning of the majority in the House of Lords proceeded (that, at the time of its insolvency, British Eagle owned property in the form of a debt owed to it by Air France), and to restore the contractual position found at first instance, and in the Court of Appeal, and accepted by the minority in the House of Lords. If there never was any property of British Eagle in the form of a debt owed to it by Air France, then there was no attempt to dispose of or deal with such property in a manner inconsistent with the insolvency laws.
185 In his judgment Gleeson CJ emphasised the importance of the question of construction of the agreement,[105] and held that on a true construction of the agreement the property of Ansett did not include debts owed to it by other airline operators and the liabilities did not include debts owed to other airline operators.[106]
186 As to Ansett's public policy argument, Gleeson CJ accepted that if the agreement was construed in such a way that the members of the Clearing House stood in relation to the claims to be cleared as debtors and creditors, that is, that simple contract debts are to be satisfied in accordance with the regulations, that would amount to an attempt to contract out of the insolvency laws and would be contrary to public policy. His Honour cited British Eagle as authority for that proposition. In so far as Ansett's public policy argument went beyond what was decided in British Eagle and was said to apply even if the agreement was construed as IATA contended, Gleeson CJ rejected it, holding that it would involve imposing a debtor-creditor relationship upon the airline members that was contrary to their agreement.[107]
187 The plurality (Gummow, Hayne, Heydon, Crennan and Kiefel JJ) also emphasised that the first task was to construe the agreement,[108] and they reached the same conclusion as Gleeson CJ in relation to the construction of regulation 9(a), that is, that no liability to effect payment arose between the airlines and that the only debt or credit which arose was between IATA and the member airline in relation to a final, single balance of all items for the relevant clearance.[109]
188 The plurality also rejected Ansett's public policy argument, although their approach differed from that of Gleeson CJ. In their judgment the plurality referred to the rule upon which Ansett relied and which Ansett described 'as a fundamental tenet of insolvency law generally'. That rule was expressed in Horne v Chester and Fein Property Developments Pty Ltd[110] and cited in IATA at [77] as follows:
[I]n insolvency law, the whole of the debtor's estate should be available for the distribution to all creditors, and that no one creditor or group of creditors can lawfully contract in such a manner as to defeat other creditors not parties to the contract.
189 Of the cases upon which Ansett relied as authority for this rule the plurality said:[111]
It is not necessary to examine in any detail the several cases in which the rule is said to have been recognised and applied. Many can be understood as depending upon the proper application of a generally expressed provision in the relevant statute requiring that all debts proved in an insolvency rank equally and, if the property of the insolvent is insufficient to meet them in full, they are paid proportionately ... Others, including British Eagle, turned upon what was the 'property' of the company that was to be applied in satisfaction of its liabilities ... Instead, it is essential to begin from the elementary proposition that insolvency law is statutory and primacy must be given to the relevant statutory text.
190 Reflecting the importance of starting from the relevant statutory text, the plurality examined the provisions of Pt 5.3A of the Corporations Act and held that:[112]
The asserted rule of public policy finds no footing in the relevant provisions of the Corporations Act. Those provisions take effect according to their terms and are not to be supplemented or varied by the superimposition of rule of the kind alleged.
191 The plurality went on to hold that as the agreement did not give rise to any liability between the airlines themselves to effect payment, and that the only debts that arose were those between IATA and the airline members in relation to the balance of all items entered for the relevant clearance, the supervening administration did not change the nature or content of the rights and obligations, and the administrators took those rights and obligations as they found them. Accordingly, there was no contracting out of the operation of the Deed.
192 Hamersley also relies on Re Trivan Pty Ltd.[113] That case involved an appeal against a liquidator's rejection of a proof of debt. The appeal turned on the availability of subrogation as a remedy. In a passage at 373 that clearly constituted obiter dicta, Young J observed:
We do not need to get into the area of statutory set off in bankruptcy under s 86 of the Bankruptcy Act 1966 (Cth), which would have been imported into the company liquidation by s 438 of the Companies (New South Wales) Code: equivalent provisions are now in s 553C of the Corporations Law. The equitable doctrine of set-off, which is not completely displaced by s 86 or its equivalent, would be applicable in the present situation, provided that there were debts at law or in equity: see McIntyre v Perkes [1990] FCA 100; (1990) 22 FCR 260, 271, affirmed by the High Court sub nom Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609.
193 The difficulty from Hamersley's perspective is that it is impossible to discern from these observations to what extent Young J considered that the equitable doctrine of set-off was displaced by the insolvency set-off provision and what principle limited the displacement effect.
194 Forge relied upon Ansett Australia Ltd (subject to a deed of company arrangement) v Travel Software Solutions Pty Ltd[114] in which the defendant, TSS, attempted to set off against its liability to pay a dividend declared in favour of its shareholders - which included Ansett - monies due to it under a loan agreement. Hargrave J rejected an argument that a set-off was automatically effected by s 553C of the Corporations Act and, having rejected TSS's argument that it was entitled to rely upon a contractual set-off provision in the loan agreement (on grounds that are presently irrelevant) added:[115]
Finally, there is in any event a fundamental answer to the contention of TSS that there can be a set-off outside of the operation of s 553C of the Act. Where s 553C applies to a deed of company arrangement, the set-off regime mandated by that section is the only means by which a set-off can be effected by a person who, as at the specified day under s 444A(4)(i) of the Act, has mutual dealings with the company. To the extent that the contractual arrangements between the company and a creditor are inconsistent with the operation of s 553C, they are void. Accordingly, where it applies, s 553C is a mandatory, automatic and exclusive regime for dealing with all rights of set-off between a company in administration and its creditors. (footnotes omitted)
195 Hamersley raises three criticisms of Hargrave J's statement that the setoff regime mandated by s 553C is the only means by which a set-off can be effected and that contractual arrangements that are inconsistent with s 553C are 'void'.
196 First, Hamersley contends Hargrave J's statement is inconsistent with the judgments of the majority in IATA.
197 I do not accept that anything said by either Gleeson CJ or the plurality on the public policy argument in IATA casts doubt upon Hargrave J's statement of the law. In IATA the contract did not give rise to a relationship of debtor and creditor between Ansett and the other Clearing House members, and thus contrary to Ansett's argument, in IATA there were no debts due by the other airlines to Ansett. Hargrave J's observations were made in the context of a case in which there was a debt due to Ansett by TSS.
198 Second, Hamersley says that Hargrave J relied on the decision of the Court of Appeal in Victoria in IATA that was overturned on appeal to the High Court.[116] In my view, Hamersley tries to make too much out of references made by Hargrave J to two paragraphs, [109] and [123], in Nettle JA's judgment in the Court of Appeal. At [109] Nettle JA (as his Honour then was) observed that parties cannot choose to apply the insolvency set-off provision to claims that are not mutual debts, mutual credits or other mutual dealings. His Honour also noted that although National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd establishes in England that parties cannot exclude the operation of insolvency provisions, 'the question is technically still open in Australia'. At [123] Nettle JA responded to a submission from IATA that even if the effect of the regulations remained as it was at the time of British Eagle, then the court should adopt the construction of the regulations adopted by the minority in British Eagle, and said that he preferred the view of the majority and that an intermediate court of appeal should ordinarily follow a decision of the House of Lords unless clearly convinced it is wrong. The citation of these paragraphs has no bearing on the weight to be attached to Hargrave J's statement about the exclusive operation of s 553C. The observations in [109] were not in issue before the High Court and no doubt is cast on them by the views expressed in the High Court. The issue dealt with in [123] of Nettle JA's reasons is the correct construction of the Clearing House regulations rather than any wider issue of principle concerning the operation of the insolvency set-off provision.
199 The third criticism Hamersley makes of Hargrave J's statement is that referred to in my earlier summary of Hamersley's submissions. Hamersley argues that the decisions relied upon by his Honour do not support the proposition that when s 553C (or equivalent provisions) is 'inapplicable', contractual set-off provisions are unenforceable and void. As already noted, Hamersley accepts the authorities support the proposition that if s 553C applies, contractual setoff, if inconsistent with s 553C, has no room to operate. Hamersley argues, however, that the contrary - that is if s 553C is inapplicable, there is no room for any other kind of set-off - is not decided by the cases on which Hargrave J relied. The decisions cited by Hargrave J as supporting the proposition stated by him include Halesowen, Gye v McIntyre, and GM & AM Pearce and Co Pty Ltd v RGM Australia Pty Ltd.
200 I do not accept Hamersley's submission. For the reasons developed more fully below, I consider that s 553C does operate as an 'exclusive regime' as described by Hargrave J and that that view is supported by the authorities.
201 In Paganini v The Official Assignee Keith J, delivering judgment for the New Zealand Court of Appeal (Gault, Thomas and Keith JJ), made the following observations about the insolvency set-off provisions in the New Zealand bankruptcy and insolvency legislation:[117]
All those provisions have been consistently read as requiring that the mutual transactions were in existence at the date of the bankruptcy or liquidation, and as replacing in the context of insolvency the general law of set off, including the statutes of 1723 and 1734. On the latter point Baron Parke as long ago as 1843 stated that the mutual credit provision (in that case found in 6 Geo 4 ch 16) was designed to do substantial justice between the parties (Foster v Wilson [1843] EngR 1141; 12 M & W 191, 203 - 204[1843] EngR 1141; , 152 ER 1165, 71). It is consistent with that judgement and appears to follow inexorably from the legislation admitting (or not) creditors' claims that no claim for set off can be made outside the legislation (see to that effect Day and Dent Constructions Pty Ltd v North Australian Properties Ltd [1981] FCA 12; (1981) 34 ALR 595, 599, 601, 637 (Full Federal Court) and the authorities assembled there; the decision was affirmed by the High Court of Australia without express reference to this issue[1982] HCA 20; , (1982) 150 CLR 85).
202 The next case Hamersley relied upon was Piccone v Suncorp Metway Insurance Ltd,[118] in which the bankrupt applicant sued for damages for personal injuries suffered in the course of a road accident. In its defence and counterclaim the respondent insurer raised a claim against the applicant that it sought to set off in extinction of the applicant's claim. The respondent's claim was for money paid in settlement of a claim made by a third party for damages for personal injuries suffered by him as a result of a road accident caused by the applicant. The question before the court was whether in seeking to establish the defence of setoff the respondent was seeking to enforce a remedy for the purposes of s 58(3)(a) of the Bankruptcy Act 1966 (Cth). The Full Court held it was not. In the course of the judgment the court referred to a submission that had been made on the applicant's behalf to the effect that the respondent's claim fell within the insolvency set-off provision, s 86 of the Bankruptcy Act 1966. The court dealt with the submission in these terms, at [12]:
It was at least tentatively submitted on behalf of the applicant that s 86 exhaustively defines the right of a creditor to set-off a debt owed by a bankrupt against any claim by the bankrupt against the creditor, and that the respondent is therefore barred from pursuing its set-off and counterclaim in the Supreme Court. However the section only regulates the way in which mutual debits and credits are to be taken into account in the administration of the bankrupt estate. It says nothing concerning the respective rights and obligations of creditors and bankrupts outside of such an administration.
203 Piccone does not assist Hamersley because, as is clear from the passage cited above, the case was not concerned with set-offs within the administration of the bankrupt estate but with the ability to raise a set-off as a defence in an action for damages for personal injury to the bankrupt that is proceeding outside of the administration of the bankrupt estate.
Contractual set-off - the importance of construing the contractual terms relied upon
204 Before setting out my conclusions on whether s 553C of the Corporations Act leaves any room for the operation of contractual set-off I should say what I mean by the term 'contractual set-off'.
205 Contractual set-off may take many forms and cases dealing with contractual set-off need to be approached with caution because as Professor McCracken notes in The Banker's Remedy of Set-off:[119]
Although a transaction may be described by a court as a 'set-off', it may be argued that in fact the particular right under discussion provides a different contractual right, distinct from 'set-off' in its traditional sense.
206 It is important, particularly when contractual set-off provisions are considered in the context of supervening insolvency, to pay close attention to the contractual terms to determine whether they give rise to debts and liabilities between the parties or, as for example in IATA, contractual rights and obligations that do not have the character or quality associated with the relationships of debtor and creditor as ordinarily understood.
207 In the context of commenting on the public policy arguments raised in British Eagle and the potential for contractual set-off provisions to infringe the pari passu principle, Professor McCracken expressed the view that:[120]
The crucial question in relation to the exercise of set-off under contract thus becomes whether the contract is capable of classification as a contract for the satisfaction of a debt.
208 Professor McCracken goes on to observe that from time to time set-off has been regarded as a mode of payment but set-off cannot be regarded as a mode of payment where:[121]
the effect of set-off is to discharge the creditor/debtor in full or in part from his initial obligation to pay the debtor/creditor. In these circumstances there is neither satisfaction of a liability nor payment of a debt, as prohibited under the bankruptcy legislation counterpart. Accordingly, the operation of this form of set-off cannot contravene these particular insolvency provisions.
