In the recent case of Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed)[1], the Western Australian Supreme Court has confirmed that the grant of a security interest under the Personal Property Securities Act 2009 (PPSA) by a company to a third party will likely render any rights of set-off enjoyed by the company’s contractual counterparties worthless where the company subsequently enters liquidation.

The PPSA is a relatively new legislative regime in Australia, and applies to a wide range of “in substance” security interests over most types of property other than land. The decision is significant, because it represents the first time an Australian Court has conducted a detailed analysis as to the interplay between security interests granted under the PPSA and statutory rights of set-off applicable in insolvency.

[1] [2017] WASC (2 June 2017)


Forge entered into various contracts with Hamersley to provide engineering and construction services. Subsequently, Forge granted an “all assets and undertaking” security interest to ANZ Fiduciary Services Pty Ltd (ANZ), in connection with the Forge group’s debt facilities. The security included the grant of a charge over all of Forge’s contractual rights under the contracts with Hamersley.

Forge went into voluntary administration and then liquidation in early 2014. ANZ appointed receivers, and Hamersley terminated the contracts. At the time of termination, Hamerlsey owed Forge approximately AUD$77m under the contracts, but counterclaimed against Forge for damages incurred as a result of the liquidation and Forge’s non-performance for an amount of approximately AUD$663m.

The ability to claim a right of set-off in respect of those amounts was of critical importance to Hamersley, because:

  • if set-off was available, Hamersley could refuse to pay anything to Forge, and prove in the liquidation for the balance owing to Hamersley of approximately AUD$556m; and
  • if set-off was not available, Hamersley would be liable to pay AUD$77m to Forge, and whilst it could prove in the liquidation for the full amount of AUD$663m it was claiming, the prospects of receiving any dividends as an unsecured creditor of Forge were negligible.

Set-off in liquidation

Under Australian law, a statutory set-off regime applies as soon as a company goes into liquidation. That statutory provision (section 553C of the Corporations Act 2001) operates to automatically set-off “mutual credits, debts or other mutual dealings” between the company in liquidation and its contractual counterparties.

The impact of security on set-off rights in liquidation

Prior to the introduction of the PPSA in Australia (which is a relatively recent, and significant, change to Australian security law, which mirrors similar regimes already in place in Canada, New Zealand, and the U.S.), it had been held that the “mutuality” required for s553C to operate is destroyed where one of the contractual parties grants security over its rights under the contract to a third party.

The Court upheld this position in this case in the context of security granted under the PPSA. The Court held that the security granted by Forge to ANZ created a fixed proprietary interest in favour of ANZ over Forge’s rights to receive payments from Hamersley (notwithstanding that the security agreement permitted Forge to deal with its book debts freely in the ordinary course of its business). In other words, monies owing by Hamersley to Forge under the contract were effectively owing to ANZ as a result of this proprietary interest. In contrast, payments moving the other way remained owing from Forge to Hamersley. This meant that payments due under the contract were no longer owing between the same parties in the same right – the mutuality required under s553C was destroyed by the grant of the security.

Hamersley was therefore unable to set-off the monies it owed to Forge against the monies it claimed from Forge by way of damages, and was liable to pay the full contractual amount owing of AUD$77m to Forge.

Hamersley’s arguments

Perhaps unsurprisingly given what was at stake, Hamersley raised a number of arguments before the Court in seeking to assert that it should be entitled to exercise rights of set-off in relation to the money it owed to Forge under the contracts. In addition to the central issue of whether the grant of security destroyed the mutuality required for statutory set-off to apply, Hamersley raised the following arguments, each of which was rejected by the Court:

  • The security given by Forge to ANZ was in effect a “floating charge”, which needed to “crystallise” before it gave rise to a proprietary interest that could destroy mutuality. The Court upheld recent New Zealand and Canadian authorities, and held that the pre-PPSA distinction between “fixed” and “floating” charges is no longer relevant. In effect, any security interest under the PPSA gives rise to a proprietary interest irrespective of concepts of “crystallisation”.
  • Hamersley could rely on separate contractual equitable and contractual set-off rights. The Court rejected this and held that in the context of liquidation, s553C operates as an exclusive code. In other words, contractual and equitable set-off rights no longer apply once a company goes into liquidation.
  • Specific provisions of the PPSA should preserve Hamersley’s contractual set-off rights, even if s553C did not operate. The Court rejected this and held that the PPSA was not intended to displace or affect the exclusive operation of s553C in a liquidation scenario.
  • On a proper construction of the clauses, the contractual set-off provisions should be interpreted as automatic “netting” arrangements (rather than pure set-off provisions). Section 553C would not apply if this interpretation was correct, because that provision requires the existence of actual mutual debts; on Hamersley’s interpretation, there would only ever be one debt due under the contract, being the net amount owing by Forge to Hamersley, which Hamersley could prove for in the liquidation. The Court rejected this argument having applied the standard objective contractual interpretation test to the relevant provision, and in particular, on the basis that the provisions did not provide for a self-executing netting mechanism – it was still necessary for Hamersley to exercise rights before a netting or set-off would apply. It is therefore possible that such an argument could succeed in another case, if the relevant contractual provisions support it.


The case is a timely reminder that set-off rights have their limitations; in particular, the grant of security by a contractual counterparty (particularly common “all assets” security to financiers) is likely to destroy the mutuality of debts required for a set-off claim to be enforceable in circumstances where the company then enters liquidation. This can leave parties potentially exposed to sizeable claims from the liquidators, with potentially worthless counterclaims for any debts owed to them by the insolvent company.