HAMERSLEY IRON PTY LTD -v- FORGE GROUP POWER PTY LTD (IN LIQUIDATION)... [2018] WASCA 163 | Case summary

HAMERSLEY IRON PTY LTD -v- FORGE GROUP POWER PTY LTD (IN LIQUIDATION)... [2018] WASCA 163 | Case summary | Zoe

[126]

This is an appeal against a decision of the primary judge,[1] concerning certain claims by the appellant (Hamersley Iron Pty Ltd (Hamersley)), against the respondent (Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) (Forge)). The dispute is essentially between Hamersley and Forge's receivers and managers (Receivers).
In broad terms, in 2012 Hamersley (as principal) engaged Forge (as builder) to carry out certain works in relation to the construction of power stations at West Angelas and Cape Lambert (collectively, Contracts). In or about 2013, Forge obtained funding from a bank, and granted to the bank certain security over its personal property. The bank registered the charge pursuant to the Personal Property Securities Act 2009 (Cth) (PPSA) on 2 July 2013. In 2014, the bank appointed Receivers to Forge, and Forge subsequently went into liquidation. Disputes arose involving claims by Hamersley against Forge, and claims by Forge against Hamersley.[2]
Hamersley alleged that its claims against Forge exceeded the claims Forge had against it, and that it was entitled to set-off its claims against Forge's claims, and prove for the balance in the liquidation of Forge.[3] Hamersley relied on contractual rights of deduction under the Contracts, equitable set-off, and/or alternatively, set-off in insolvency pursuant to s 553C of the Corporations Act 2001 (Cth).
Forge, by its Receivers, alleged that Hamersley has no entitlement to deduction or set-off. The Receivers contended, in effect, that once liquidation supervened, there was no right of set-off other than under s 553C of the Corporations Act, and s 553C had no application in the circumstances.
In broad terms, the Receivers contended, first, that mutuality under s 553C was determined by reference to equitable interests and secondly, that there was no mutuality because the equitable interest in Forge's claims against Hamersley subsisted in the bank, by virtue of the operation of the PPSA, as from 2 July 2013.
The Receivers accordingly contended that Hamersley was obliged to pay the Receivers the debts and other monies due to Forge, effectively for the benefit of the bank, and that Hamersley was left to prove in the liquidation of Forge for the whole of its claims, without the benefit of any set-off.[4]
The primary judge upheld Forge's contentions in a trial of preliminary issues, in which there was an agreed statement of facts. Hamersley challenges that decision. The decision is interlocutory and leave to appeal is required.[5]
For the reasons which follow, leave should be granted and the appeal should be upheld. In broad summary:
1. Section 553C of the Corporations Act applied and provided for Hamersley's claims to be set-off against Forge's claims, and for the balance to be admissible to proof against Forge. As at the commencement of the winding up of Forge in insolvency, the relevant dealings between Hamersley and Forge under the Contracts were mutual dealings for the purposes of s 553C. That is on the basis that, at that time, Forge retained the right to use amounts paid by Hamersley to Forge under the Contracts for Forge's own benefit. Section 553C operated to the exclusion of any contractual or equitable rights of set-off which Hamersley had prior to the commencement of the winding up of Forge.[6]
2. Alternatively, if s 553C did not apply because the amounts due by Hamersley to Forge under the Contracts were payable for the benefit of the bank rather than the benefit of Forge, then s 553C does not preclude Hamersley from asserting any available contractual or equitable rights of set-off in recovery proceedings brought for the benefit of the bank as secured party.[7]
3. The rights of the bank (as the transferee of an account) in relation to Forge's claims against Hamersley are subject to the terms of the Contracts and any equity, defence, remedy or claim arising in relation to the Contracts (including a defence by way of a right of set-off), pursuant to s 80(1)(a) of the PPSA.[8]

[162]

Forge's claims against Hamersley are legal choses in action.[52] Historically, legal choses in action were not directly assignable at law prior to the enactment of s 25(6) of the Judicature Act 1873 (UK) (Judicature Act).[53] Prior to then, legal choses in action were only assignable in or with the assistance of equity.[54]
An assignment in equity depends upon there being a sufficient expression of an immediate intention by the assignor to impart the assignor's interest in the property, or some lesser interest carved out of it, to the assignee.[55]
As between assignor and assignee, an equitable assignment of the chose in action (unlike a legal assignment at law)[56] is effective without notice being given to the debtor/obligor.[57]
However, from the assignee's point of view, the purpose of giving notice of the assignment to the debtor/obligor is, first, to bind the conscience of the debtor/obligor to require payment to the assignee - otherwise the assignee would be bound by any payments made by the debtor/obligor to the assignor[58] and secondly, to preserve its priority against other assignees of the chose in action.[59]
The assignee of a chose in action takes the chose (or the equitable interest in the chose),[60] subject to all the 'equities' that the debtor/obligor has against the assignor at the time of notice of the assignment, and subject also to all the infirmities and defects in the title of the assignor.[61] It is a paramount rule that the assignee takes subject to the infirmities of his or her assignor's title.[62]
The word 'equities' has a wide meaning in this context and it is not used in its technical sense.[63] It is a general expression calculated to comprehend defences which would have been available to the debtor/obligor in an action brought against the debtor/obligor by the assignor, as well as set-off and counterclaims.[64]
The assignee takes subject to any defence or set-off available to the debtor/obligor at the time when notice of the assignment is given, unless the right of set-off is excluded by agreement between the assignor and the debtor/obligor.[65]
Further, claims that flow out of, and are inseparably connected with, the obligation the benefit of which is assigned, and do not involve any fresh transaction entered into by the assignor after notice of the assignment, may also be set-off in equity against the assignee, at least insofar as they impeach the assignee's title.[66]
Successive equitable assigns of an interest in personal property are governed by the particular rule in Dearle v Hall.[67]
Future property, or an 'expectancy', is not property. It cannot, therefore, be assigned at law, and can only be assigned in equity for consideration.[68] Providing the consideration has been paid or executed, an equitable interest in the property vests in the assignee when the property is acquired by the assignor, and it is ascertained or identifiable.[69] If a company agrees to assign for executed consideration, future property and, before it acquires that property, is wound up, the subsequent acquisition of the property and its vesting in the assignee is not a 'disposition of property of the company' for the purposes of s 468(1) of the Corporations Act.[70]

[165]