By contrast, where the terms of the contractual set-off provision purport to enable the assertor to appropriate a credit balance and to apply it in reduction of outstanding liabilities, that action is likely to amount to satisfaction or payment of a debt. (footnotes omitted)
209 When I refer to contractual set-off in the paragraphs that follow I am referring to contractual provisions that either give rise to or preserve, and do not eliminate, a debtor-creditor relationship; that is, the contract gives rise to debts and provides for them to be set off against each other, in contrast to creating relationships that do not have the characteristics of a debtor-creditor relationship and do not give rise to debts.
Section 553C of the Corporations Act constitutes an exclusive code displacing equitable and contractual set-off
210 In my view s 553C constitutes a code that regulates set-off between an insolvent company and a person who wants to have a debt or claim admitted against the company to the exclusion of equitable set-off and any form of contractual set-off. The reasoning that leads me to this conclusion is as follows.
211 First, the conclusion is supported by the statutory text. The phrase 'statutory directive' used by the High Court to describe s 86 of the Bankruptcy Act 1966 is equally apt to describe s 553C given the mandatory language used in the provision: 'an account is to be taken of what is due';[122] 'the sum due from the one party is to be set off against any sum due from the other party';[123] and, 'only the balance of the account is admissible to proof against the company, or is payable to the company...'.[124] The section stipulates a process for the determination of the setting-off of claims in liquidation in an orderly way, a matter in which the commercial community has an interest.[125]
212 Second, the statutory context is important. Section 553C appears in a subdivision of the Corporations Act that governs the admission to proof of debts and claims and provides a detailed set of rules to be applied in doing so. The breadth of application of these provisions manifests a legislative intention that they should regulate all debts and claims between the company, its debtors and its creditors. To allow equitable or contractual set-offs to operate outside of these provisions would be inconsistent with that legislative intention. The requirements of s 553C that govern when set-off is permitted would serve no purpose if set-offs that do not satisfy those requirements but do satisfy the requirements of contractual set-off or equitable set-off were permitted. Many contractual set-offs operate as modes of payment; they are essentially a self-help remedy. If contractual set-offs could be relied upon, this would enable an alternative system for admission and payment of debts to operate in parallel with the statutory provisions. That would be inimical to the orderly administration of the affairs of insolvent companies.
213 Third - and this is closely related to the second point - s 553C operates to replace the original claim of a party who wants to have a debt or claim admitted against the company with a net balance. The finality of the process would be undermined if, notwithstanding the striking of the balance under s 553C, the party claiming to prove could improve its position by raising a set-off outside the s 553C regime.
214 Fourth, construing s 553C as a code is consistent with the statutory purpose of s 553C and its predecessor provisions, that is, to do 'substantial justice' between the company and its debtors and its creditors as a whole. Setoff has the capacity to encroach on the pari passu rule.[126] The potential for set-off to affect the interests of creditors unfairly was recognised by the observations of the High Court in Gye v McIntyre at 619 to the effect that 'substantial justice' requires that the operation of set-off in bankruptcy be confined within limits which protect creditors from being disadvantaged by a set-off being allowed in circumstances where debits, credits or other dealings have not been 'genuinely mutual'. The statutory purpose would be undermined if set-offs, whether equitable or contractual, that were not confined by the limits of s 553C could be invoked.
215 Fifth, whilst the issue may technically be open, the reasoning in Halesowen and Gye v McIntyre provides persuasive support for the proposition that there can be no contracting out of s 553C. From this proposition it is only a short and logical step to the conclusion that the section establishes a code and it follows there can be no reliance outside of the code on other forms of set-off because, as Sheppard J observed in Day v Dent at (325):
Since the object of that legislation was to deal fairly with all, it is to be expected that the courts would not lightly engraft upon its terms additional circumstances or situations in which a set-off might be permitted.
216 In this respect, I note Professor McCracken records that it has generally been considered that the fact a person cannot contract out of insolvency set-off must necessarily preclude reliance on other forms of set-off.[127]
217 Sixth, the weight of authority favours the view that s 553C constitutes a code and that other forms of set-off cannot be relied upon independently of the section. In particular, the considered reasoning of the members of the Full Court of the Federal Court in Day & Dent is to that effect. The issue has not been considered as fully in any other Australian decision as it was in Day & Dent. The views of the Court of Appeal in England and the Court of Appeal in New Zealand about the operation of comparable insolvency set-off provisions in their respective jurisdictions support the views expressed in Day & Dent.
218 For the reasons given in the course of reviewing the authorities relied upon by Hamersley, I am not persuaded that they establish the principle that equitable set-off is available in insolvency outside of s 553C. I should follow the reasoning in Day & Dent because it is the reasoning of an intermediate court of appeal and I have no reservations about the correctness of the conclusion arrived at by each of the members of the court on the issue.
Are Hamersley's contractual set-off rights preserved by s 80(1)? Section 80 of the PPSA
219 Section 80(1) and (2) read:
Rights on transfer of account or chattel paper - rights of transferee and account debtor
Rights of transferee subject to contractual terms and defences
(1) The rights of a transferee of an account or chattel paper (including a secured party or a receiver) are subject to:
(a) the terms of the contract between the account debtor and the transferor, and any equity, defence, remedy or claim arising in relation to the contract (including a defence by way of a right of set-off); and
(b) any other equity, defence, remedy or claim of the account debtor against the transferor (including a defence by way of a right of set-off) that accrues before the first time when payment by an account debtor to the transferor no longer discharges the obligation of the account debtor under subsection (8) to the extent of the payment.
(2) Subsection (1) does not apply if the account debtor makes an enforceable agreement not to assert defences to claims arising out of the contract.
220 In relation to the transfer of accounts, the Replacement Explanatory Memorandum states:[128]
2.177 In order to ensure that an account debtor is not in a worse position following the transfer of an account or chattel paper, the rights of a transferee of an account or chattel paper (including a secured party or receiver) would, subject to the account debtor not having agreed not to assert any contractual defences (clause 80(2)), be subject to:
221 As is apparent both from the statutory text and the Replacement Explanatory Memorandum, the purpose of s 80(1) is to protect account debtors who would otherwise be disadvantaged by the transfer of accounts in which they have an interest.
Section 80(1) has no application in the liquidation of Forge
222 Hamersley cannot invoke s 80(1) to enable it to raise any form of set-off in the liquidation of Forge, other than one permitted by s 553C of the Corporations Act, for two reasons: first, because there is no basis for concluding that Parliament intended s 80(1) to amend the statutory regime for mutual credit and set-off in liquidation set out in s 553C; and, second, Hamersley's rights are to be determined within the context of the liquidation of Forge, that is, they are to be determined by reference to the statutory provisions governing the admission to proof of debt and claims in the Corporations Act.
223 As noted earlier, amendments were made to the Corporations Act to reflect changes in the law introduced by the PPSA. Section 553C establishes a regime applicable to mutual credit and set-off. For the reasons I have already provided, s 553C is a code. Had Parliament intended s 80(1) to permit contractual set-offs not otherwise recognised by s 553C to be relied upon by an account debtor in the winding up of a grantor who has transferred collateral, it would have done so expressly using clear language. It has not done so. Thus, in my opinion, a person wanting to prove in a winding up cannot rely upon a contractual right of set-off not recognised by s 553C.
224 As stated in the introduction to these reasons, the dispute may be characterised as a contest between the rights of ANZ (advanced in Forge's name) and Hamersley. In that context, the inability of Hamersley to raise its contractual set-off in defence to Forge's claims may be perceived as an unfair limitation on the statutory protection afforded by s 80(1) of the PPSA to Hamersley as an account debtor. But it is important to remember that Hamersley wants to have its claims admitted in the winding up of Forge for what it contends is the balance of the account between it and Forge. Hamersley cannot seek to have its claims admitted in the winding up and have the benefit of setting-off those claims against claims advanced in Forge's name by the receivers outside of the liquidation. Hamersley's rights must be determined in the context of the liquidation in which it has sought to prove.
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?
225 In the light of my conclusion that s 80(1) does not permit contractual setoffs outside of s 553C of the Corporations Act, it is unnecessary for me to deal with Forge's submission that by reason of s 258 of the PPSA, s 553C prevails over s 80(1), but in deference to the parties' submissions I will do so.
226 Section 258 deals with the circumstances in which other laws prevail in the context of personal property and security interests and matters excluded from State amendment referrals. The provisions of s 258 applicable to personal property and security interests are as follows.
Personal property and security interests
(1) This Act (apart from Division 4), or any instrument made under this Act, does not have an effect covered by subsection (2) to the extent to which that effect would give rise (apart from this subsection) to a direct inconsistency between this Act, or the instrument, and a law covered by subsection (3).
Note: Division 4 restricts the operation of State and Territory laws in certain respects, for example by preventing formal requirements under those laws from affecting the validity of security interests.
(2) The following effects of a law are covered by this subsection:
(a) prohibiting or limiting a person creating, acquiring or dealing with personal property or a security interest in personal property;
(b) without limiting paragraph (a):
(i) prohibiting or limiting the right of a person to hold, transfer or assign a security interest in personal property; or
(ii) imposing limitations or additional obligations or requirements in relation to the enforcement of a security interest in personal property.
(3) The following laws are covered by this subsection:
(a) a law of the Commonwealth (other than this Act, or an instrument made under this Act);
(b) a law of a referring State (while the State is a referring State);
(c) a law of a Territory;
(d) the general law.
(4) Subsection (1) does not apply to an effect of a law to the extent (if any) prescribed by the regulations.
Matters excluded by State amendment referrals
(5) ...
(6) ...
227 Shortly stated, Forge's argument is that as s 553C of the Corporations Act constitutes an exclusive code governing set-off in insolvency, to the extent to which s 80 of the PPSA is construed as having the effect of permitting an account debtor to raise a contractual set-off against a company in liquidation, it is inconsistent with s 553C, and by reason of the operation of s 258 of the PPSA it will not have that effect.
228 Forge submits that 'to elevate the application of s 80 such that a contractual right of set-off is to apply despite the unavailability of set-off pursuant to s 553C would give rise to a direct inconsistency' between the PPSA and the Corporations Act that would invite the application of s 258. It contends that to permit s 80 to operate in that way would be, in effect, to postulate the implied repeal of s 553C, and that no legislative intention to that effect is found within the PPSA.
229 Hamersley submits s 258 is not engaged because neither s 80 of the PPSA, nor s 553C of the Corporations Act, have the effects prescribed by s 258(2) for which Forge contends. Hamersley submits, first, that s 80(1) does not have the effect of imposing limitations or additional obligations or requirements in relation to the enforcement of a security interest in personal property and, second, when s 553C requires mutuality and confers a right of set-off it is not a law dealing with the enforcement of a security interest in personal property. Hamersley argues that the relevant inquiry is not confined to identifying an alleged 'direct inconsistency', but requires that the alleged inconsistent laws concern the matters specified in s 258(2)(a) or (b) and that s 80(1) and s 553C are not such laws.
230 In answer to Hamersley's submissions, Forge emphasises that s 258 of the PPSA is concerned with the effects of a law not merely with its express terms. It argues it is the result or consequence of s 553C that is relevant, not whether on its face s 553C deals with the enforcement of security interests in personal property. Forge argues the effect of s 553C is to impose limitations or additional obligations or requirements in relation to the enforcement of security against certain debts. More specifically, Forge contends '... the effect of s 553C is that the enforcement of a security interest against an account where the account creditor is insolvent, will only be subject to set-off by an account debtor if the debtor has mutual debts or claims. To construe a subsequent law as prevailing to remove this requirement would be to effect a repeal of s 553C.' Forge points out that the words 'in relation to' are of wide import.
231 In support of its argument that there is a direct inconsistency between the effect of s 80(1) and the effect of s 553C, Forge says that s 80(1) provides that the enforcement of security over an account is subject to any defence of set-off contained in the contract between the grantor and the account debtor, its effect is to allow set-off even if there is no mutuality of debts and claims. In the context of the insolvency of a corporate grantor this is directly inconsistent with s 553C, as it covers the field as to set-off and requires mutuality. Accordingly, Forge argues s 80(1) should be read down to the extent to which it would otherwise impose any other regime for set-off in insolvency. Forge submits that this is s 258 working as intended to prevent the implied repeal of existing legal regimes in relation to the enforcement of security interests.
This Part deals with the interaction of this Act with other Australian laws.
This Act is not intended to exclude or limit the operation of any other law if that other law is capable of operating concurrently with this Act.
If there is an inconsistency between this Act and another law, regulations may be made to resolve the inconsistency.
Other laws prevail over this Act in certain situations, as follows:
(a) certain specified Commonwealth laws prevail;
(b) other laws may govern security agreements;
(c) other laws may include restrictions on acquiring or dealing with personal property or a security interest;
(d) State or Territory laws may exclude certain matters from coverage under this Act.
However this Act prevails over other laws in relation to certain requirements relating to the registration and form of security interests, and their assignment, attachment and perfection.
233 Division 2 of Pt 7.4 deals with the concurrent operation of the PPSA and other laws. Section 254(1) provides that the PPSA is not intended to exclude or limit the operation of a concurrent law to the extent to which the law is capable of operating with the PPSA.
