No set-off allowed #PPSR

Imagine Company A owes Company B $100k, and B owes A $50k.

You’d expect the two companies could just set-off those debts so that A only had to pay $50k.

However, what happens if B goes into Liquidation before A exercises its right to set-off?

Further imagine that bank (“C”) is a secured creditor, having properly registered its AllPAAP on the #PPSA.

This is similar to the recent case of Re Hamersley Iron v Forge Group [2017] WASC 152.

It’s long, and at times difficult to follow, but the gist of the case (similar to the above scenario, but think $100’s of millions) is that:

– the right to set-off is codified by s553C Corporations Act (no contractual or equitable set-off could subsist);

– (lawyer jargon) crystalisation does not exist under the PPSA, as the purpose of s19(2) PPSA grants C a proprietary interest in the collateral; and

– any mutuality of interest between A and B was lost following the attachment of C’s AllPAAP.

To sum up, this means that A could not set-off its debts with B, because of the AllPAAP and also because A had not exercised its contractual right to set-off before B went into external administration.

Key lesson: if you think you have a right of set-off, get in touch with an insolvency lawyer. Don’t just rely on contractual terms.

#SVVoidables

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