Floating charges are founded in contract, and their legal effect derives from the agreement between the parties.[81]
The nature of the charge is not finally determined by what the parties call it. Accordingly, labels such as 'fixed' or 'specific' cannot be decisive if the rights created by the charge, properly construed, are inconsistent with that label.[82]
A creditor who accepts a floating charge over a company's assets allows the business of the company to be carried on and the assets of the company which are subject to the floating charge to be altered by the efforts of the company and its employees.[83] The distinguishing feature of a floating charge is that, given that the class of present and future assets that are charged are such as in the ordinary course of the company's business would be changing from time to time, the company is left at liberty, until one of the 'crystallising' events happens, to dispose freely, in the ordinary course of its business, of any property to which the charge attaches.[84] Until then, the chargor is left free to use the charged asset and to remove it from the security. The asset the subject of the floating charge is not finally 'appropriated' until then.[85] The property charged remains 'liquid' until then.[86]
Even if the charge purports to be a fixed charge over present and future book debts and contains restrictions on the chargor creating further charges over its debts or assigning or factoring them, if the chargor is left free to continue to collect the debts and use the proceeds without the consent of the chargee, the charge will ordinarily be construed as operating as a floating charge over uncollected debts as at the date of crystallisation.[87] On the other hand, if, for example, the charge provides for the company to collect the debts as agent for the chargee and pay them into an account which is 'blocked' from use by the chargor without the consent of the chargee, and the account is operated in that way, the arrangement is not consistent with a floating charge.[88]
The essence of crystallisation is that the charge becomes fixed upon certain specific property, and the chargor's right as against the chargee to dispose of the property comes to an end.[89]
The question of whether a floating chargee has a proprietary interest in the charged assets prior to crystallisation has been the subject of considerable debate.[90] One line of authority is to the effect that a floating chargee, even prior to crystallisation, has a proprietary or equitable interest in the property charged, coupled with an implied licence to deal with the assets free of the charge in order to carry on its business until the charge is crystallised.[91] Other authorities have described a floating charge as operating as an 'incomplete [equitable] assignment', which, upon crystallisation, becomes 'converted into a completed equitable assignment ... of the assets charged'.[92] Professor Worthington has observed that 'any theory describing the floating chargee's proprietary interest prior to crystallisation of the charge simply enables the rational resolution of a separate problem, the priority disputes between competing proprietary interest holders'.[93]
Whatever may be the true character of the floating chargee's interest prior to crystallisation, importantly for present purposes, any right of set-off (legal or equitable) accruing between the company and its debtor or creditor prior to crystallisation is not destroyed by the crystallisation, and may be asserted by or against the receiver as the case may be. That is so even if the claim the subject of the asserted set-off is only brought after crystallisation, and even if the party asserting the set-off had prior notice of the floating charge and its potential to effect, at some future time, an assignment to the chargee.[94] The parties in this case accepted that a fixed charge, on the other hand, would preclude the application of insolvency set-off under s 553C of the Corporations Act. After the charge becomes fixed, there is an absence of mutuality for the purposes of insolvency set-off.[95]
Equity may also, in effect, restrain the exercise of the right of legal set-off after crystallisation. Thus, equity may not permit a pre-crystallisation debt owed by a company (first debt) to be set-off against a post-crystallisation receivable of the company (second debt).[96] The better view is that that result does not follow because of an absence of mutuality on the basis that the second debt is beneficially owned by the secured creditor. Rather, in such a case, whilst there is, undoubtedly, a right to legal set-off, equity will intervene where the exercise of the legal right would be unconscientious.[97]

[167]

The PPSA contains provisions dealing with references to fixed and floating charges in Commonwealth laws and security agreements (such as the GSA in this case).[98] In particular, a reference in such instruments to a 'charge' over property is taken to be a reference to a security interest that has attached to a 'circulating asset' or to a security interest that has attached to personal property that is not a 'circulating asset'.[99] A reference to a 'fixed charge' in such an instrument is taken to be a reference to a security interest that has attached to personal property that is not a 'circulating asset'.[100] A reference to a 'floating charge' is taken to be a reference to a security interest attached to a 'circulating asset'.[101]
The PPSA recognises that such references in instruments are likely to have less relevance over time.[102] That is because the PPSA has its own rules for the enforcement of security agreements against grantors of security and third parties.[103] Thus, at least in general terms, there is no need to characterise the instrument as either a fixed or a floating charge for the purpose of determining priority disputes under the PPSA. The PPSA evidently seeks, amongst other things, to provide a 'rational resolution' to priority disputes whilst avoiding the entanglements of the theories under the general law as to the nature of a chargee's interest under a floating charge prior to crystallisation.[104]
Under the PPSA, circulating assets are defined to include specified types of current assets.[105] These include 'accounts' which, in general terms, include, relevantly, monetary obligations arising from the provision of services in the ordinary course of the business of providing services of that kind.[106] An exception to this, which in broad terms is consistent with the pre-PPSA law, is that an account is not a circulating asset if the secured party has 'control' of the account.[107] 'Control' for this purpose includes its ordinary meaning.[108] 'Control' also includes where the parties have agreed in writing that the amounts paid in discharge of the account must be deposited into a specified bank account controlled by the secured party.[109]
In the case of assets other than the specified current assets, a 'circulating asset' is one where the secured party has given the grantor of the charge express or implied authority for any transfer of the personal property to be made in the ordinary course of the grantor's business, free of the security interest.[110]
A circulating asset is an example of collateral within the exceptions to s 32(1) of the PPSA. In broad terms, the effect of s 32(1) of the PPSA is that (subject to the provisions of the PPSA) if collateral gives rise to proceeds, the security interest continues in the collateral itself in the hands of a transferee unless the secured party expressly or impliedly authorised the disposal of the collateral or agreed that the dealing would extinguish the security interest, and the security interest attaches to the proceeds unless the security agreement provides otherwise.
The Corporations Act has been amended, effectively in tandem with the PPSA, so that security interests, which have attached to 'circulating assets' under the PPSA where the grantor has title to the asset, are grouped together with floating charges, and called 'circulating security interests'. These amendments apply to various provisions in ch 5 of the Corporations Act (headed External Administration), including, amongst other things, the proof and ranking of claims in a winding up.[111] In other words, in ch 5 of the Corporations Act, a security interest that is a floating charge is treated in the same way as a security interest attached to a circulating asset under the PPSA where the grantor has title to the asset.