234 Division 3 of Pt 7.4 deals with the circumstances in which other laws prevail. Section 256 deals with the circumstance of an inconsistency between the PPSA and the Payment Systems and Netting Act 1998, the Cheques Act 1986, the Bills of Exchange Act 1909, and the International Interests in Mobile Equipment (Cape Town Convention) Act 2013, and provides that those Acts prevail to the extent of the inconsistency. Section 257 deals with the circumstances in which other laws prevail by restricting the extent to which a security agreement is effective in accordance with its terms under subsection 18(1).
235 Division 4 of Pt 7.4 contains provisions that identify the circumstances in which the PPSA prevails over other laws. In summary, the requirements of the PPSA as to registration, assignment, the formalities of security agreements and the provisions relating to attachment and perfection of security interests are to prevail over other laws.
236 In my view, s 258 of the PPSA does not apply because whilst s 80(1) has an effect of the nature covered by s 258(2), s 553C does not. The stipulated effect is the effect of prohibiting or limiting a person creating, acquiring or dealing with personal property or a security interest in personal property, including by prohibiting or limiting the right of a person to hold, transfer or assign a security interest in personal property or by imposing limitations or additional obligations or requirements in relation to the enforcement of a security interest in personal property.
237 Section 80(1) of the PPSA has an effect of the kind covered by s 258(2) for two reasons. First, it has the effect of imposing a limitation on the grantor's right to transfer an account or chattel paper by providing that the account cannot be transferred free of the account debtor's rights, including set-off rights (unless the account debtor has agreed not to assert defences arising out of the contract). Second, s 80(1) imposes a limitation on the right of a transferee of an account or chattel paper in relation to the enforcement of a security interest in personal property because the transferee's rights are subject to the account debtor's rights.
238 The application of s 553C may give rise to the effect of imposing limitations or additional requirements in relation to set-off by a person who wants to have a debt or claim admitted against an insolvent company. In that context, as Forge submits, s 553C may operate as a limitation on the defence of set-off. But even if the phrase 'in relation to' is construed as requiring no more than a remote connection between the imposition of a limitation or additional obligation or requirement and the enforcement of a security interest in personal property, s 553C does not have an effect in relation to the enforcement of a security interest in personal property. The effect of s 553C is confined to the determination of the debts and claims of a person proving within a liquidation. The enforcement of a security interest takes place outside the liquidation.
239 Even if one assumes, in Forge's favour, that s 553C has an effect in relation to the enforcement of a security interest in personal property, the effect identified by Forge is a restriction on the rights of the account debtor to raise a set-off. This is not an effect of the kind covered by s 258(2)(b)(ii) because it does not 'impos[e] limitations or additional obligations or requirements' in relation to the enforcement of a security interest. It is the converse because it removes a limitation on the enforcement of a security interest in personal property by limiting the rights of set-off.
Are Forge's claims accounts that have been transferred to ANZ?
240 Once again, because I have concluded that s 553C of the Corporations Act covers the field and s 80(1) does not operate to preserve Hamersley's contractual set-off rights it is unnecessary for me to deal with the parties' submissions on the issue of whether Forge's claims constitute accounts transferred to ANZ, but again in deference to the parties' submissions I will do so.
241 Hamersley submits the effect of s 80(1)(a) of the PPSA is '... to ensure that ANZ, as alleged beneficial owner (by way of security), takes all debts allegedly owing by Hamersley to Forge subject to Hamersley's contractual rights not to pay Forge because it has off-setting damages claims'. This result, Hamersley says, is a consequence of s 80(1) effectively replicating the general law rule that an assignee 'takes subject to equities', which is not outflanked by the applicability or alleged inapplicability of s 553C. It says this outcome is supported by the decision in Greenview (Municipal District No 16) v Bank of Nova Scotia.[129]
242 Forge submits that the majority of its claims against Hamersley were not monetary obligations prior to or at the time of winding up because they were not claims for an identifiable or ascertainable sum of money payable on an ascertainable future date. Thus they are not accounts and s 80(1) has no application. It relies upon Strategic Finance Ltd (in liq) v Bridgman[130] in which the Court of Appeal in New Zealand held that 'monetary obligation', as it appears in the definition of 'accounts receivable' in s 16 of the Personal Property Securities Act 1999 (NZ), means 'an existing obligation imposed on, or assumed by, one party to pay a certain sum of money to the other party on a specific or ascertainable future date'. Forge contends that damages claims or other claims for compensation are not monetary obligations that are capable of constituting an account because damages claims do not involve an existing obligation to pay with a matching legally enforceable right to receive. Forge concedes that there are some limited progress payment claims that may constitute 'accounts'.
243 Hamersley responds to Forge's submissions that Forge's claims are not accounts by contending that if the relevant monetary obligation is not a damages liability (with damages being at large) but can sound in debt, it qualifies as an account. Hamersley contends that Forge's claims for payment under the Contracts are claims for payment of a liability for services rendered. It argues that it cannot be correct that whenever a dispute is raised about the liability or quantum of the liability, a monetary obligation ceases to be able to be so characterised.
244 The parties' submissions were not directed to the concept of a transfer under s 80 of the PPSA. Both parties' submissions on this issue proceeded on the basis that a transfer for the purposes of s 80(1) includes an equitable assignment and if Forge's claims constituted 'accounts' they were transferred.
245 Ascertaining the meaning of 'account' is an exercise in statutory construction. Accordingly, the meaning of 'account' depends upon the text of the statute, its context, and the legislative purpose and policy of the relevant provisions. As noted earlier, the decisions of courts of other jurisdictions on equivalent provisions may provide guidance but the court must start and conclude its analysis of the meaning of 'account' by reference to the text of the PPSA.
account means a monetary obligation (whether or not earned by performance, and, if payable in Australia, whether or not the person who owes the money is located in Australia) that arises from:
(a) disposing of property (whether by sale, transfer, assignment, lease, licence or in any other way); or
(b) granting a right, or providing services, in the ordinary course of a 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);
but does not include any of the following:
(c) an ADI account;
(d) chattel paper;
(e) an intermediated security;
(f) an investment instrument;
(g) a negotiable instrument.
247 The dictionary definitions of 'account' include, relevantly, 'a bill, as for services rendered or goods purchased; and, a relationship between a person and [an organisation] ... which allows the provision of goods or services without immediate cash payment ...'.[131] Ordinarily, an account comes into existence when following the transfer of something of value, an ascertainable amount of money becomes due to be paid on a future date.
248 The dictionary definitions of 'monetary' and 'obligation' are: 'of or relating to money, or pecuniary matters'; and, 'a binding requirement as to action; the binding power or force of a promise, law, duty, agreement, etc'.[132]
249 For an obligation to have substance, both what is to be done and the time within which it is to be done must be identified or be identifiable.
250 The ordinary meanings of the words 'account' and 'monetary obligation' support the view that for the purposes of the PPSA an 'account' requires there to be an existing, binding legal obligation to pay an ascertainable amount of money at some ascertainable future time arising from the disposal of property, the granting of a right, or the providing of services in the ordinary course of a business of granting rights or providing services of that kind.
251 The definition of 'account debtor' is, 'a person who is obligated under an account or chattel paper'.[133] The use of the word 'obligated' reinforces that an existing binding requirement is necessary for an account to exist.
252 There is nothing in the definition of 'account' or in the statutory context that would support the conclusion that 'account' is a term that should be construed restrictively.
253 The meaning of 'account' has been considered in two recent Australian decisions. In Re Amerind Pty Ltd (receivers and managers appointed) (in liq),[134] Robson J held that a trustee's right of indemnity is an equitable right, and that as it did not involve any money being owed for the provision of the trustee services it did not constitute an account. And in Re Langdon at [149] Gilmour J held that a monetary obligation arising after the appointment of receivers was not in the ordinary course of business and thus not an account.
254 In Strategic Finance, a central question for the determination of the Court of Appeal (Arnold, Stevens and White JJ) was the meaning of the term 'accounts receivable'.
255 Section 16 of the Personal Property Securities Act 1999 (NZ) defines 'account receivable' as:
a monetary obligation that is not evidenced by chattel paper, an investment security, or by a negotiable instrument, whether or not that obligation has been earned by performance
Putting aside obligations evidenced by chattel paper, an investment security or a negotiable instrument, each of which is separately defined in the PPSA and none of which is relevant in this case, we consider that 'monetary obligation' in the context of the PPSA means an existing obligation imposed on, or assumed by, one party to pay a certain sum of money to the other party on a specific or ascertainable future date. An obligation of this nature will involve an existing liability on the part of the first party which is legally enforceable by the second party. Each of the essential elements of the term 'monetary obligation' is supported by reference to relevant dictionary definitions and legal texts.
The use of the adjective 'monetary', which means relating to money or currency, excludes non-monetary obligations such as an obligation for specific performance or an obligation to deliver or restore property. As pointed out in Mann on the Legal Aspect of Money, monetary obligations primarily exist where the debtor is bound to pay a fixed, certain, specific or liquidated sum of money. A liquidated obligation generally includes both debts in the classical sense and executory obligations of a monetary character, such as an obligation to pay the price of goods not yet delivered.
The need for an existing liability to pay and a matching legally enforceable right to recover the payment is recognised by the relevant accounting standards which state that:
' ... one party's contractual right to receive (or obligation to pay) cash is matched by the other party's corresponding obligation to pay (or right to receive).'
When 'monetary' and 'obligation' are read together, it is also clear that the liability must be to pay an identifiable sum on an ascertainable date. This will include a claim of that nature based on debt statute or money had and received. A possible liability to pay an unidentifiable sum at an unascertainable future date will not suffice.
The fact that in terms of the definition the monetary obligation 'need not have been earned by performance' confirms that existing monetary obligations that are not earned by performance under a contract are within the definition. Such obligations will include those that exist under deed, statute or by virtue of a court order, independently of any need for performance.
Recognition of obligations which are not dependent on the need for performance does not mean, however, that an obligation that requires performance in order to come into existence will be recognised. The absence of performance in that case will simply mean that there is no obligation in existence.
We therefore do not accept [the] submission that the definition includes wholly executory contracts under which monetary obligations have not yet been earned by performance. An executory contract exists when the parties have exchanged promises to perform certain obligations in the future but have not yet performed them. No monetary obligation arises until performance by which the other party earns the right to be paid occurs. For an amount to be 'receivable', it must be currently owed to a party who is entitled to expect its payment without undertaking further performance. In the absence of any obligation being earned, there will be no existing obligation and therefore no account receivable.
The adjective 'receivable' and the express provision that the obligation need not already have been earned also reinforce the need to focus on the existence of the obligation at the relevant time, that is, in this case, the date of liquidation. An obligation that may arise in the future when there is performance in terms of the contract will not be included because once a company is in liquidation (or a person is insolvent) there may be no prospect of performance justifying payment.
In the event of liquidation or insolvency, performance may become impossible. An executory obligation will therefore not suffice in this context. This distinction is recognised in Goode on Payment Obligations in Commercial and Financial Transactions where it is noted that the difference between existing and contingent rights and obligations may be material. Typically, an existing right to payment is one which is definite, even if maturing in the future, whereas a contingent claim is one which may not materialise. The latter does not therefore constitute an existing monetary obligation. There is no existing liability to pay and no matching legally enforceable right to receive.
Accordingly we do not accept [the] submission that 'monetary obligation' includes an existing right to claim damages in tort or equity. In the absence of a judgment of the court, such claims do not involve an existing liability to pay with a matching legally enforceable right to receive. The existence of a claim against a director of a company for reckless trading or misappropriating company property, which [was] suggested might also fall within the definition, does not mean that the director is under an existing monetary obligation to pay.
We recognise that claims for money had and received may be in a different category because such claims involve recovery of a debt due which may constitute an existing monetary obligation. We do not, however, need to decide this issue as there is no suggestion that Takapuna had any relevant claim of this nature ... (citations omitted)
257 When considering the reasoning in Strategic Finance regard must be had to the differences in the definitions of 'account' in the PPSA and 'account receivable' in the New Zealand legislation. In the PPSA 'account' is not qualified by the adjective 'receivable' (to which White J in Strategic Finance attached significance as emphasising that the amount the subject of the obligation must be currently owed without the requirement of further performance) but is qualified by the requirement that the monetary obligation must arise from the disposal of property or the granting of a right or the provision of services in the ordinary course of business. Further, the exclusions of certain monetary obligations from the definitions overlap though they do not correspond exactly. The central concept in both definitions is, however, that of a 'monetary obligation', and I do not consider the differences in definition bear upon the construction of that term.
