Bank guarantees and set-offs in liquidation

Background

The Hastie Group carried on the business of providing mechanical, electrical and plumbing services, and the Hastie entities in these proceedings entered into major long-term building subcontracts with head contractors on various large-scale, multimillion-dollar projects around Australia.  The performance of the Hastie entities under each subcontract was secured by way of bank guarantees issued to the respective head contractors.

In 2013, liquidators were appointed in respect of the Hastie entities.  In these proceedings, the liquidators sought to recover approximately $63.5M drawn down by the head contractors from bank guarantees provided by the Hastie entities.  The liquidators contended that the moneys drawn down from the bank guarantees were assets of the Hastie entities and therefore “property” within s 9 of the Act, which the head contractors were required to repay to the liquidator.  The liquidators also alleged that the head contractors had failed to pay the Hastie entities approximately $60M in amounts owed under the subcontracts (“receivables”) and that these amounts were also property of the Hastie entities which should be paid to the liquidator. 

The head contractors asserted that, if the receivables were in fact owed, they were entitled to rely on a statutory set-off of these amounts pursuant to s 553C of the Act against loss and damage suffered as a result of the Hastie entities’ failure to complete outstanding subcontract works.

The liquidators, relying upon the decision of the Western Australian Supreme Court in Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (2017) 52 WAR 90, contended there was no mutuality between the head contractors and relevant Hastie entities as required by s 553C of the Act.  This was because the Personal Property Securities Act 2009 (Cth) (PPSA), which afforded security interests to the financier, purportedly operated to preclude mutuality. 

Before the hearing of these proceedings, the Supreme Court’s decision to this effect was overturned by the Court of Appeal’s decision in Hamersley, which found that s 553C of the Act applied despite the existence of a financier’s PPSA interest.  Therefore, Hamersley’s claims could be set-off against Forge’s claims to the exclusion of any contractual or equitable rights of set-off, with the balance admissible to proof against Forge.  If s 553C did not apply, Hamersley could assert contractual or equitable rights of set-off in recovery proceedings brought for the benefit of the financier as secured party.

Findings

Proprietary interest in the physical bank guarantees and proceeds

The Court found that the head contractors/beneficiaries under the bank guarantees had a proprietary interest in not only the physical bank guarantees, but also the proceeds from drawdowns on the bank guarantees.  In the absence of any competing proprietary interest held by the Hastie entities,¹ the head contractors’ proprietary interests in the proceeds were absolute.²  The head contractors’ rights to call on the bank guarantees and to retain the proceeds were beneficially held in their own right, unless a trust was found to exist (no express or other form of trust was asserted by the Hastie entities).³   The Hastie entities did not have a proprietary interest in the bank guarantees that could affect the proprietary interests of the head contractors in the proceeds of the bank guarantees.

However, the Court found that the head contractors did have an obligation to account to the Hastie entities in respect of any surplus proceeds (in other words, an obligation to return funds not required to meet their relevant claim against the Hastie entities).⁴  Therefore, the Hastie entities had a separate chose in action to claim for the return of such amounts.  This right is of a personal, not a proprietary, nature.  It is a contractual right arising under the relevant subcontract and as such is only enforceable against the relevant head contractor in circumstances where the relevant Hastie entity had pleaded an alternative contractual claim.

Whether the drawdown of the bank guarantees was voided by s 437D or s 468 of the Act

The Court found that the drawdowns were not voided by either section of the Act.  There was no relevant transaction “affecting the property of the company” for the purpose of s 437D of the Act.  Accordingly, s 437D of the Act did not apply.⁵ The transactions of the bank making payment to the head contractors under the bank guarantees were not “dispositions of the property of the company.”⁶  Therefore, s 468 of the Act did not apply.  Further, the head contractors’ ability to retain custody of the proceeds from the draw down was not affected by s 553C(2) of the Act.

The Court found that the head contractors were not restrained from retaining the bank guarantee proceeds by virtue of the Act and were entitled to retain the bank guarantee proceeds.⁷

In making these determinations, his Honour referred to earlier authorities recognising that bank guarantees have long been used in the construction industry for specific protection against the potential insolvency of the contractor.⁸

Whether the head contractors’ claims against the Hastie entities were subject to mutuality under s 553C of the Act

In light of the Court of Appeal’s decision in Hamersley, the liquidators conceded that mutuality was satisfied for the purposes of s 553C of the Act.  Accordingly, the head contractors’ claims against the Hastie entities for loss and damage could be set off against any receivables payable to the Hastie entities pursuant to the subcontracts.  Taking this one step further, his Honour found that the head contractors were automatically entitled to the application of set-off pursuant to the principles set out in s 553C.⁹ That is, the entitlement was not dependent on the head contractors lodging a proof of debt in the winding up, or on the determination of the liquidator to the application of s 553C set-off in respect of the relevant claims.

Key Takeaways

Head contractors and other beneficiaries of bank guarantees will be pleased with the Court’s confirmation that the beneficiary of a bank guarantee obtains a proprietary interest in both the physical bank guarantee and the proceeds of any amount drawn down, and that drawdowns on the bank guarantee are not voided by s 437D or s 468 of the Act.

The Court also confirmed, consistently with earlier authority, that set off claims subject to mutuality under s 553C of the Act accrue automatically and are not subject to lodgement of a proof of debt or determination of a liquidator.

Note: Norton Rose Fulbright acted for Lendlease and Grocon in these proceedings