[193]

The above cases demonstrate that in deciding whether mutuality exists, equitable or beneficial interests must be considered, and that a difference in beneficial ownership may lead to a conclusion that mutuality is lacking. However, in our view, that is but an example of a situation in which mutuality may be lacking. The existence of a trust or other equitable interests is not made the criterion for operation of the provision. The critical issue in assessing mutuality is not the source of the relevant parties' rights (the common law, equity or statute) but the content of those rights. The critical question is that which was identified by Parke B in Forster v Wilson, subsequently cited in the later cases. The question is whether, at the commencement of the liquidation, the debt sought to be used as a set-off by the creditor of an insolvent party would have been recovered 'for his own benefit', or vice versa.
In this context, it should be observed that a secured debt may be the subject of (statutory) insolvency set-off. Insolvency set-off is not necessarily confined to unsecured debts.[135]
Focussing on whether the payments are received for the relevant person's own benefit explains why, under the general law, fixed charges generally destroyed mutuality while floating charges did not. Where, for example, the insolvent's receivables are subject to a floating charge, mutuality for the purposes of insolvency set-off subsists prior to crystallisation.[136] That is because, as a matter of substance, the chargor may collect the receivable and use the proceeds for its own benefit. It is not required to collect the receivable and apply the proceeds for the benefit of the chargee. On the other hand, once the charge becomes fixed, there is an absence of mutuality for the purposes of insolvency set-off.[137] That is because, in substance, the receivable is being recovered for the benefit of the chargee, and not the insolvent chargor. In that way, property which is subject to a floating charge may be used by the security grantor for its own benefit while property which is the subject of a fixed charge may not.
Therefore, the critical question when assessing mutuality is not the classification of a charge over receivables as fixed or floating, but whether the chargor has the right to use payments received for its own benefit.

[201]

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

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

[204]

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

...

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

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

[213]

In this case, cl 3.1(2)(b) applies rather than cl 3.2(a). Whilst Forge's claims are 'accounts', they are not Revolving Assets as defined.
The reference to 'charge' in the phrase 'a charge over all other Collateral' in the first part of cl 3.1(2)(b) is taken, by virtue of s 339(3) of the PPSA, to be a reference to a security interest that has attached to a circulating asset or to personal property that is not a circulating asset.[156]
The application of the second sentence in cl 3.1(2)(b) is provisional in nature - 'If for any reason it is necessary ...'. In this case, it is not 'necessary' within the meaning of cl 3.1(2)(b) to make the determination referred to therein. The reference to 'charge over all other Collateral' in the first part of cl 3.1(2)(b) operates comprehensively in accordance with s 339(3) of the PPSA. No further inquiry is necessary.
The only question is whether Forge's claims are a circulating asset within the meaning of s 339(3)(a) of the PPSA, or personal property that is not a circulating asset within the meaning of s 339(3)(b) of the PPSA. Forge's claims are circulating assets. They are accounts within the meaning of s 340(1)(a) and s 340(5)(a) of the PPSA to which, for reasons developed later, the exception in s 340(2) of the PPSA has no application. Accordingly, the bank's security interest in Forge's claims is taken to be a reference to a security interest that has attached to a circulating asset.
Alternatively, if it is 'necessary' to determine the nature of the charge under cl 3.1(2)(b), the result is materially the same for essentially two reasons. First, insofar as the words 'fixed charge' in the second sentence of cl 3.1(2)(b) must be taken to refer to a security interest attached to personal property that is not a circulating asset,[157] they cannot have any application to Forge's claims because Forge's claims are circulating assets. Secondly, even if the second sentence of cl 3.1(2)(b) could be read without reference to s 339 of the PPSA, and could be read as operating solely by reference to the position under the general law, the position is no different. Insofar as the second sentence of cl 3.1(2)(b) provides that assets other than Revolving Assets are intended to be the subject of a fixed charge under the general law, that provision must be construed in the context of the GSA as a whole.[158] If, when the GSA is read as a whole, the bank has no control of the proceeds of Forge's claims, then the GSA does not yield the intention that such assets are the subject of a fixed charge. [159] Clause 3.3 recognises this consequence and provides, in effect, that the occurrence of a Control Event renders the floating charge fixed.
Clause 3.3 provides:

[239]

Under s 18(1) of the PPSA, the GSA and the Terms Deed are effective according to their terms.
The following conclusions may be drawn from the operation of the financing documents in relation to Forge's claims against Hamersley:
1. Forge's claims are accounts.
2. There was no Control Event or Event of Default prior to the appointment of voluntary administrators to Forge.
3. At no material time had the bank required Forge to open and maintain a Controlled Account, or issued a notice under cl 4.5 of the GSA.
4. By cl 3.4 of the GSA, Forge is permitted by the bank to collect the proceeds of Forge's claims, subject to using the proceeds as permitted under, relevantly, the Terms Deed.
5. Also, the money representing the proceeds of Forge's claims which are paid into Forge's bank account, are a Revolving Asset with which Forge is permitted to deal under cl 4.2 of the GSA unless prohibited from doing so under, relevantly, the Terms Deed.
6. By cl 5.14(3) of the Terms Deed, Forge may use moneys received from Forge's claims to repay its Permitted Financial Indebtedness without prior reference to, or consent from, the bank. Forge's Permitted Financial Indebtedness includes debts owed to trade creditors on account of services provided to Forge in the ordinary course of Forge's ordinary business.
7. Accordingly, Forge's claims are accounts over which the bank has no control within the meaning of s 340(2) of the PPSA. With respect to Forge's claims, the bank 'has a security interest that has attached to ... a circulating asset'.[165] The fact of attachment does not affect the nature of the asset as a circulating asset, over which the bank has no control.
8. Alternatively, insofar as cl 3.1(2)(b) of the GSA invokes the operation of the general law, the absence of control means that the charge operates as a floating charge over Forge's claims.
It follows that, as at the commencement of the winding up, Forge's claims were, as a matter of substance, recoverable for the benefit of Forge rather than for the benefit of the bank. Any amounts paid by Hamersley to Forge under the Contracts could be used by Forge for its own benefit (by discharging its Permitted Financial Indebtedness) and was not available to the bank. Amounts payable by Forge to Hamersley under the Contracts could be used by Hamersley for its own benefit. Therefore, at that time, the dealings between Hamersley and Forge under the Contracts were mutual dealings within the meaning of s 553C of the Corporations Act, notwithstanding the bank's security interest.