258 Contrary to Hamersley's submissions Greenview (Municipal District No 16) v Bank of Nova Scotia is not authority for the proposition that a bank holding a security interest over book debts of an insolvent company could not enforce its security without taking account of the debtor's claims for damages for breach of the contract giving rise to the book debts. The facts were as follows. Greenview had paid a contractor, Horizon, part of the agreed contract price for road-grading and other work done by it. Horizon ceased work and entered receivership before completing the work, leaving amounts outstanding to its secured and unsecured creditors. The work was completed using funds realised by calling on performance bonds. After completion there was a surplus of funds. Greenview sought to use the surplus to pay Horizon's unpaid unsecured creditors who had undertaken work as Horizon's subcontractors. Horizon's bank held a perfected security to any accounts receivable due or to become due to Horizon at the time of its bankruptcy. The Bank and the company that had provided the performance bonds both claimed the surplus funds.
259 The trial judge determined that the disputed surplus should be paid to the bank. The Court of Appeal allowed an appeal and directed there be a trial of the issue of whether, at the time of the bankruptcy, there was a debt due to Horizon pursuant to the contract, that is, whether there was an account. The court noted that the trial judge had not addressed the issue of whether the surplus funds were in fact owed to Horizon, and thus whether there was an account. In the course of the judgment the court referred to the 'major defaults' by Horizon. But that was in the context of whether Horizon could claim a debt due to it given its defaults and not because of the existence of a claim by Greenview for damages for breach of contract. The court could not determine the question of whether a debt was due because it had not been fully argued.[137] There was no issue as to whether, if there was a debt due to Horizon, its liability to pay damages for breach of contract should be taken into account before the debt was paid to the Bank. Nothing said by the court addresses an issue formulated in those terms. Greenview does not assist Hamersley's case.
260 Reflecting the view based on the ordinary meanings of the words 'account' and 'monetary obligation' I have expressed earlier in this section of the reasons, a 'monetary obligation' for the purpose of the definition of 'account' in the PPSA is - to adapt White J's formulation in Strategic Finance - an existing legal obligation on one party to pay an identifiable monetary sum to another on an ascertainable date arising from the disposing of property or the granting of a right or providing services in the ordinary course of granting rights or providing services of that kind subject to the specified exceptions.
261 I consider that a claim for payment for services provided pursuant to an agreement is capable of constituting a monetary obligation provided that the agreement contains a mechanism for ascertaining the amount to be paid and the payment date. If there is a legally enforceable obligation and a corresponding existing liability to make payment then it is immaterial that enforcement by court proceedings is required or that a court is required to resolve a dispute as to the amount to be paid or the payment date. Contractual claims of this nature may be contrasted with a right to claim damages in tort or equity, which the court in Strategic Finance held did not constitute monetary obligations. In the case of a right to claim damages in tort or equity a legally enforceable obligation and corresponding liability does not arise until judgment. By way of contrast, a legally enforceable contractual obligation and corresponding liability arises when there is performance in accordance with the terms of the contract.
262 In its submissions Forge characterised its claims as follows:
(i) Payment Certificate Claims - claims for amounts certified for payment by Hamersley;[138]
(ii) Progress Claims - that is specific amounts Forge claimed were due to it for work done;[139]
(iii) Securities Claims - claims arising from securities it says were wrongfully drawn down by Hamersley.[140]
263 Forge concedes that the Payment Certificate Claims are accounts, but submits that the Progress Claims are not. It contends that Progress Claims are properly described as a bundle of rights, including a contingent right to payment, which do not constitute existing monetary obligations.
264 In its written submissions, Forge describes its Progress Claims as quantum meruit claims. Forge pleads, however, that the amounts claimed were due to it under each of the Contracts.[141] As termination of a contract is normally prospective and does not abrogate accrued contractual rights to payment, there may be no right to restitutionary recovery in respect of a performance to which the accrued right relates, because the contract governs accrued contractual rights.[142] It appears to me that the Progress Claims are claims for debts - money due for services provided under the Contracts before they were terminated. The entitlement to the amounts claimed and the dates by which the amounts were due to be paid are not at large but are governed by the Contracts. That the amounts payable and the dates by which the amounts should have been paid may only be established by litigation does not mean that the claims are not monetary obligations. Alternatively, the claims are claims for damages for the failure to pay identifiable monetary sums due by ascertainable dates, where the loss comprises the identifiable monetary sum and interest.
265 In my view, it is not correct to characterise the Progress Claims as quantum meruit claims. Accordingly, I consider that the Progress Claims are accounts for the purposes of the PPSA.
266 The Securities Claims are not accounts for the purposes of the PPSA. They are not claims for identifiable monetary sums due by ascertainable dates arising from the disposing of property or the granting of rights in the ordinary course of business. They are claims that arose after the receivers were appointed by reason of the alleged wrongful draw down by Hamersley of securities provided by Forge.
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?
(i) summarise the submissions of the parties and the Department;
(ii) outline the principles underlying the requirement of mutuality;
(iii) outline relevant aspects of the pre-PPSA law that governed fixed and floating charges and the interaction with rights of set-off;
(iv) consider the consequences that flow from s 8(1) of the PPSA;
(v) consider whether Forge had any rights capable of constituting collateral in which ANZ could acquire a security interest; and
(vi) consider the nature and consequences of the attachment rule in s 19 of the PPSA and state my conclusions on the nature of the security interest acquired by ANZ and its effect on mutuality of interest.
268 A central theme in Hamersley's submissions is that, by reason of s 8(1)(d), the PPSA does not apply to any right of set-off and there is no indication, explicit or implicit, that the PPSA was intended to effect a change in the law previously applicable to any right of set-off. Hamersley contends that the true purpose of the PPSA is to ensure that all security interests in personal property are regulated by one regime, a regime that determines priorities between competing security interests and promotes the merits of perfection, as described in the PPSA. The aim was not, Hamersley says, to regulate rights of setoff or change the law applicable to those rights. Accordingly, Hamersley submits that the PPSA does not govern a contest between the rights of a party with a security interest and a party claiming a right of set-off. Such a contest is to be resolved by reference to the general law which, on Hamersley's view, supports its claim to set-off.
269 Hamersley submits that the true effect of the PPSA is not to render each security interest to which the PPSA applies a fixed security for all purposes. It submits that there is nothing in the PPSA that discloses that one of its purposes was to 'obliterate' the distinction between fixed and floating charges. It contends that it would be a strange result if a statute that defined 'security interest' in functional terms - as an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation - would for unarticulated reasons focus on the distinction between fixed and floating charges and preserve the former while abolishing the latter. Hamersley submits that the use of the term 'floating charge' as an example of a 'security interest' in s 12(2)(b) of the PPSA reveals a legislative intention that the concept of a 'floating charge' was to remain unaltered. Hamersley contends that the rules in Part 9.5 of the PPSA dealing with references to charges and fixed and floating charges in security agreements also reveal such a legislative intention.
270 Fundamental to Hamersley's submission that the PPSA has not altered the law relating to floating charges is its contention that the process of attachment provided in s 19(2) of the PPSA does not mean that there is automatic crystallisation of all floating charges. It contends that the concept of attachment in the PPSA is not used to change the general law distinction between fixed and floating charges. Hamersley points out that the statutory concept of attachment involves two elements. First, the grantor must have rights in the collateral or the power to transfer rights in the collateral. Second, the grantor must have given value or have done an act giving rise to the security interest. Hamersley argues that this concept of attachment does not say anything about the nature or extent of the secured party's rights or entitlement to the relevant collateral. It says attachment as defined is merely an event that must take place in order for a security to be enforceable and take priority in accordance with the rules about enforceability, registration and priority found in the PPSA - it is not to be equated with crystallisation of a floating charge.
271 Hamersley also relies on s 19(4) of the PPSA as recognition that a security interest may be created by a floating charge and this, it argues, demonstrates not only that the concept of a floating charge survives the PPSA, but also that attachment as defined in s 19(2) is a concept divorced from crystallisation of a floating charge under general law. Hamersley also argues that if a security agreement is structured as a floating charge, it should take effect in accordance with its terms as provided by s 18(1), with the secured party obtaining no greater rights than it would otherwise enjoy under the general law applicable to a floating charge.
272 Hamersley contends the fact that s 18(3) provides that a security interest in after-acquired property attaches without specific appropriation by the grantor does not support the conclusion that the 'floating charge' has been abolished by the PPSA, once it is appreciated that attachment for the purposes of the PPSA and crystallisation of a floating charge under the general law are distinct concepts.
273 Hamersley advances three reasons why s 32(1) does not support the conclusion that a security interest under the PPSA is a fixed interest that is proprietary in nature, as Forge contends.
274 First, s 32(1)(a) recognises that a security agreement may permit disposal of or dealings with collateral, which is what is permitted under a floating charge. Therefore, Hamersley argues, the provision does not support a blanket characterisation of all security interests covered by the PPSA as fixed securities.
275 Second, Hamersley contends that s 32(1) and s 32(2) contemplate the possibility that a security interest may subsist in both the original collateral and the proceeds of the transfer of that collateral, something that does not promote the grantor's ability to deal with book debts, a problem that - on Forge's submissions - s 32(1) was enacted to solve.
276 Third, Hamersley contends the statutory purpose of s 32(1) was to enable a secured party to trace into proceeds without requiring a fiduciary relationship between the secured party and the person who deals with the collateral. Hamersley says the purpose was not to address the consequences following from the alleged abolition of floating charges.
277 Hamersley next points to s 253 and s 254 and submits that these provisions reinforce its contention that nothing in the PPSA prevents the concurrent operation and application of the general law relating to floating charges and set-off.
278 Hamersley then contends mutuality of interest is preserved for two reasons. First, because Forge had not acquired rights in what Forge contended was the collateral - Forge's claims - and thus the attachment condition in s 19(2)(a) of the PPSA was not satisfied. This, Hamersley argues, is because the contractual set-off provisions - in particular cl 16.12 of the GCs - operated as a set-off provision that resulted in no amounts being due to Forge. Hamersley accepts that the condition in s 19(2)(b) was satisfied.
279 Second, Hamersley submits there is mutuality between its claims and those of Forge because ANZ had not acquired a proprietary interest in Forge's claims at the relevant date, 11 February 2014. Hamersley contends this is because the General Security Agreement created a floating charge over Forge's claims and that the charge had not crystallised as at 11 February 2014. At the heart of Hamersley's submissions is the proposition that the General Security Agreement permitted Forge to deal with proceeds or accounts freely in the course of its ordinary business and this freedom to trade was sufficient to preserve mutuality. Hamersley contends that whilst it is unnecessary to characterise the charge created by the General Security Agreement for the purposes of the PPSA, it is necessary to do so for the purposes of determining whether Hamersley's set-off rights continued despite the security taken under the General Security Agreement. It contends as a matter of principle and authority that the set-off rights continued. Hamersley submits that even if the charge is a fixed charge over Forge's claims - which it denies - mutuality of interest was not destroyed.
280 Hamersley makes two points about the Canadian and New Zealand decisions which provide support for the proposition that a security interest covered by the PPSA is in the nature of a fixed interest. First, Hamersley says that focussing on the decisions from other jurisdictions concerning legislation enacted in different terms distracts from the primary task of construing the text of the PPSA. Second, Hamersley says that none of the decisions in other jurisdictions involve the issue before this court, namely, a contest between a debtor's rights of set-off and the rights of the secured party conferred by the security interest.
281 Forge's case is that the security interest granted to ANZ over its claims against Hamersley destroys mutuality either because that interest was proprietary in nature, or because it was sufficiently analogous to the kind of beneficial interest in property that does destroy mutuality for the purposes of s 553C of the Corporations Act.
282 Forge's central submission is that, following the reforms brought about by the PPSA, the nature of ANZ's security interest is to be determined having regard to the terms of the PPSA and not the traditional general law concepts of fixed and floating charges and crystallisation, such concepts no longer being of determinative significance. Forge's submissions acknowledge that the PPSA does not identify the nature of a security interest in proprietary terms.
283 Forge's central submission is developed by reference to the Canadian and New Zealand decisions that it submits support the following propositions:
(i) a security interest governed by the PPSA, including a security interest in circulating assets, is a fixed security interest which attaches to each item of collateral when the grantor acquires it;
(ii) the use of a floating charge in an agreement does not affect that characterisation and does not postpone the time for attachment;
(iii) where a secured party authorises the grantor to deal with the assets in the ordinary course of business, the security interest in the assets subsists until disposal;
(iv) a security interest in circulating assets extends to their proceeds by force of the PPSA; and
(v) 'crystallisation' of a floating charge is not a concept imported into the PPSA.
284 Forge submits that one of the central benefits of the floating charge - the ability of the grantor to continue to trade by selling inventory and using the proceeds - is accomplished by s 32 of the PPSA and that the concept of 'security interest' under the PPSA has replaced the fixed and floating charge.
285 Forge argues s 8(1) serves a limited purpose, namely to provide that the stipulated interests are not security interests subject to the rules of the PPSA, so that the stipulated interests are not capable of being registered, and a party with such an interest does not have to comply with the requirements of the PPSA. A right of set-off, Forge submits, is not a security interest and does not create an interest in personal property. Forge contends that the exclusion of an interest from the operation of the PPSA does not mean that the holder of the interest obtains priority over a party with a security interest in the same property.
