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HFW wins court of appeal victory in landmark Australian dispute

Global, sector-focused law firm HFW has helped Rio Tinto subsidiary Hamersley Iron Pty Ltd successfully overturn a Supreme Court decision in a dispute that will have significant implications for insolvency proceedings in Australia.

The Court of Appeal of Western Australia unanimously ruled on 21 September to overturn an earlier Supreme Court decision that Hamersley could not set off its claims against Forge Group Power Pty Ltd.

The Supreme Court decision handed down in 2017 created a windfall for secured creditors who had taken security over companies that entered insolvency. It also created uncertainty for any company contracting with another which was at risk of insolvency, as in the event of an insolvency, a company may find itself powerless to defend against claims by the insolvent entity's secured creditors.

The decision in the Court of Appeal found that section 553C applied and allowed Hamersley's claims to be set off against Forge's claims.

The Court held that section 553C took effect at the moment of insolvency and applied to the exclusion of contractual or equitable rights of set off. It found that the Personal Properties Securities Act (PPSA) did not operate to exclude the effect of the Corporations Act, and the creation of a security interest under the PPSA (the rights charged in favour of ANZ) did not destroy the mutuality that is required for section 553C to operate.

HFW's team advising Hamersley was led by Matthew Blycha.

Matthew Blycha, Construction Partner, HFW:

"Today's decision is not only good news for Hamersley, but for many other unsecured creditors. The rights between contracting parties in the event of insolvency is something impacting almost all businesses. Many cases around Australia have been awaiting this decision and the Court of Appeal has been clear in stating the primacy of set off under the Corporations Act. While the decision will not likely be welcomed by financiers, it should provide more certainty for businesses generally."

BACKGROUND:

Hamersley contracted with Forge in relation to a number of construction contracts to build power stations in Western Australia. Forge, in turn, charged its rights under those contracts in favour of a secured creditor, ANZ. In 2014, Forge went into administration, then liquidation. Receivers were appointed. Hamersley and Forge each had substantial claims against one another.

Hamersley's claims far exceeded those of Forge and it argued that it could set off its claims against the claims of Forge. Hamersley claimed a right of set off under, among other things, section 553C of the Corporations Act. Section 553C provides that set off can occur where there is 'mutual dealing' between a creditor and an insolvent company. This question of whether Hamersley could set off was disputed by Forge.

In 2017 the Supreme Court held that Hamersley could not set off its claims. The mutuality required for section 553C to operate was destroyed when Forge's rights under the contracts were charged in favour of ANZ, which created a 'security interest' under the PPSA. This meant that Hamersley's claims, which were more than $200 million, were effectively worthless as they could only be made against the insolvent entity. Whereas ANZ, through the receivers, was entitled to pursue Hamersley for all amounts claimed to be owed under the construction contracts.

ABOUT HFW:

HFW is a leading global law firm in the aerospace, commodities, construction, energy, insurance and shipping sectors. The firm has almost 600 fee-earners, including 170 partners, based in 19 offices across the Americas, Europe, the Middle East, Asia and Australia. HFW prides itself on its deep industry expertise and its entrepreneurial, creative and collaborative culture.

ABOUT HFW AUSTRALIA:

HFW was one of the first international firms to establish an office in Australia, launching in Melbourne in 2006. The firm now has 22 partners and more than 80 lawyers across three offices, having opened in Sydney and Perth in 2009 and 2011, respectively.

HFW's Australia practice has grown organically and works collaboratively with colleagues across the firm's global network to support clients in each of the firm's core sectors.

For further information, please contact:

Pernilla Linden
Marketing and Business Development Manager Australia
+61 3 8601 4512 | M +61 401 219 443
E pernilla.linden@hfw.com

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