[241]

There is, accordingly, mutuality for the purposes of s 553C of the Corporations Act.
The result is that s 553C of the Corporations Act is capable of operating concurrently with the PPSA. That conclusion is confirmed by the observation that in ch 5 of the Corporations Act, a security interest that is a floating charge is treated in the same way as a security interest attached to a circulating asset where the grantor has title to the asset.[166] The PPSA does not exclude or limit the operation of the general law or State or Commonwealth laws that are capable of operating concurrently with the PPSA.[167]
Nothing in the PPSA denies the operation of the provisions of the GSA which entitle Forge to use payments received from Hamersley under the Contracts for its own benefit. To the contrary, as noted at [130] above, s 18(1) of the PPSA provides that a security agreement such as the GSA is effective according to its terms. The provisions of the PPSA and the Corporations Act relating to security interests in circulating assets are noted above at [59] - [64]. In addition, s 32(1)(a)(i) of the PPSA (which itself operates subject to s 18) provides for Forge to have given good title to the funds disposed of with the bank's express or implied authority. Section 69 of the PPSA gives priority to persons receiving payment discharging Forge's Permitted Financial Indebtedness.
An important aspect of the primary judge's reasoning was his Honour's conclusion that the attachment of a security interest in collateral, as provided for by s 19 of the PPSA, confers on the secured party a proprietary interest in the collateral at the time of attachment. The primary judge also reached the related conclusion that the concept of crystallisation of a floating charge is rendered redundant by the PPSA.[168] For the purpose of disposing of this appeal it may be assumed, without deciding, that these conclusions were correct. The important point is that those conclusions do not answer the question of whether attachment of a security interest destroys mutuality. That is because the provisions of the PPSA to which we have referred accommodate a security agreement providing for a grantor to retain the right to use a circulating asset to which a security interest has attached for its own benefit. Any proprietary right in the circulating asset which a security holder gains once its security interest attaches to that collateral allows for that use. Therefore the rights which accrue to a secured party on attachment of its security interest to collateral are not necessarily inconsistent with the maintenance of mutuality between the grantor and its debtors.
Forge submits that the security interest created by the PPSA is akin to a fixed charge. Forge refers to a line of Canadian and New Zealand authority, in relation to similarly expressed legislation in those jurisdictions, in support of that proposition.[169] It is unnecessary to resolve this issue. Even if the PPSA creates a statutory propriety interest in collateral which is, as Forge submits, akin to a fixed charge, there is at least one significant difference between a security interest and a fixed charge. The PPSA accommodates payments received in discharge of a debt owed to the security grantor, which is collateral, being used for the benefit of the security grantor. A fixed charge under the general law does not. That difference means that, whatever the nature of a security interest under the PPSA, the attachment of the security interest to the debt owed to the security grantor does not necessarily destroy mutuality of the dealings between the security grantor and its debtors. The critical question in this case remains whether payments received can be used for the benefit of the security grantor.
For the reasons explained above, under the GSA read with the PPSA, at the relevant date Forge retained the right to use amounts paid by Hamersley to Forge under the Contracts for its own benefit (by discharging its Permitted Financial Indebtedness). Therefore, the primary judge erred in concluding that, for the purposes of s 553C, the dealings between Forge and Hamersley under the Contracts were not mutual.

[260]

Fourthly, and by analogy with respect to the statutory operation of the pari passu rule, in Australia, the weight of authority was that public policy did not necessarily prohibit effect being given to an agreement by which a creditor agreed to subordinate its debt behind the debts of other creditors: see United States Trust Co of New York v Australia and New Zealand Banking Group Ltd,[199] and the cases referred to therein.[200]
Fifthly, whilst the need for recourse to equitable set-off is diminished in insolvency, given the scope of the statutory set-off, the proposition that equitable set-off has potential vitality in appropriate circumstances, notwithstanding that one party may be insolvent, has received support in a number of cases. [201] The conventional starting point for considering equitable set-off in this context is the case of Ex parte Stephens.[202]
In Ex parte Stephens, Ms Stephens had instructed her bankers to sell certain annuities on her behalf, and to purchase others. The bankers sold the annuities for over £3,000 but did not purchase the new annuities, and fraudulently kept the proceeds themselves without telling Ms Stephens. Subsequently, Ms Stephens' brother, James, borrowed £1,000 from the bankers on the security of a joint and several promissory note given both by James and Ms Stephens. The bankers went into bankruptcy. The trustees in bankruptcy brought an action against James (but not Ms Stephens) at law on the promissory note for £1,000, and thereby sought to recover, for the benefit of the bankrupt estate, 100 pence in the pound in respect of that debt. James was unable to rely on bankruptcy set-off because he (unlike Ms Stephens) had no claim against the bankers for the £3,000 wrongfully retained by them (or any other claim). Nevertheless, James and Ms Stephens both brought proceedings in equity, seeking orders (1) that they be at liberty to set-off what was due on the promissory note, from the £3,000 debt due from the bankers to Ms Stephens, (2) that Ms Stephens may prove for the residue in the bankruptcy, (3) that the promissory note be delivered up, and (4) that the trustees in bankruptcy be restrained from suing either or both James and Ms Stephens upon the promissory note.[203] Lord Eldon LC granted orders to that effect, save that as to the first, the order was that Ms Stephens (alone) had the liberty to set-off.[204]
Lord Eldon said that if the trustees in bankruptcy could proceed against James, the result would be that 'they shall recover from him the sum, for which they have the joint note of him and his sister, and that she must come in as a creditor for the whole sum of her money, received by the bankers, instead of the balance, for which she would have been creditor, if the [trustees in bankruptcy] had sued her, or arranged the account upon the principle of mutual debt and credit'.[205]
As to that statement, it has been observed that, at that time, the concept that bankruptcy set-off operated automatically had not been fully recognised or developed.[206] If it had, one would have expected Ms Stephens to have had the benefit of bankruptcy set-off without first seeking an account or waiting to be sued by the trustees in bankruptcy.
In Ex parte Stephens his Lordship continued:

[264]