286 The Department's primary submission is that the PPSA does not require there to be a charging or transfer of the beneficial interest in collateral for a security interest to exist. It argues that s 32 and s 79 of the PPSA embody a regime that alters the concept of a 'fixed charge' or 'fixed equitable charge' as those terms are understood by the general law. The Department says that, significantly, the PPSA collapses the categories of securities subject to its regime into a single interest which is a legal interest 'in the nature of a fixed charge' in that it does not require an event of crystallisation to be effective over collateral over which security is granted but this does not mean it carries all the features of a fixed charge under general law. The Department's submissions urge caution against reading into the General Security Agreement proprietary security rights which are either unnecessary in the regime established by the PPSA or inconsistent with it.
287 The Department points to the freedom conferred on a grantor by s 79 of the PPSA to transfer the whole of the collateral the subject of the security, including both legal and equitable title notwithstanding any prohibition in the security agreement, and focuses on the protection afforded to a secured party by s 32 of the PPSA (subject to the taking free rules in Pt 2.5 of the PPSA). The Department stresses that the rights of a secured party to trace the collateral and to have its interest perfected against the interest held by the grantor's transferee do not arise because the secured party holds an equitable estate in the collateral, but rather by force of s 32(1)(a) of the PPSA.
288 The Department argues that whilst the precise nature of a 'security interest' under the PPSA is uncertain, if it were necessary to determine that question, the court should find it is a statutory charge over collateral, analogous to a real property mortgage over Torrens title land.
289 It is common ground that for s 553C of the Corporations Act to operate there must be mutuality of interest between the parties.
290 The concept of mutuality is explained by Dr Derham as follows:[143]
For both the insolvency set-off section and the Statutes of Set-Off there must be mutuality. Mutuality does not require that the claims should arise at the same time, nor that there should be any connection between them. It is irrelevant, moreover, that the claims may be of a different nature. As the High Court of Australia observed in Gye v McIntyre, 'the word "mutual" conveys the notion of reciprocity rather than that of correspondence'. Thus, an obligation arising out of an instrument under seal may be set off against a simple contract debt, and a secured debt may be set off against an unsecured debt. Mutuality means that the demands must be between the same parties and they must be held in the same capacity, or right, or interest. It is concerned with the status of the parties and their relationship to each other. It is not concerned with the nature of the claims themselves. The nature of the claims is dealt with instead by the requirement of 'debts' or, in insolvency set-off, of 'debts', 'credits' or claims arising out of prior 'dealings'. (footnotes omitted)
291 As Dr Derham records, it is a fundamental principle of insolvency set-off that mutuality is determined by reference to equitable interests rather than bare legal rights,[144] citing as authority, amongst others, the decision of the High Court in Hiley v Peoples Prudential Assurance Co Ltd (in liq).[145]
292 The principle underlying the requirement of mutuality is that stated in Jones v Mossop by the ViceChancellor, Sir James Wigram, as follows:[146]
[N]o rule is better understood than that you cannot set off demands due in different rights; the principle being that one man's money shall not be applied to pay another man's debt.
293 Applying that principle in the context of the dispute between these parties, and bearing in mind that it is contended that ANZ is the beneficial owner of Forge's claims against Hamersley, the proposition advanced against Hamersley is that ANZ's money (derived from the claims Forge has against Hamersley, advanced in Forge's name on behalf of ANZ) should not be used to satisfy Forge's debts to Hamersley by allowing Hamersley to set off those debts against the claims advanced in Forge's name for the benefit of the ANZ.
Pre-PPSA law relating to fixed and floating charges over personal property
294 The purpose of referring to the pre-PPSA law of fixed and floating charges is to provide historical context for the consideration of the operation of the attachment rule in s 19 of the PPSA. I will provide only an overview of the relevant principles in order to avoid becoming entangled in the controversies that beset this area of the law.
295 The essence of a charge is that a particular asset or class of assets is appropriated to the satisfaction of a debt or other obligation of the chargor, or a third party, so that the chargee is entitled to look to the asset and its proceeds for the discharge of the liability: Beconwood Securities Pty Ltd v Australia & New Zealand Banking Group Ltd.[147]
296 Under a fixed charge the assets charged as security are permanently appropriated to the payment of the sum charged in such a way as to give the chargee an immediate proprietary interest in the assets: Re Spectrum Plus Ltd (in liq).[148] The interest is an equitable interest that arises from the assignment in equity of the assets to the chargee.
297 In Goode on Legal Problems of Credit and Security, the floating charge is described as:[149]
one of the most subtle creations of equity, and despite the volume of case law and literature devoted to its analysis it remains conceptually elusive. (footnotes omitted)
298 In Re Spectrum Plus Ltd (in liq), Lord Scott identified the essential characteristic of a floating charge as follows:[150]
the essential characteristic of a floating charge, the characteristic that distinguishes it from a fixed charge, is that the asset subject to the charge is not finally appropriated as a security for the payment of the debt until the occurrence of some future event. In the meantime the chargor is left free to use the charged asset and to remove it from the security.
300 Courts determine whether a charge is a fixed charge or a floating charge not by reference to the label given to it by the parties but by the legal effect of what they have intended, that is, the rights and obligations the parties intended to create.[153] The characterisation issue turns on the degree of control the charge confers on the chargee over the chargor's freedom to manage the assets that comprise the security.
301 Attachment and crystallisation are terms with established meanings in the context of fixed charges and floating charges. In Goode on Legal Problems of Credit and Security, the concept of attachment is described as follows:[154]
Attachment denotes the creation of the security interest as between debtor and creditor. The effect of attachment is that the security interest fastens on the asset so as to give the creditor rights in rem against the debtor himself, though not necessarily against third parties. Attachment of a security interest is thus to be distinguished from perfection of a security interest, the latter usually involving a further step (possession, registration, notice, or attornment) which constitutes notice of the security interest to third parties and must be taken if they are to be bound. (footnotes omitted)
302 Upon crystallisation, a floating charge attaches to the collateral and the freedom of the chargor to trade and manage the assets constituting the security comes to an end. Crystallisation results in a fixed equitable charge over a defined fund of assets out of which the chargee has a right to be paid.[155] Crystallisation marks the moment when the equitable assignment of the security to the chargee occurs or is completed.[156]
303 Prior to crystallisation, the existence of a floating charge had no effect upon the rights of set-off accruing to the debtor of a company/chargor.[157] The law recognised that it was unfair to trade creditors to allow a chargor to trade freely but remain immune from the normal incidents of legal process.[158]
Section 8(1)(d) is of limited significance
305 By way of context, I note a bare right of set-off does not create a proprietary right that constitutes a security interest at common law.[159] Section 8(1)(d) is statutory recognition of the notion that set-off does not involve the creation of a security interest.
306 Construing s 8(1) of the PPSA is not without its difficulties for the reasons given in Personal Property Securities in Australia.[160] In my view, the role played by s 8(1) is a limited one: it excludes the stipulated interests from the operation of the PPSA and exempts those who hold such interests from the need to comply with the provisions of the PPSA. Had Parliament intended that the stipulated interests were to be insulated from the operation of the PPSA so that, in effect, whenever those interests intersect with rights or interests created by the PPSA, the latter would be disregarded, it would have used much clearer language.
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?
307 For the reasons I have set out earlier I do not accept Hamersley's contention that the contractual set-off provision operates as a net-off provision with the result that there were no monies due to Forge capable of forming part of the Collateral. Accordingly, I do not accept the argument that ANZ did not acquire rights in Forge's claims because the condition in s 19(2)(a) of the PPSA -that the grantor has rights in the collateral - was not satisfied.
308 Although, ultimately, s 81 of the PPSA did not feature to any significant extent in the parties' submissions, for the sake of completeness I should say that if cl 1.8 of the GCs is construed as restricting Forge's rights to grant a security interest to ANZ, the restriction was binding on Forge but only to the extent of making it liable for damages and the restriction was unenforceable against ANZ.
The nature and consequences of the attachment rule in s 19 of the PPSA
309 The essential question to be answered is: did the attachment rule in s 19 of the PPSA operate in such a way that mutuality of interest between Forge's claims and Hamersley's claims ceased to exist?
310 Resolving this question involves determining whether the concept of attachment in s 19 of the PPSA renders the equitable concept of crystallisation redundant in the context of a security interest over personal property regulated by the PPSA.
311 I have concluded that the attachment rule in s 19 of the PPSA operated in such a way that mutuality of interest between Forge's claims and Hamersley's claims ceased to exist.
312 I have reached this conclusion for three reasons.
313 First, I consider that the attachment rule operates to confer on the secured party a proprietary interest in the collateral upon satisfaction of the conditions in s 19(2) and not at a later time. In this case, ANZ and Forge had not agreed that attachment would occur at a later time. I consider that this proprietary interest is sufficient to bring mutuality of interest to an end.
314 Second, contrary to Hamersley's submission, I consider that the prePPSA concept of crystallisation is rendered redundant by the PPSA, and so too is the floating charge as a device for taking security over personal property.
315 Third, and even if I am wrong in concluding that as a matter of statutory construction a security interest under the PPSA is proprietary in nature, the General Security Agreement is effective according to its terms. It provides that the Security Interest granted to ANZ is by way of a charge over all Collateral other than Revolving Assets. Forge's claims are not Revolving Assets. Accordingly, the charge has attached by reason of the operation of s 19(2) of the PPSA and thus conferred on ANZ an equitable interest - and so a proprietary interest - in Forge's claims.
316 The conclusions that on attachment under s 19 a secured party acquires a proprietary interest and that the concept of crystallisation is redundant arise from a construction of the statutory text, and are consistent with the approach taken to the construction of equivalent provisions of personal property securities legislation in Canada and New Zealand. The conclusions are also supported by the views expressed by the commentators.
317 Before developing the reasons for my conclusions, I should clarify what I mean by describing the security interest as a proprietary interest. In so doing, I disclaim any attempt at a universal definition of 'proprietary interest'. I heed the observations of the learned editors of Meagher, Gummow & Lehane's Equity: Doctrines and Remedies that:[161]
The obsession with the definition of equitable proprietary interests by reference to fixed, universal and exhaustive criteria is delusive; and, as Holmes J put it '[d]elusive exactness is a source of fallacy throughout the law'. (footnotes omitted)
318 As Professor Worthington has observed, 'proprietary interest' is a term that has a broad compass but can be loosely defined:[162]
as an absolute or limited right to particular property, or a right to have particular property or its derivatives applied towards the satisfaction of some obligation. The interest can be legal or equitable; it can be an ownership interest or a security interest and, at common law, it can also be a right of possession.[163] (footnotes omitted)
319 In Goode on Legal Problems of Credit and Security, the distinction between real rights and personal rights is emphasised in the following terms:[164]
A real right is a right in an asset (right in rem) as opposed to a personal right to an asset (right ad rem). A personal claim to delivery or transfer of an asset does not survive the debtor's bankruptcy but becomes converted into a right to prove for a dividend in the debtor's estate in competition with other creditors. By contrast a security interest is a right in rem and in principle the secured creditor is entitled to remove the asset from the general body of creditors. (footnotes omitted)
320 Against that background, it is perhaps a statement of the obvious that a security interest under the PPSA is a proprietary interest in the form of rights in rem. As stated in s 12 of the PPSA, '... a security interest means an interest in personal property ...'. The proprietary interest is sufficient to remove the assets in which it exists from the pool of assets available to the general body of creditors of the grantor for the exclusive benefit of the secured party to the extent required to satisfy the secured obligation.
321 It is unnecessary, however, to import into the regime established by the PPSA particular forms of interest known to the general law for the purpose of characterising in a more detailed way a security interest under the PPSA. In particular, it is unnecessary to conclude that a security interest under the PPSA has been created by a particular mechanism, such as an assignment in equity. It is sufficient to identify the interest as a statutory interest that is proprietary in nature. By agreement, parties may structure their arrangements in such a way as to confer a security interest of a particular type, but given the functional approach to the definition of security interest in the PPSA, beyond recognising the proprietary nature of a security interest, it is unnecessary to construe the PPSA as attributing to a security interest under the PPSA particular characteristics associated with pre-PPSA forms of security. Indeed, there is no justification in the text of the statute for taking such an approach.
(1) A security agreement is effective according to its terms.
(2) A security agreement may provide for security interests in after-acquired property.
(3) A security interest in after-acquired property attaches without specific appropriation by the grantor.
(4) A security agreement may provide for future advances.
(5) A security interest is taken to secure reasonable expenses in relation to the enforcement of the security interest, unless the parties agree otherwise.
(1) A security interest is enforceable against a grantor in respect of particular collateral only if the security interest has attached to the collateral.
Attachment rule
(2) A security interest attaches to the collateral when:
(a) the grantor has rights in the collateral, or the power to transfer rights in the collateral to the secured party; and
(b) either:
(ii) the grantor does an act by which the security interest arises.
Time of attachment
(3) Subsection (2) does not apply if the parties to a security agreement have agreed that a security interest attaches at a later time, in which case the security interest attaches at the time specified in the agreement.
(4) To avoid doubt, a reference in a security agreement to a floating charge is not a reference to an agreement that the security interest created by the floating charge attaches at a time later than provided under subsection (2).