Lord Eldon's orders reflected the juristic basis of equitable set-off at the time. Prior to the Judicature Act, an equitable set-off was enforced by an injunction obtained in Chancery to restrain the plaintiff at law from proceeding with his action, without giving benefit to the defendant for the amount of his cross-demand.[210] Accordingly, Lord Eldon LC's judgment appears to be to the following effect:
1. Equitable set-off antedated both the statutes of set-off and the bankruptcy statutes.
2. Where there are mutual debts and credits for the purposes of the bankruptcy legislation, equity follows the law.
3. Bankruptcy set-off was not available to Ms Stephens (apparently on the basis that it was thought not to be self-executing).
4. Had the bankers not fraudulently concealed the fact that Ms Stephens was a creditor for £3,000 prior to the bankruptcy, she would have had an equity to restrain the bankers from suing on the promissory note at law, and would also have had the benefit of a set-off 'upon the statute of mutual debts and credits'.[211]
5. Ms Stephens had not lost her equity merely because the bankers had gone into bankruptcy.
6. Although in the suit in Chancery, James (in addition to Ms Stephens) claimed an equitable set-off, it was not a question of set-off in the 'strict and technical sense' in that the 'question upon the whole' was whether equity could be interposed in the action at law brought by the bankers against James.[212]
The orders in that case achieved indirectly what could not have been achieved directly under the application of the bankruptcy set-off provisions, so far as the trustee in bankruptcy was concerned. The trustee in bankruptcy, and the unsecured creditors of the bankers, were left in the position that they would have been in had James been entitled to invoke bankruptcy set-off. The decision is effectively grounded in equity's response to the unconscientious exercise of the bankers' legal rights by the bankers' trustee in bankruptcy, albeit that the fraud had been practised before the assignment of the bankers' estate to the trustee in bankruptcy.
Sixthly, it remains to consider the decision in BCCI No 8, referred to by Forge. In that case, a bank had lent money to a company, the principal debtor. The debt owed by the principal debtor to the bank (principal debt) was secured by a charge given by shareholders of the company, over funds the shareholders had deposited into a deposit account with the bank (shareholders/depositors). On the proper construction of the agreements, the bank could, at its option, have recourse to the money in the shareholders' deposit account, but it was not bound to have recourse to that fund in satisfaction of the principal debt. On the proper construction of the charge, the shareholders/depositors had not assumed any liability to pay the principal debt. The bank went into liquidation, and the liquidators sought to recover the principal debt from the company (ie, the principal debtor). A question arose as to whether the liquidators of the bank could recover the principal debt in full from the company, leaving the shareholders/depositors to prove in the liquidation of the bank for their deposit, or whether by virtue of set-off under the insolvency legislation, or otherwise, the liquidators could only recover the difference between the principal debt owed by the company, and the moneys in the deposit account. There were also other issues such as marshalling. The primary court had held that the liquidators of the bank could recover the principal debt in full. The Court of Appeal dismissed the appeal, and summarised its reasoning as follows:[213]

[265]

In our judgment the problem in the present case is susceptible of a simple solution. The [company was] indebted to the bank. Their controlling shareholders deposited moneys with the bank. If the case had stopped there, there could have been no question of set-off in the bank's insolvency. The bank could not have set off the debts which it owed to the depositors against the debts which their companies owed to the bank. The requirement of mutuality would have been absent. Even if all parties agreed that the bank should set off the amounts in question, it could not have done so after the bankruptcy. In the absence of the necessary mutuality, the set-off would have contravened the statutory scheme of distribution in insolvency. Once insolvency supervenes, rule 4.90 of the Insolvency Rules 1986 [the Insolvency Set-off rule] requires set-off in the situations in which it is applicable and public policy forbids it where it is not.

By the letters of lien/charge the depositors have agreed with the bank that it may apply the amounts standing to the credit of their deposit accounts in discharge or reduction of the indebtedness of the appellants. That is an express agreement that the bank may set off the debts due to the depositors against the debts due from the [company], and as such it is ineffective once the bank is in liquidation. But in any case the letters of lien/charge only authorise the bank to set off the debts due to the depositors against the debts due from the [company], they do not oblige the bank to do so; and they confer no rights of set-off on the depositors or the [company]. The [company] must, therefore, succeed under [the Insolvency Set-off rule] or not at all. Despite all the sophisticated arguments of counsel for the appellants, they have been unable to persuade us that the mandatory set-off under [the Insolvency set-off rule] is triggered by an agreement for set-off where the requirement of mutuality is absent, or that the fact that the agreements for set-off were comprised in charge-backs supplied the missing element of mutuality.

... We do not consider the conclusion to be unjust. It appears to be so only because the sureties are the controlling shareholders of the principal debtors and so have a common interest in dictating how the creditor should enforce its security. As we have stated earlier, however, it is not the function of insolvency set-off to prefer a creditor [the shareholders/depositors] who is not indebted to the insolvent estate [the bank], or whose liability is secondary only and capable of being discharged by the party primarily liable. There is no injustice in requiring a creditor [the shareholders/depositors] against whom no claim is made to prove for the debt which is due to him. (emphasis added)

[272]

Where a set-off would not 'subvert the fundamental principle of pari passu distribution of the insolvent company's assets', the rationale posited by Lord Hoffman tends to lose its force. Moreover, their Lordships were not addressing the question presently under consideration.
The foregoing considerations combine, in our view, to indicate that s 553C of the Corporations Act is not a code in the sense found by the primary judge. In an insolvency where the statutory set-off does not apply to the particular circumstances of the case, it will be necessary to consider whether the absence of a statutory set-off in those particular circumstances reflects an underlying Parliamentary intention to exclude any set-off otherwise applicable.
It seems to us that, at least in the circumstances of this case, where the chargee stands outside the administration of the insolvent company and relies on its security to collect, for its own benefit, the debt owed to the insolvent, there is nothing in s 553C or its purpose or policy which would relieve the chargee of any equities which would otherwise apply to the charged debt. The position would be different if the chargee of the debt surrendered it and proved in the insolvent administration for its own debt. In that event, the liquidator would recover the insolvent company's debt for the benefit of all the unsecured creditors including, in that circumstance, the (former) secured creditor.
The results produced by the alternative view, advanced by the Receivers and accepted by the primary judge, are ones which, it might be doubted, were within Parliament's contemplation objectively ascertained.[217] Those results are:
1. Unsecured creditors are prejudiced in that the whole of Hamersley's claims are thrown on the fund to be administered for the benefit of unsecured creditors, rather than (in effect) the asset over which the bank has elected to exercise its rights of security.
2. The fact of insolvency produces a windfall to the bank. That is because it is accepted that, had the winding-up not intervened, the bank, as chargee, would have taken subject to the equities, including any rights of set-off available to Hamersley against Forge.
3. An injustice of the character which insolvency set-off is itself designed to avoid (see [94] above) would be created, rather than alleviated.
If s 553C itself has no application to the present circumstances, it does not, in our view, operate so that the bank takes its interest in Forge's claims free of any rights of set-off which would otherwise be applicable under the general law and, or alternatively, the statutory 'equities' provided for in s 80(1) of the PPSA.[218]

[279]

Strategic was a case concerning a dispute over certain funds in the hands of a liquidator of an insolvent company. The insolvent company had been a property developer. The dispute was between the taxation commissioner and two companies (collectively, Strategic). Strategic was a secured creditor whose security agreement created a security interest in all the personal property of the property developer under the Personal Property Securities Act 1999 (NZ) (PPSA (NZ)).[225]
The taxation commissioner claimed that all the relevant funds were recoverable by the commissioner as a preferential payment in the winding up of the property developer. Strategic said that the funds were caught by its PPSA (NZ) securities, and that the moneys were recoverable by Strategic.[226]
The funds in dispute were essentially as follows:
1. The property developer had paid certain contributions to a local authority which were subsequently found to have been unlawfully levied. The local authority refunded those moneys after the property developer had gone into liquidation.[227]
2. The property developer had also paid certain bond moneys to the local authority which, in the events which occurred after liquidation, the local authority was required to return. Those moneys were also paid to the property developer after the date of its liquidation.[228]
3. After the property developer went into liquidation, the commissioner 'by mistake' paid it a GST refund to which it was not entitled.[229]
4. Certain moneys held by the solicitors for the property developer in their trust account as at the date of the winding up of the property developer.[230]
The court found that all the funds in dispute were after-acquired personal property, or the proceeds of after-acquired personal property, under Strategic's security agreement.[231] Strategic thus had the right to recover the funds unless Strategic's claims were defeated by the commissioner on the basis that the commissioner was a preferential creditor under the Companies Act 1993 (NZ).[232]
The commissioner's claim to priority depended upon the funds being 'accounts receivable' under the Companies Act (NZ).[233] The term 'account receivable' in the Companies Act (NZ) was defined to have the same meaning as 'account receivable' in the PPSA (NZ).[234] Accordingly, it was necessary to consider the meaning of 'account receivable' in the PPSA (NZ).[235]
The PPSA (NZ) defined 'account receivable' as:[236]

[283]

The court made the following findings:
1. The property developer's right to recover the unlawful levies from the local authority had arisen before the date of its liquidation. The moneys refunded, albeit after the date of liquidation, were 'accounts receivable' and thereby recoverable by the commissioner.[239]
2. Unlike the unlawful levies, the bonds paid by the property developer to the local authority were lawfully received by the local authority at the time, and were not refundable until the local authority had been satisfied that the particular development was compliant with the local authority's standards. Compliance occurred after the date of liquidation. Accordingly, the property developer had no right to recover the bonds prior to the date of its liquidation. The bonds were not 'accounts receivable'.[240]
3. As at the date of liquidation, there was no obligation on the part of the commissioner to refund any GST to the property developer. The GST refund paid to the property developer 'by mistake' occurred after its liquidation. Those funds did not come within the definition of 'accounts receivable'.[241]
4. The money in the solicitor's trust account was payable to the property developer prior to the date of its liquidation. Hence those funds were 'accounts receivable' recoverable by the commissioner.[242]
The decision in Strategic was referred to by Gilmour J in Re Langdon.[243] In Re Langdon, Forge's receivers had obtained a tax refund from the Australian Taxation Office. The tax refund arose as a result of, and following, the termination of Forge's construction contracts following the appointment of the receivers. The question was whether the moneys the subject of the tax refund could be paid to the bank as the secured creditor of Forge pursuant to its security interest under the PPSA, or whether the receivers were required to pay the moneys to satisfy preferential employee entitlements pursuant to s 433 of the Corporations Act. [244]
Gilmour J observed, in effect, that s 433 of the Corporations Act applied where, relevantly, a receiver was appointed by a secured creditor with a 'circulating security interest', or where possession was taken or control was assumed on behalf of debenture holders of any property comprised in or subject to a 'circulating security interest'. In that event, the receiver or person assuming control must pay the stipulated preferred creditors 'out of property coming into his, her or its hands'.[245]
His Honour held, in effect, that the date for the fixing of the assets the subject of the statutory entitlement in favour of preferred creditors for the purposes of s 433 was the date of the appointment of the receivers and that, at that date, Forge had no right to the tax refund.[246] His Honour said:[247]

[286]

In Strategic and Re Langdon, the assets found not to be available for the benefit of preferential creditors were characterised as effectively arising wholly from post-receivership, or post-liquidation, circumstances. Those cases do not bear upon, and provide no real assistance in, the disposition of the limited issues on the agreed facts in these proceedings.
In the present case, the performance guarantees provided for in GC 4.2 were, in effect, to secure payment of Hamersley's underlying claims. If Hamersley did not have the right to call on the guarantees in the events which had happened up to and including the appointment of voluntary administrators,[251] the obligation to repay the money received as a result of any subsequent wrongful call on the guarantees is, in our view, an 'account' for the reasons given below.
It is an obligation to pay an amount of money, being the proceeds of the wrongful call. Further, the obligation arises from the maintenance of bank guarantees to which Forge gave Hamersley rights of recourse under GC 4.2. The maintenance of the guarantees for recourse by Hamersley was an aspect of providing building services in the ordinary course of providing services of that kind (building services). Alternatively, the maintenance of the guarantees for recourse by Hamersley was itself a service provided by Forge in the ordinary course of a business of providing services of that kind (the securing of the performance of building work). Further or alternatively, the granting by Forge of the right to Hamersley to have recourse to the guarantees pursuant to GC 4.2 was the granting of a right in the ordinary course of a business of granting rights of that kind (the granting of rights to secure the performance of building work). Forge's contention that the 'Securities Claims' are not 'accounts' because Forge's business from which it earned income 'was construction work and engineering work' and not 'income [derived] from the provision of bank securities', cannot be accepted.[252]
We would uphold ground 3.