Goods leased, bailed, consigned or sold under a conditional sale agreement
(5) For the purposes of paragraph 2(a), a grantor has rights in goods that are leased or bailed to the grantor under a PPS lease, consigned to the grantor, or sold to the grantor under a conditional sale agreement (including an agreement to sell subject to retention of title) when the grantor obtains possession of the goods.
(6) Subsection (5) does not limit any other rights the grantor may have in the goods.
325 Although s 10 of the PPSA provides that 'attaches' has the meaning given by s 19, that section identifies when attachment occurs - it does not state the meaning of 'attaches'. Hamersley contends that to treat 'attach' as if it refers to the ordinary meanings of the word - 'seize, grasp, take hold of', 'fasten or join (a thing to another), 'join or connect functionally', 'fix to something or someone as property, description or other adjunct' - is an 'easy trap to fall into', and that 'attaches' has the more confined and precise meaning set out in s 19(2). The difficulty with this submission is that to which I have just adverted, s 19(2) does not define attachment, it only states when it occurs.
326 The conclusion that 'attaches', as used in s 18(3) and s 19, connotes the creation of an interest of a proprietary nature flows from the ordinary meaning of the word 'attaches' (that is 'fastens'), the use of 'security interest' and 'afteracquired property' in s 18(3), and the use of 'security interest' and 'collateral' in s 19(2).
327 These provisions are concerned with interests that fasten on personal property for the purposes of conferring security. The language points to the creation of an interest in the property. The words reflect the essential elements of a 'security': the secured party acquires an interest in the form of rights in the property that diminishes the grantor's rights in the property. The reference in s 19(2)(b)(ii) to the grantor doing an act by which the 'security interest arises' is a further indication that these provisions are concerned with the creation of interests in property, and not merely concerned with identifying the moment at which a security interest is enforceable or confers 'in personam' rights. If Parliament's intention had been that these provisions operated merely to identify an event, as Hamersley contends, or rights other than proprietary rights, this could have been achieved without using the word 'attaches'. But the word has been used and its significance is recognised by giving to it the meaning to which I have referred.
328 The conclusion that 'attaches' connotes the creation of a proprietary interest can be sustained on the additional ground that 'attachment' has the established meaning in equity to which I have referred earlier.
329 When a word used in a statute has an established legal meaning it is assumed that it is used with that meaning unless the context indicates a different meaning.[165]
330 Applying this interpretative principle, as 'attach' and its cognate 'attachment' have a settled meaning in equity, it should be assumed that they have the same meaning in the PPSA. There is no intention express or implied in the PPSA that 'attach' and its other forms should have a different meaning.
Context supports attachment connoting the creation of a proprietary interest
331 There is no contextual reason for concluding that 'attaches' should not be taken as connoting the creation of a proprietary interest in the collateral on the part of the secured party. On the contrary, the context supports the conclusion that 'attaches' connotes the creation of a proprietary interest for the benefit of the secured party.
332 The fact that s 12 of the PPSA defines security interest as meaning 'an interest in personal property' is an important contextual consideration.
333 Further, s 19 is concerned with the enforcement of the security interest by the secured party against the grantor and s 20 is concerned with the enforcement of the security interest against third parties. The fact that attachment is a necessary condition of enforcement against third parties supports the conclusion that attachment of a security interest in collateral signifies the creation of a proprietary interest for the benefit of the secured party, as otherwise there is nothing to enforce. In this respect I draw support from the observations of Charron J in Royal Bank of Canada v Radius Credit Union Ltd[166] to which I refer later in the course of reviewing the Canadian authorities.
334 It follows from the views I have expressed that the attachment rule leaves no room for the continued operation of the concept of crystallisation. This conclusion is consistent with the statement in the Replacement Explanatory Memorandum that:[167]
The Bill would do away with the equitable concept of the crystallisation of floating charges and interests in after-acquired property would attach on the acquisition of the property by the grantor.
335 I note that the view that I have reached on the attachment rule accords with the views expressed by Gilmour J in Re Langdon at [36] and [156].
Department's submission about the nature of a 'security interest' under the PPSA
336 I accept the Department's submission that it is unnecessary to conclude that the concept of security interest of itself connotes a charge or transfer of a beneficial interest. I do not accept that a PPSA security interest is not a proprietary interest. There are three reasons for this. First, the task of construction begins and ends with the text of the PPSA and, as I have said, the text provides strong support for the view that upon attachment a secured party acquires a proprietary interest. Second, to deny that a security interest is proprietary in nature is to deny its essential characteristic. Third, as I discuss later in this section, the authorities in which the attachment rule in the personal properties securities statutes in force in Canada and New Zealand has been considered support the view that a security interest is a proprietary interest.
Conclusion that attachment creates a proprietary interest does not depend on the abolition of the distinction between fixed and floating charges
337 The conclusion that 'attach' and 'attachment' when used in the PPSA connote the creation of a proprietary interest in collateral does not depend on attributing to Parliament an intention to abolish the general law distinction between fixed and floating charges, as Hamersley suggests in its submissions. For the purposes of this case it is unnecessary to reach the conclusion that the PPSA abolishes the general law distinction between fixed and floating charges over personal property. In considering Hamersley's submission, and the way in which the PPSA operates, it is important to note that the attachment rule in s 19(2) is the default rule that applies in the absence of an agreement between the parties that the security interest attaches at a later time.[168]
338 Section 19 does not prevent the parties from agreeing that attachment will take place on the happening of a later event of a kind that might commonly have constituted a 'crystallising event' under a traditional floating charge. Section 19(4) makes it plain that a mere reference in a security agreement to a floating charge is not to be taken as an agreement that the security interest created by the floating charge attaches at a later time.
339 Although for the reasons I will come to shortly it is unnecessary to do so, parties may make a security agreement under the PPSA that adopts the features of a floating charge but this does not alter the default position that, absent an express agreement providing for attachment at a later time, attachment will take place on the satisfaction of the s 19(2) conditions with no requirement for a subsequent crystallising event.
340 Whilst it is unnecessary to hold that the PPSA abolishes the general law distinction between fixed and floating charges, as I have indicated, I consider that the PPSA does render the distinction between these traditional forms of security redundant in the context of securities over personal property to which the PPSA applies. It is convenient to deal with that issue next.
The floating charge is no longer required to take security over circulating assets
341 As I have observed earlier, the attachment rule renders the concept of crystallisation redundant. The effect of the regime established by the PPSA goes further and renders the floating charge redundant as a mechanism for taking security over circulating assets.
342 Sections 31 and 32 of the PPSA make it unnecessary to use the mechanism of a floating charge in order to permit a grantor to give a creditor security over its collateral and to utilise the collateral in the ordinary course of its business. The effect of the s 32(1) provisions is to authorise a grantor to deal with collateral in the ordinary course of business and convert it into proceeds and for the security interest to attach to the proceeds without employing a floating charge. As Sifris J observed in Warehouse Sales Pty Ltd (in liq) & Lewis and Templeton v LG Electronics Australia Pty Ltd, the authorisation contained in s 32(1) is equivalent to the concept of the floating charge.
343 I do not accept Hamersley's submissions that the references to floating charges in various provisions of the PPSA are indicative of a statutory intention that floating charges are to be of continued relevance in taking security over personal property. That is reading too much into those references which are necessary because of the widespread use of floating charges as a method of taking security over personal property prior to the PPSA. As s 338 of the PPSA states, the rules governing the references are expected to have less relevance over time because the scheme provides an alternative to reliance on fixed and floating charges for security interest transactions.
344 Hamersley submits that the attachment rule in s 19 only applies for the purposes of determining priority disputes regulated by the PPSA and that it has no wider significance, that is, it does not operate to determine disputes between the holder of a 'security interest' regulated by the PPSA and rights that exist independently of the PPSA - in this case set-off rights.
345 I do not accept that the consequences flowing from the application of the attachment rule are so limited. The proprietary interest in collateral conferred upon a secured party by operation of the attachment rule is a statutory interest which, in the absence of an express legislative provision to the contrary, is recognised at law for all purposes. There is no textual or contextual reason for confining recognition of the statutory interest to disputes about matters covered by the PPSA.
346 Hamersley's submission that the consequences flowing from the application of the attachment rule are confined to disputes between interests regulated by the PPSA gives rise to the prospect that the nature and character of a secured party's interest in personal property will vary according to the circumstances in which the interest is being considered. On Hamersley's argument, an attached security interest may be regarded as having one character for the purposes of determining a contest between interests covered by the PPSA but another character for the purposes of determining a contest between the security interest and an interest not covered by the PPSA. Such an approach would be inimical to the statutory purpose of simplifying the regime relating to securities in personal property. It cannot have been Parliament's intention to create two sets of principles for determining a secured party's rights in personal property depending upon the context in which those rights had to be determined.
347 The starting point is the decision of the Supreme Court of Canada in The Royal Bank of Canada v Sparrow Electric Corp.[169] The decision is authority for three propositions.
348 First, a security interest created under the Personal Properties Securities Act 1988 (Alberta) (PPSA (Alb)) over after-acquired property is a fixed security over future property that is to be characterised as a fixed and specific charge, pursuant to which the secured party acquires a proprietary interest, subject to a licence to sell inventory.
349 Second, and implicit in the first proposition, the acquisition of a proprietary interest by the secured party is not contingent upon the occurrence of a crystallising event.
350 Third, the PPSA (Alb) security interest retains its character as a fixed and specific charge for the purposes of determining conflicts with interests not covered by the PPSA (Alb).
351 Sparrow involved a priority dispute between a security interest created by a general security agreement governed by the PPSA (Alb) and a statutory deemed trust created by income tax legislation. The general security agreement covered all the debtor's present and afteracquired property and permitted the debtor, until default, in the ordinary course of its business to lease or sell inventory but obliged it to pay all taxes. The debtor defaulted and the Bank appointed a receiver who proceeded to sell the debtor's assets including inventory. In breach of its obligation to do so, the debtor had not remitted payroll tax deductions and the Crown claimed that the unremitted payroll tax deductions were the subject of a statutory deemed trust which had priority over the Bank's security interest. The Crown argued that the Bank's security interest in circulating assets was a floating security interest and, as such, until crystallisation, was subordinate to the Crown's deemed statutory trust. In the alternative, the Crown argued that the general security agreement gave the debtor an implied licence until default to deal with inventory and proceeds in the ordinary course of business which included payment of taxes and, therefore, the Bank's security interest was subordinated to the Crown.
352 Both the majority and the minority held that the security interest created by the general security agreement governed by the PPSA (Alb) must be characterised as a fixed and specific charge subject to a licence to sell the inventory.[170] The majority agreed with the reasons given by Gonthier J on behalf of the minority as to the nature of the security interest.
353 In the course of his judgment, Gonthier J made a number of observations about the nature and extent of the changes to personal property securities law introduced by the PPSA (Alb).
354 In rejecting the Crown's submission that the Bank's security interest was in the nature of a floating charge, Gonthier J said:[171]
For the reasons which follow, I cannot accept this submission. In my view, the general security agreement in this case, which was subject to the Alberta personal property security legislation, must be characterised as a fixed and specific charge subject to a licence to sell the inventory.
It is of course true that the PPSA does not govern the priority competition between a statutory trust and a security interest. Subsection 4(a) explicitly removes statutory trusts such as the one created by s 227 ITA from the province of the Alberta PPSA.
...
However, this does not mean that the PPSA does not affect the characterisation of a charge executed in a jurisdiction which is subject to such an Act. To the contrary, the effect of personal property security legislation has been said to have 'fundamentally changed the characterisation of security interests': Wood and Wyllie, 'Non-Consensual Security Interests in Personal Property'... In particular, while pre-PPSA, a security agreement purporting to create a floating charge could be said to remain unattached to the collateral until crystallisation, s 12(1) of the Alberta PPSA manifestly alters this situation.
...
Generally speaking, therefore, absent an express intention to the contrary, a security interest in all present and after-acquired personal property will attach when that agreement is executed by the parties. Once attachment has occurred, in my view, the GSA then becomes in law a fixed and specific charge over the collateral.
I find support in this conclusion as to the effect of personal property security legislation upon security interests from the fact that the academic literature is unanimous on this point.
...
... the GSA held by the respondent bank must certainly be characterised as a fixed and specific charge. It attached at the time the agreement was executed, February 25, 1992. More specifically, however, because of the permission granted by the bank which allowed Sparrow to sell the encumbered inventory, the GSA is in the nature of a fixed charge with a licence to deal with the inventory.
355 Gonthier J commented on the concept of a fixed and specific charge over inventory:[172]
It would seem appropriate at this point, before leaving the present discussion, to comment briefly upon this novel and perhaps abstract notion of possessing a fixed charge over all of the present and future inventory of a debtor. To begin with, I note the traditional definitions of the fixed charge ... emphasise the ability to 'settle and fasten' upon ascertainable and defined property as being an integral attribute to this particular form of charge. This type of attachment to tangible and ascertainable property, of course, is impossible to achieve in the case of an assignment of inventory, where that collateral is changing constantly. In short, the traditional concept of the fixed charge seems to be at odds with the notion of having a proprietary right over collateral such as after-acquired inventory which, by definition, is not yet in existence at the time the security agreement is executed.
In my view, however, a fixed charge over all present and future inventory represents a proprietary interest over a dynamic collective of present and future assets. To this extent, as stated above, this form of security interest challenges our traditional conception of a fixed charge; to the same extent, in my opinion, our conception of this form of charge must change to meet the modern realities of commercial law, and in particular the legislative provisions which have been brought to bear in this appeal.
In effect, the fixed and specific charge gives to the secured creditor the title (subject, of course, to the debtor's equitable right of redemption) to the present inventory of the debtor, as well as the after-acquired inventory of the debtor. In this way, the secured creditor becomes the legal owner of inventory as it comes into possession of the debtor. I note that the Alberta PPSA contains a specific provision securing a creditor's proprietary right to after-acquired property in this way:
13(1) Except as provided in subsection (2), where a security agreement provides for a security interest in after-acquired property, the security interest attaches in accordance with section 12, without the need for specific appropriation. (italics added - underlining in the original)
356 The reasoning in Sparrow was followed in Bank of Montréal v Innovation Credit Union.[173] The court held that an unperfected security interest in farm equipment created by a general security agreement regulated by the Saskatchewan Personal Property Securities Act 1988 (PPSA (Sask)) was a legal interest, created by statute and recognised at law, that conferred a proprietary interest on the secured party giving it priority over a second-in-time non-PPSA (Sask) interest held by the Bank. The Bank's interest was governed by the Bank Act 1991 SC, a federal statute.
357 The Bank argued that no proprietary interest was conveyed to Innovation Credit under its PPSA (Sask) security agreement and that consequently the Bank acquired an unencumbered interest in the debtor's property. The court rejected this argument holding that Innovation Credit had acquired a statutory interest in the collateral correlative to a proprietary right at common law and the Bank took its security interest subject to it.
358 Charron J delivered judgment for the court and made the following observations on the nature of a PPSA (Sask) security interest under the Saskatchewan legislation:[174]
The PPSA does not contain any provisions which identify the nature of a PPSA security interest in proprietary terms. This is because, as discussed above, for those interests to which the PPSA applies, the PPSA resolves priority disputes through a detailed set of priority rules rather than on the basis of title or the form of a transaction. However, because the PPSA's internal provisions do not apply to Bank Act security, and because the security regime contained in the Bank Act is property-based, it is necessary for the purposes of deciding the priority dispute in this case to characterise the PPSA security interest as a matter of property law: see Cuming and Wood at p 274
Two characteristics of the PPSA are relevant for the present case. First, it is clear that [the] PPSA security interest, just as the Bank Act security interest, is a statutorily created interest and, as such, an interest recognised at law. While some of the historical forms of security created equitable rather than legal interests, the effect of the PPSA's functional approach, which covers all of these antecedent security interests, is to treat them all equally as 'security interests' under the PPSA. This conclusion is also the consensus found in the academic commentary, and I see no reason to depart from it: Cuming and Wood, at p 275; Poireir, at p 360.
Second, it is clear that having a PPSA security interest in collateral does not give a creditor full right and title to the collateral. Rather, a PPSA security interest gives the secured creditor an interest in the property to the extent of the debtor's obligation. Upon the debtor's default, the secured creditor has no interest in the collateral beyond the satisfaction of the debtor's obligation as well as reasonable costs of seizing and disposing of the collateral to satisfy the obligation: ss 59 and 60.
359 Charron J rejected the Bank's submission that no proprietary interest was conveyed to Innovation Credit under its prior security agreement because the submission would effectively characterise the PPSA (Sask) interest as analogous to a type of floating charge, a characterisation rejected in Sparrow.[175]
360 Commenting on Innovation Credit Professor John G H Stumbles has observed:[176]
In Canada, it appears that the personal property security legislation does not operate in its own virtual world. A security interest subject to that legislation is not a chameleon having one set of characteristics solely for the purposes of the personal property security legislation and another set of characteristics for the purposes outside the statute. Rather, the legislation has also wrought changes which are to be recognised generally, so that for the purposes of determining whether a person has a proprietary security interest in an asset, a security interest, once it becomes subject to the Canadian personal property security legislation, is to be characterised for all purposes as a legal (statutory) fixed charge. (emphasis supplied)
361 Royal Bank of Canada v Radius Credit Union Ltd was heard at the same time as Innovation Credit and judgment was delivered on the same day with Charron J once again delivering the judgment of the court that comprised the same coram. Her Honour referred to the cases as 'companion' cases, which both involved contests between a security interest regulated by the PPSA (Sask) and a security interest regulated by the Bank Act 1991 SC. The facts were relevantly the same save that in Radius the collateral was acquired after both security agreements had been made. Charron J referred to the fact that s 10 of the PPSA (Sask) provided that a security interest was enforceable against third parties upon the signing of a security agreement (provided it contained a proper description of the collateral), as meaning that at the moment of execution of the agreement some statutory interest is acquired by the creditor. Her Honour went on to deal with the nature of that interest as follows:[177]
The fact that s 10 of the PPSA 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) must mean that, at the moment of execution, some statutory interest is acquired by the creditor. Otherwise, there would be nothing to enforce. As for the nature of this interest, I return to this Court's holding in Sparrow Electric that all security interests under the Alberta PPSA were akin to a fixed charge and as such, correlative to 'a proprietary interest over a dynamic collective of present and future assets'...
362 In i Trade Finance Inc v Bank of Montréal,[178] the Supreme Court applied the reasoning developed in its earlier decisions on the personal property securities legislation of Alberta and Saskatchewan to the Ontario Personal Property Securities Act 1990 (PPSA (Ont)). The court held that the characterisation of a PPSA (Ont) security interest as a statutory security interest recognised by law was relevant to the determination of a priority dispute between a PPSA (Ont) security interest, created by a pledge of shares purchased with funds acquired fraudulently from i Trade, and i Trade's competing purely equitable interest that arose from a declaratory judgment in its favour. The court concluded that assets acquired with the fraudulently obtained funds were held on constructive trust for i Trade's benefit.
363 Credit Suisse Canada v 1133 Yonge Street Holdings Ltd,[179] a decision of the Ontario Court of Appeal, is a case upon which both parties placed some reliance. It is significant for two reasons. First, the court confirmed that crystallisation was an irrelevant concept in the context of security interests governed by the PPSA (Ont). Second, the court acknowledged that s 9(1) of the PPSA (Ont) preserves the principle of freedom of contract between the parties to a securities transaction. Section 9(1) of the PPSA (Ont) reads:
9(1) Except as otherwise provided by this or any other Act, a security agreement is effective according to its terms between the parties to it and against third parties.
364 As can be seen, s 9(1) of the PPSA (Ont) is in very similar terms to s 18(1) of the PPSA.
365 The security interest under consideration took the form of an 'Assignment of Leases and Rents'. By cl 2 of the Assignment the debtor/grantor had granted a security interest in collateral by way of an effective, present assignment of the present and future rents of a commercial building (the 1133 accounts). Clause 7 of the Assignment provided that until notified in writing the grantor was entitled to retain all the 1133 accounts. The grantor defaulted and the creditor served notice of its intention to enforce its security. At the time the notice was served $550,000 was deposited in the grantor's bank accounts which could be traced from the proceeds of the 1133 accounts. The grantor argued that the agreement should be construed as a floating charge that did not crystallise until notice of default was served. The trial judge rejected the argument that the assignment constituted a floating charge and held that the concept of crystallisation was irrelevant under the PPSA (Ont) regime, emphasising that the PPSA (Ont) should not be interpreted by reference to old forms of security and related concepts,[180] and went on to hold that the provision entitling the grantor to the 1133 accounts and their proceeds prior to default was not sufficient to establish a contrary intention that attachment should take place at a later time.
366 In the Court of Appeal, Blair J, with whose reasons McKinley and Weiller JJA agreed, upheld the trial judge's conclusion that the concept of crystallisation was irrelevant under the PPSA (Ont) and held that although the lender's security interest had attached, the effect of cl 7 was to discharge and release the security in the 1133 account proceeds paid over prior to default.[181] In reaching this conclusion Blair J made the observation about s 9(1) of the PPSA to which I have referred and went on to observe:[182]
The real question in these proceedings, however, is whether the Assignment by its terms enables the Lender retrospectively to reach the net rental proceeds paid to Holdings during the loan period but prior to default. For the reasons I have indicated, I do not think it does. While the security interest 'attaches', within the meaning of the PPSA, its 'effect' is to permit the Borrower to deal with the net rents for its own account until default occurs and it is 'notified to the contrary in writing'. In short, the security interest of the Lender, in so far as it attaches to the net rental proceeds, is released or discharged with respect to such proceeds once they are paid out to the Borrower in accordance with the terms of the agreement. Consequently, to the extent that the net rentals are discharged upon payment to the Borrower, the issue of whether attachment and perfection of the security causes the security to extend to the proceeds of the collateral - which is what s 25(1) is about - is not engaged, and the matter of identifiably tracing the proceeds does not arise.
Counsel for the respondent submitted that to interpret the Assignment in this fashion would be tantamount to re-introducing the concepts of the floating charge and crystallisation to PPSA matters, contrary to what has recently been clarified in cases such as Royal Bank of Canada v Sparrow Electric Corp ... and Canadian Imperial Bank of Commerce v Otto Timm Enterprises ... I do not agree. It can be equally as misleading and confusing to suggest that a given security structure created by the parties should not be recognised because to do so would re-invoke the concepts of old forms of security. Such an argument - a sort of in terrorem response - runs the risk of precluding the legitimate creativity of parties to tailor their agreements to meet their particular circumstances ... It is not the purpose of the PPSA to render security transactions inflexible or, indeed, to prevent the parties from agreeing to security structures which may well accomplish the same kind of protection that older forms of security - such as floating charges - seek to provide. The purpose of the PPSA is to establish and clarify priorities and notions of attachment and perfection which relate to the registration and operation of security instruments. What academics have suggested, and the courts have confirmed, is that attempts to interpret the PPSA and the regime it establishes in terms of the old forms of security are not helpful, and that those old forms and their concepts do not govern how the PPSA regime should unfold. Professor McLaren captures the tension between these two concepts in the following passage of his text, Secured Transactions in Personal Property in Canada, 2nd ed, (Carswell) at pp 2-37 and 2-38:
There is no historical need or justification for carrying the concept (ie the floating charge concept) forward into the Act. The Act has created a flexible single security interest which can meet the needs of the business community as they arise. It should not be burdened with a concept designed to serve the needs of the financial community of the nineteenth century. [Emphasis added.]
In each case, it is a matter of examining the terms of the security interest in question to determine what precisely are its terms as between the parties, because s 9(1) of the PPSA makes it clear that the security instrument is only effective in accordance with those terms. There is nothing which prevents commercial parties from negotiating terms which may, in practical terms, have similar commercial consequences to those encompassed in older forms of security. Such flexibility is required.
367 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.
368 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
369 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.
370 There are differences between the legislation enacted in each of the jurisdictions.
371 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]
372 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'.
373 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'.
374 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.
375 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
376 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
377 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.
378 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.
379 Second, the concept of crystallisation is no longer relevant.
380 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.
381 Fourth, parties can make security agreements that operate in a manner that achieves a similar commercial outcome as that achieved by a floating charge.
382 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.
383 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.
384 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.
385 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.
386 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]
(iii) a PPSI is statutory and hence legal in nature.
387 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)
388 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:
389 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.
390 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)
391 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)
392 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] FCA 33; (1999) 30 ACSR 204 at 209.
393 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
394 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
395 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.
396 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.
397 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
398 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.
399 First, Forge's claims are not Revolving Assets, relevantly in the context of the definition in the General Security Agreement, money.
400 Second, the General Security Agreement is effective in accordance with its terms.[197]
401 Third, cl 3.1(2)(b) provides that the Security Interest is a charge over all Collateral other than Revolving Assets.
402 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.
403 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.
404 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
405 As appears from the reasons I have given, I consider that the answer to the first preliminary question is 'yes'.
406 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.
407 The answer to the second preliminary question is 'no'.
[1] Although there are minor variations in the clause numbers, the relevant clauses in the Cape Lambert Contract contain identical terms.
[2] Amended statement of claim [33] [54].
[3] Amended statement of claim [12] [14] and [37] [39].
[9] Amended statement of claim [29] and [51].
[10] Amended statement of claim [30] and [52].
[11] Amended statement of claim [37].
[12] Amended statement of claim [32] and [54].
[13] Amended statement of claim [32] and [54].
[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)].
[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)].
[17] Reply and defence to counterclaim [2(a)].
[18] Reply and defence to counterclaim [2(b)].
[19] Reply and defence to counterclaim [2(b)].
[20] Reply to defence to counterclaim [2(a)].
[21] Amended defence and counterclaim [56] - [58].
[22] Reply and defence to counterclaim [3(h)].
[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)].
[25] Reply and defence to counterclaim [3(b)], [3(c)].