[295]

Section 12(1) and s 12(2) of the PPSA refer to a security interest as an interest in personal property 'provided for by a transaction that, in substance, secures payment or performance of an obligation'. By s 12(2)(j), an interest in, for example, an account (or chattel paper) which is the subject of an assignment which, in substance, secures payment or performance of an obligation, is a 'security interest'. The word 'assignment' is not defined, but as the form of the transaction is irrelevant (s 12(1)), any transfer of an account which, in substance, secures payment or performance of an obligation would, prima facie, be an 'assignment' within the meaning of s 12(2)(j). Also, some indication of the width of the word 'assignment' may be gleaned from s 263(1)(a), which refers to 'assignment (however described)'[253] and includes, for the purposes of the operation of the PPSA against potentially conflicting laws, both the 'transfer' of a security interest and the 'giving' of security interest.[254] Further, the language of 'whether or not' in the chapeau of s 12(3) indicates that a transaction involving a 'transfer of an account'[255] may be either one which in substance secures payment or performance of an obligation, or one which does not.
Section 12(3)(a) of the PPSA provides relevantly, in effect, that under a transaction involving the 'transfer' of an account (or chattel paper),[256] the interest of the transferee is also deemed to be a 'security interest', even if the transaction does not, in substance, secure payment or performance of an obligation. The word 'transfer' is broad and, in its ordinary meaning, would include an assignment. The transferor of an account under an outright transfer also comes within the definition of 'grantor'.[257]
Accordingly, the statutory regime under the PPSA regarding attachment, perfection and registration and priorities applies to outright transfers of accounts. On the other hand:
1. The enforcement regime in ch 4 of the PPSA, which, in broad terms, provides for rules about the rights and remedies available to a party to a security agreement[258] does not apply to outright transfers of accounts (or chattel paper).[259]
2. Unperfected outright transfers of accounts (or chattel paper), unlike transfers which secure the payment or performance of an obligation, do not vest in the grantor upon the insolvency of the grantor.[260]
3. An account (or chattel paper) which is the subject of an outright transfer is not a circulating asset.[261]
It is convenient, for ease of exposition, to refer to a 'security interest' within the meaning of s 12(1) and (2) as a 'actual security interest', and a 'security interest' within the meaning of s 12(3)(a) as a 'deemed security interest'.

[340]

By its notice of contention, Forge contends that s 80 of the PPSA, within the suite of provisions in pt 2.7 of ch 2, applies only to an outright transfer of an account under s 12(3)(a), and has no application to the security interest granted by Forge by way of charge over its claims. It submits, in effect, that:
1. Forge's claims became subject to the security interest and charge in after-acquired property that attached without specific appropriation by the grantor, and 'thus' Forge's claims were not transferred to the bank.
2. The language of 'transfer' in s 80 picks up, and is intended to apply only to, outright transfers under s 12(3)(a).
3. Had s 80(1) been intended to operate upon an assignment by way of security, different language like that used in relation to liens in the PPSA would have applied. Section 80(1)(b) and (c) exclude liens (in general terms) arising under statutory and general law. The table in s 8(2) refers, as an exception, to s 73, which, in turn, refers expressly to priority over a 'security interest'. It is said, in effect, that the absence of a reference to 'security interest' in s 80(1) is telling.
4. The reference to a 'receiver' in the chapeau of s 80(1) is no more than a reference to someone who receives a security interest pursuant to a transaction that is a 'transfer'.
Forge also refers to and relies on In re Printz.[269]
Forge's submissions cannot be accepted. As to the first point, the attachment to after-acquired property in the case of a transfer of an account in a transaction which secures the payment or the performance of an obligation does not cease to be a 'transfer' within the meaning of s 12(2)(j). As to the second point, as indicated above in [204], 'transfer' is wide enough to comprehend an assignment by way of security.
As to the third point, s 73 creates a priority regime between, in effect, security interests under the PPSA and non-consensual security interests arising under the general law, or Commonwealth, or State law. The starting point for s 73 is different from that relating to the transfer of an account. By s 12(3)(a), the transfer of an account is effectively deemed to be a 'security interest' under the PPSA. Moreover, Forge's submission overlooks the point that in relation to transfers of an account, where the PPSA wishes to make clear that it is not speaking of an outright transfer, it adds the words 'that does not secure payment or performance of an obligation'.[270] The outright transfer of an account pursuant to s 12(3)(a) is more of an 'add-on', which enlarges the operation of the PPSA so as to apply also, where indicated, to transfers or assignments which do not secure the payment or performance of an obligation. As to the fourth point, that submission involves a misreading of the word 'receiver' in this context.
In the case of Printz, CNH made loans to Mr and Mrs Printz. Mr and Mrs Printz gave CNH security over specific crops, and the proceeds from those crops. They also they granted CNH a security interest in their present and after-acquired receivables. Trainor purchased crops from Mr and Mrs Printz. Mr and Mrs Printz delivered the crops in accordance with the contracts. However, Trainor withheld part of the purchase price (Crop Receivable), and applied those moneys to debts which Mr and Mrs Printz owed Trainor. CNH sought, in effect, a declaration that its security interest in the Crop Receivable (owed to Mr and Mrs Printz from the purchase price) took priority over any interest of Trainor.[271]
Trainor defended CNH's claim on the basis, amongst other things, that it had a contractual right of set-off against Mr and Mrs Printz of which it had the benefit, as against CNH, through the operation of the equivalent (in very general terms) of s 80(1) of the PPSA. The court held that the s 80(1) equivalent applied not only to outright assignments, but also to assignments by way of security.[272] To that extent, the case is against Forge.
The court also held that the s 80(1) equivalent applied only to assignments of existing receivables and, accordingly, CNH's charge (for want of a better word) of after-acquired receivables did not operate as an assignment of the Crop Receivable for the purposes of the s 80(1) equivalent. The court referred to previous authority to that effect. The case to this extent provides some support for Forge's contention. However, it appears that the result in Printz was also significantly influenced by two further considerations. The court considered it to be important that the crop purchase contracts, by their terms, precluded Mr and Mrs Printz from assigning their rights under the crop contracts. The court also regarded it as significant that Trainor had actual knowledge of CNH's security interest at the time that it entered into the purchase contracts.[273]
Further, in Bank of Waunakee v Rochester Cheese Sales Inc[274] (a case referred to in Printz), the court also considered the operation of the relevant equivalent (in very general terms) of s 80(1) of the PPSA. In that case, a company (RCS) was in the business of purchasing and reselling cheese. Another company (Kase) was also in a similar business. The two companies shared a business relationship. There were transactions between the two companies in March to early June 1988 under which Kase owed RCS $97,482. On 10 June 1988, it was agreed that the cross-demands would be set-off, and that RCS would pay Kase the balance of $22,643, which it did. Some months earlier, a bank had lent $1.434 million to Kase, and had perfected a security interest in Kase's inventory and accounts receivable. Kase went into insolvency in due course. The bank claimed against RCS the amount of the receivable that had been the subject of the set-off, $97,482. RCS resisted the bank's claim on the basis of the equivalent (in general terms) of s 80(1) of the PPSA. The bank contended that the s 80(1) equivalent had no application to its charge (for want of a better word). The court found against the bank. The court held that the s 80(1) equivalent applied. The court noted that 'in other states, the courts and the [PPSA equivalent] have made no distinction between a party with a security interest in a debtor's accounts receivable and party who is an assignee of a debtor's accounts receivable'.[275] The court did not, in terms, refer to the receivables being after-acquired property, but that would appear to be the case on the facts.
The cases referred to ultimately provide no definitive guidance to the operation of s 80(1)(a) of the PPSA. For the reasons given earlier, s 80(1)(a) applies to the bank's security interest in respect of Forge's claims.

[345]

The Contract is a lump sum contract. The 'Employer' in the Contracts is Hamersley and the 'Contractor' is Forge. By cl 1 and cl 2 of the Formal Instrument Agreement, the Contractor agrees to carry out the Work under the Contract in accordance with the Contract and the Employer agrees to pay a lump sum Contract Price.[278]
By GC 12 (read with the definition of Acceptance in GC 1.1), the separable parts of the works are to be completed in accordance with the Contract by its specified dates.[279] By GC 13, the Contractor must pay liquidated damages for each day there is a delay in achieving Acceptance of the works.[280]
By GC 16.1, the Employer must pay for the works on the basis of the Contract Price, subject to adjustments in accordance with the Contract.[281]
The Contract contains a number of provisions by which the Contract Price may be adjusted. There are procedures for the Contractor to make claims which may result in an increase to the Contract Price.[282] In relation to certain types of claim by the Contractor, there is a procedure by which the Employer is first required to make a determination under GC 3.5 which, if favourable to the Contractor, results in the additional costs claimed being added to the Contract Price.[283] By GC 3.5(d), if the Contractor is unhappy with the determination by the Employer, the matter may go to Dispute Resolution in accordance with GC 22. The Contract also provides for reductions to the Contract Price in specified circumstances and subject to the Employer making a determination to that effect under GC 3.5.[284] The Contract Price may also be adjusted (upwards or downwards) with respect to variations in accordance with the Employer's determination under GC 3.5.[285]
The Contract Price (as adjusted) is payable in accordance with the provisions of GC 16. In broad terms, GC 16 requires Progress Claims to be submitted to the Employer, the certification by the Employer of its opinion as to the amount due to the Contractor (or to the Employer) pursuant to the Progress Claim, and payment within a specified number of days of certification, subject to specified rights of deduction by the Employer under GC 16.12. The relevant provisions are set out in [245] below.
The Employer may, without prejudice to its other rights or remedies, terminate the Contract under GC 17. The Employer's rights of termination arise where, amongst other things, an Event of Insolvency occurs. An Event of Insolvency is defined to include the appointment of administrators. By GC 17.3, the Employer has a range of rights or remedies consequential upon termination, including taking over the works.[286] By GC 17.10, termination of the Contract operates without prejudice to any rights accrued to either party prior to termination.[287]
By GC 19.6, subject to certain specified exceptions, the Contractor's total liability to the Employer under or in connection with the Contract does not exceed the Contract Price. The exceptions include where there is fraud, deliberate fault or reckless misconduct, and the Contractor's obligation to pay liquidated damages for delay.[288]
There are Dispute Resolution provisions in GC 22.2 - 22.12. By GC 22.4, the parties' obligations under the Contract continue despite the existence of a Dispute.[289] By GC 22.12, the referral of a matter under GC 22 does not affect the obligations of the parties under the Contract.[290]

[361]

It is unnecessary to determine, for present purposes, the full scope and effect of GC 16.12 in the context of its operation of the contract as a whole. Insofar as GC 16.12 operates as a set-off,[302] it can have no application given that, as we have found, s 553C of the Corporations Act applies. That provision requires a once-and-for-all final account to be taken of the parties' claims arising from their mutual dealings. For the reasons given earlier, where s 553C applies to the circumstances of the case, it applies exclusively to other rights of set-off. On this basis, we would dismiss ground 1.
Further, insofar as ground 1 alleges that if the bank could recover Forge's claims for its own benefit, GC 16.12 would operate to bring about a permanent reduction or extinguishment of Forge's claims to the extent of the amount deducted, we would reject that contention. GC 16.12, where it applies, only operates as a provisional deduction, effectively pending resolution of the underlying disputes.[303]
It is strictly unnecessary to deal with Forge's submission referred to in [249] above. Nevertheless, for the following reasons, it seems to us that the point has no substance.
The phrase 'otherwise due to the Contractor' in the chapeau of GC 16.12 is evidently designed to refer to, at least, an amount certified by the Employer as, in its opinion, 'due' for payment to the Contractor under GC 16.4 which is payable under GC 16.5. In other words, it applies, at least, to an amount certified as due under a Payment Certificate under GC 16.4 which has become payable under GC 16.5. GC 16.12 does not operate on the basis that any deduction under that clause has to be made either at the point of issuing a Payment Certificate under GC 16.4(a), or not at all. GC 16.4(a) makes it plain that payment of a Payment Certificate may not be withheld except as specified in subpars (i) and (ii), but may be the subject of contractual adjustment under GC 16.12. The consideration that cashflow is the 'life-blood' of the Contractor cannot serve as a basis for contradicting the plain words of the clause. GC 16.4(b) is expressed to be without limitation to GC 16.4(a). Further, the right under GC 16.4(b) may be exercised independently of the exercise of the right under GC 16.12, and vice versa: GC 1.20. GC 16 read as a whole does not operate to require, in effect, any deduction under GC 16.12 to be the subject of, and effectuated only by, a revised Payment Certificate issued under GC 16.4(b).

HAMERSLEY IRON PTY LTD -v- FORGE GROUP POWER PTY LTD (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) [2018] WASCA 163 (21 September 2018)

At a glance

Court

Decision date

Before

Source

Judgment (557 paragraphs)

HAMERSLEY IRON PTY LTD -v- FORGE GROUP POWER PTY LTD (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) [2018] WASCA 163 (21 September 2018)

The burden or benefit must lie in the same interest

Grant of security interest and its nature

Permitted repayment of Financial Indebtedness

Legislation Cited (6)

Cases Cited (51)

Cited By (1)