[26] Reply to defence to counterclaim [3(a)].
[27] Reply and defence to counterclaim [3(d)], [3(e)], [3(f)(i)].
[28] Reply and defence to counterclaim [3(f)(iii)].
[29] Reply to defence to counterclaim [3(c)], [3(d)].
[30] Reply to defence to counterclaim [3(b)].
[31] Reply to defence and counterclaim [3(e)].
[32] Reply to defence to counterclaim [3(f)].
[33] Reply to defence to counterclaim [3(f)(ii)].
[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)].
[40] Amended defence and counterclaim [59(b)].
[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.
[44] A Duggan and D Brown, Australian Personal Property Securities Law (2nd ed, 2016) [1.41]
[45] Australian Personal Property Securities Law [1.50].
[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).
[48] Warehouse Sales Pty Ltd & Lewis and Templeton v LG Electronics Australia Pty Ltd [2014] VSC 644; (2014) 291 FLR 407 [27] - [32].
[49] Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liq) (receivers and managers appointed) [2017] NSWCA 8 [83].
[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.
[51] Commonwealth, Parliamentary Debates, House of Representatives, 24 June 2009, 6960 (Mr R McClelland, Attorney-General).
[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).
[53] Re Maiden Civil (P&E) Pty Ltd; Albarran v Queensland Excavation Services Pty Ltd [2013] NSWSC 852; (2013) 277 FLR 337 [32].
[54] Future Revelation Ltd v Medica Radiology & Nuclear Medicine Pty Ltd [2013] NSWSC 1741; (2013) 283 FLR 122 [5] - [6].
[55] Re Arcabi Pty Ltd (receivers and managers appointed) (in liq); Ex parte Theobald & Herbert [2014] WASC 310; (2014) 288 FLR 236 [14].
[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.
[66] IATA v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151.
[67] Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104.
[68] Amended defence and counterclaim [23(b)(ii)], [45(b)(iii)].
[69] GM & AM Pearce and Co Pty Ltd v RGM Australia Pty Ltd [1998] 4 VR 888; (1997) 143 FLR 1, 8 - 9.
[70] On this date amendments to the Corporations Law enacted by the Corporate Law Reform Act 1992 (Cth) came into effect.
[71] GM & AM Pearce and Co Pty Ltd v RGM Australia Pty Ltd 13 - 14.
[72] Day & Dent Constructions Pty Ltd (in liq) v North Australian Properties Pty Ltd (provisional liquidator appointed) [1981] FCA 12; (1981) 54 FLR 277 (Forster, MacGregor and Sheppard JJ).
[73] S Derham, Derham on the Law of SetOff (4th ed, 2010) [6.26].
[74] Derham on the Law of Set-Off [6.31].
[75] Popular Homes Ltd v Circuit Developments Ltd [1979] 2 NZLR 642.
[76] Re Trivan Pty Ltd [1996] NSWSC 534; (1996) 134 FLR 368.
[77] Westmex Operations Pty Ltd v Westmex Ltd (1992) 8 ACSR 146.
[78] Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439.
[79] National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785.
[83] Re Paddington Town Hall Centre Ltd (in liq) (1979) 41 FLR 239.
[84] Paganini v The Official Assignee (Unreported, NZCA, 22 March 1999).
[88] Day & Dent Constructions Pty Ltd (in liq) v North Australian Properties Pty Ltd (provisional liquidator appointed) [1982] HCA 20; (1982) 150 CLR 85.
[89] McIntyre v Perkes [1990] FCA 100; (1990) 22 FCR 260 (Pincus, Gummow and von Doussa JJ).
[90] Re Gye & Perkes; Ex parte McIntyre (1989) 89 ALR 460, 472.
[91] Ex parte Stephens [1805] EngR 113; (1805) 11 Ves Jun 24; 32 ER 996.
[92] Re Bank of Credit and Commerce International SA (No 8) [1996] Ch 245.
[93] Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609 (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ).
[96] Westmex Operations Pty Ltd (in liq) & Ors v Westmex Ltd (in liq) (1994) 12 ACLC 106.
[97] Re Bank of Credit and Commerce (No 8) (SA) 255.
[98] Re Bank of Credit and Commerce (No 8) (SA) 265.
[99] Re Bank of Credit and Commerce (No 8) (SA) 269.
[100] Re Bank of Credit and Commerce (No 8) (SA) 272.
[101] See Derham on the Law of Set-off [12.35] - [12.39]; see also the observations of Gummow and Von Doussa JJ as to fraud in Re Gye v Perkes; Ex parte McIntyre to which I have referred above.
[102] British Eagle International Air Lines Ltd v Compagnie Nationale Air France (1975) 1 WLR 758; [1975] 2 All ER 390.
[110] Horne v Chester and Fein Property Developments Pty Ltd [1987] VicRp 75; [1987] VR 913, 919.
[113] Re Trivan Pty Ltd [1996] NSWSC 534; (1996) 134 FLR 368.
[114] Ansett Australia Ltd (subject to a deed of company arrangement) v Travel Software Solutions Pty Ltd [2007] VSC 326; (2007) 214 FLR 203.
[116] Hargrave J's judgment was delivered after the Court of Appeal decision and before the High Court decision.
[117] Paganini v The Official Assignee [70].
[118] Piccone v Suncorp Metway Insurance Ltd [2005] FCAFC 260; (2005) 148 FCR 437 (Dowsett, Jacobson and Greenwood JJ).
[119] S McCracken, The Banker's Remedy of Set-off (3rd ed, 2010) 224.
[120] The Banker's Remedy of Set-off 285.
[121] The Banker's Remedy of Set-off 286.
[125] National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd 809 (Lord Simon of Glaisdale).
[126] As to which, see the observations of Finkelstein J in Lindholm, Re Opes Prime Stockbroking Ltd (administrators appointed) (receivers and managers appointed) [2008] FCA 1425; (2008) 68 ACSR 88 [8] - [9].
[127] The Banker's Remedy of Set-off 290. This is also the view expressed in L Gullifer (ed), Goode on Legal Problems of Credit and Security (5th ed, 2013) [7.90].
[128] Replacement Explanatory Memorandum, Personal Property Security Bill 2009 (Cth).
[129] Greenview (Municipal District No 16) v Bank of Nova Scotia [2013] ABCA 302 (Conrad, Watson and McDonald JJ) (Alberta Court of Appeal) [4] - [5], [45] - [46].
[130] Strategic Finance Ltd (in liq) v Bridgman [2013] NZCA 357; [2013] 3 NZLR 650 [54].
[131] Macquarie Concise Dictionary (5th ed).
[132] Macquarie Concise Dictionary (5th ed).
[134] Re Amerind Pty Ltd (receivers and managers appointed) (in liq) [2017] VSC 127 [380].
[135] Strategic Finance [47] - [85].
[136] Strategic Finance [54] - [64].
[137] Greenview (Municipal District No 16) v Bank of Nova Scotia [45], [50] - [51].
[138] Amended defence and counterclaim [11(a)(iv)(E)], [36(b)(v)(C)].
[139] Amended defence and counterclaim [23(b)], [45(b)].
[140] Amended defence and counterclaim [23(b)], [45(b)].
[141] See [23(b)] and [45(b)] of the amended defence and counterclaim.
[142] N Seddon, R Bigwood and M Ellinghaus, Cheshire and Fifoot Law of Contracts (10th Aust ed, 2012) [26.6 fn 78] citing GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50; (2003) 201 ALR 55 at 656 - 657 (Finn J).
[143] Derham on the Law of Set-off [11.01].
[144] Derham on the Law of Set-Off [11.13].
[145] Hiley v Peoples Prudential Assurance Co Ltd (in liq) [1938] HCA 40; (1938) 60 CLR 468.
[146] Jones v Mossop [1844] EngR 803; (1844) 67 ER 506, 509; [1844] EngR 803; 3 Hare 568, 574.
[147] Beconwood Securities Pty Ltd v Australia & New Zealand Banking Group Ltd [2008] FCA 594; (2008) 66 ACSR 116 [38] (Finkelstein J).
[148] Re Spectrum Plus Ltd (in liq) [2005] UKHL 41; [2005] 2 AC 680 [138] (Lord Walker).
[149] Goode on Legal Problems of Credit and Security [4.01].
[150] Re Spectrum Plus Ltd (in liq)[111].
[151] Smith v Bridgend County Borough Council [2001] UKHL 58; [2002] 1 AC 336, 357 [61] (Lord Scott of Foscote).
[152] see Goode on Legal Problems of Credit and Security [4.06]; Wily v St George Partnership Banking Ltd [1999] FCA 33; (1999) 84 FCR 423.
[153] Goode on Legal Problems of Credit and Security [4.05].
[154] Goode on Legal Problems of Credit and Security [2.02].
[155] Goode on Legal Problems of Credit and Security [4.32].
[156] W Gough, Company Charges (2nd ed, 1996) 100.
[157] Derham on the Law of Set-off [11.49].
[158] R v Federal Business Development Bank [1988)] 1 WWR 1; 43 DLR (4th) 188, 221 (McLachlin J).
[159] Goode on Legal Problems of Credit and Security [1.20].
[160] C Wappett, B Whittaker and S Edwards (eds), Lexis Nexis, Personal Property Securities in Australia (at 29 March 2017) [2.1050], [2.1100].
[161] J Heydon, M Leeming and P Turner, Meagher, Gummow & Lehane's Equity: Doctrines and Remedies (5th ed, 2015) [4-010].
[162] S Worthington, Proprietary Interests in Commercial Transactions (1996) 3.
[163] See also their Honours' observations in Wily v St George Partnership Banking Ltd 426 (Sackville J ), 432 (Finkelstein J).
[164] Goode on Legal Problems of Credit and Security 13 [1-18].
[165] Attorney-General (NSW) v Brewery Employes Union of New South Wales [1908] HCA 94; (1908) 6 CLR 469 [531] (O'Connor J); Barker v The Queen [1983] HCA 18; (1983) 153 CLR 338, 341 (Mason J), 356 (Brennan and Deane JJ).
[166] Royal Bank of Canada v Radius Credit Union Ltd [2010] 3 SCR 38 [31].
[167] Replacement Explanatory memorandum, Personal Property Security Act 2009 (Cth) 11.
[169] The Royal Bank of Canada v Sparrow Electric Corp [1997] 1 SCR 411.
[170] Majority (Sopinka, McLachlin, Iacobucci and Major JJ); Minority (La Forest, Gonthier and Cory JJ).
[173] Bank of Montréal v Innovation Credit Union [2010] 3 SCR 3; 2010 SCC 47 (McLachlin CJ, Binnie, LeBel, Deschamps, Fish, Abella, Rothstein and Cromwell JJA).
[174] Innovation Credit [41] - [43].
[175] Innovation Credit [45] - [47].
[176] J Stumbles 'The PPSA: The extended Reach of the Definition of the PPSA Security Interest' [2011] UNSWLawJl 21; (2011) 34(2) UNSWLJ 448, 454.
[178] i Trade Finance Inc v Bank of Montréal [2011] 2 SCR 360; 2011 SCC 26.
[179] Credit Suisse Canada v 1133 Yonge Street Holdings Ltd (1998) 41 OR (3d) 632.
[183] Commissioner of Inland Revenue v Stiassny [2012] NZCA 93; (2013) 1 NZLR 140.
[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.
[186] Caisse Populaire Desjardins de l'Est de Drummond v Canada [2009] 2 SCR 94; 2009 SCC 29.
[187] S McCracken 'The Personal Property Security: Identifying Some Essential Attributes' (2014) 30 Law in Context 146, 150.
[188] 'The Personal Property Security: Identifying Some Essential Attributes' 153.
[189] S McCracken, J Bird, J Stumbles and G Tolhurst, Everett and McCracken's Banking and Financial Institutions Law (8th ed, 2013) 511.
[190] Personal Property Securities in Australia [1.2200].
[191] Personal Property Securities in Australia [1.2450].
[192] Australian Personal Property Securities Law [1.36]; see also [4.44]-[4.54].
[193] E Tyler, D Young and C Croft, Fisher and Lightwood's Law of Mortgage (3rd Aust ed, 2014) [5.35].
[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.
(1987) 14 FCR 461
(2001) 205 CLR 603
(1999) 84 FCR 423
(1908) 6 CLR 469
(1983) 153 CLR 338
(1981) 34 ALR 595
(1990) 22 FCR 260
(1991) 171 CLR 609
(1982) 150 CLR 85
(2014) 291 FLR 407
(2008) 233 CLR 259
(2013) 277 FLR 337
(2013) 283 FLR 122
(2014) 288 FLR 236
(2014) 285 FLR 267
(2008) 234 CLR 151
(2015) 256 CLR 104
(1997) 143 FLR 1
(1981) 54 FLR 277
(1996) 134 FLR 368
(1993) 31 NSWLR 439
(1979) 41 FLR 239
(1989) 89 ALR 460
(2007) 214 FLR 203
(2005) 148 FCR 437
(2003) 201 ALR 55
(1938) 60 CLR 468