Edited By: William Johnston, Thomas Werlen, Frederick Link
- Banks and cross-border issues — Bank resolution and insolvency — Credit risk — Monetary obligations — Insolvency set-off
3.02 In the context of reducing credit risk involving financial rights and obligations (such as loans, deposits, and financial markets transactions), the key types of set-off and netting arrangements in Australia are reliant on one or more of:
• section 553C of the Corporations Act 2001 (Cth) (‘Corporations Act’),2 and
• the Payment Systems and Netting Act 1998 (Cth) (‘Netting Act’).
(p. 20) 3.03 There are other types of set-off rights (such as equitable and statutory set-off rights) that are available in most States and Territories of Australia outside insolvency proceedings but, by and large, these are either narrow in their scope or subject to the discretion of an Australian court. As a result, these set-off rights are rarely relied on in a commercial context as a means for reducing exposure to operational or credit risk.
3.04 Set-off outside insolvency or cases involving the claims of third parties (such as holders of security interests) is relatively straightforward. The more complex issues arise where one of the parties to cross-demands is in insolvent liquidation. In this case, whether set-off is available is determined by the Corporations Act. The set-off under the Corporations Act is self-executing and effected automatically on the commencement of liquidation in respect of cross-demands that fall within the scope of the statutory provisions, whether or not the claims were liable to be set off outside the liquidation. Unlike contractual set-off, these provisions impose a number of conditions that substantially restrict the scope of set-off involving a company in insolvent liquidation. One of the most significant restrictions is the requirement of mutuality of demands that are sought to be set off. Accordingly, if market participants seek to rely on set-off to reduce their risk exposure (and, in particular, to reduce credit risk), it is important that they ensure that the Corporations Act requirements for insolvency set-off are satisfied.
3.05 This chapter aims to provide an overview in sections B and C of the law of set-off and netting in Australia and, importantly, to highlight the key restrictions on the availability of set-off under Australian law. This overview is followed in section D by an analysis of cross-border issues which may arise under Australian law in respect of the availability of set-off.
1. Contractual set-off
3.06 Outside insolvent liquidation, the key form of set-off relied on to reduce credit and operational risk is contractual. Generally, a contractual right to set-off will be enforceable under Australian law without court intervention if neither party to the set-off is in insolvent liquidation.3
3.07 Generally, a mere contractual right of set-off does not give rise to a security interest in the claims that are to be set off and does not require registration or other filing in order to make it effective.
• assigns or grants a security interest over the claim the subject of the contract,
• enters into the contract to set off in breach of an agreement not to do so,
• goes into administration, or
• enters into a court-approved compromise or arrangement with its creditors.
3.09 The rules governing these exceptions differ to some extent depending on whether the Personal Property Securities Act 2009 (Cth) (the ‘PPSA’) applies and it is convenient to say something at this point about this Act.4 The PPSA governs the creation, perfection, priority, and enforcement of ‘security interests’ in personal property. A security interest is defined as:
an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).5
3.10 This definition includes traditional security interests such as mortgages, charges, pledges, and liens. Section 12 of the PPSA also sets out specified transactions which are deemed to constitute security interests and excludes specified transactions from the scope of security interest. Among the inclusions is a ‘flawed asset arrangement’, if it secures payment or performance of an obligation,6 and a transfer of an ‘account’, whether or not the transaction secures an obligation.7 The PPSA also expressly declares it possible for a creditor to take security over a debt owed by the creditor to the debtor.8 Among the exclusions from the concept of a ‘security interest’ are:
• ‘any right of set-off or right of combination of accounts (within the ordinary meaning of the term “accounts”)’,9
(i) an approved netting arrangement;
(ii) a close-out netting contract;
(iii) a market netting contract’.10
3.11 The set-off and netting exclusions do not exclude every interest which exists under the terms of an agreement which contains a right of set-off or netting. Rights commonly included in or in conjunction with a set-off agreement or close-out netting contract could constitute a ‘security interest’ for the purposes of the PPSA, including agreements for the creation of a charge-back or a flawed asset. An agreement that creates or evidences a security interest is a ‘security agreement’ for the purposes of the PPSA,11 and will attract the provisions of the PPSA dealing with ‘security interests’ and ‘security agreements’.
3.12 The PPSA then further complicates the position by drawing distinctions between types of collateral that might be the subject of a security agreement and providing different rules as to how any security interest in those rights may be perfected and the effect of transfers or other dealings in the collateral. Relevant to agreements where contractual set-off rights are often found are the following types of collateral:
• An ‘account’ is defined in the PPSA as:
‘a monetary obligation (whether or not earned by performance, and, if payable in Australia, whether or not the person who owes the money is located in Australia) that arises from:
(a) disposing of property (whether by sale, transfer, assignment, lease, licence or in any other way); or
(b) granting a right, or providing services, in the ordinary course of a business of granting rights or providing services of that kind (whether or not the account debtor is the person to whom the right is granted or the services are provided)’.12
This includes a claim for payment for services where the agreement for the services contains a mechanism for ascertaining the amount to be paid and the date for payment. It does not include a claim for damages.13
• An ‘ADI account’ is an account within the ordinary meaning of the term kept by a person with an ADI that is payable on demand or at some time in the future (as agreed between the ADI and the person).14
3.13 Where an agreement between the customer and its ADI gives rise to a security interest in favour of the bank in an ADI account, the ADI may perfect its interest by ‘control’ of the account.15 Security interests that are not perfected by control are usually perfected by registration.16 Different rules relating to transfers and dealings in ‘accounts’ and ‘ADI accounts’ and the implications of these are discussed below.
Assignment and grant of a security interest
3.14 The assignment or grant of a security interest over one of the parties’ assets may affect contractual set-off rights to the extent that those assets include any rights that are the subject of the contractual set-off. The precise rules are complicated and not settled in all respects.17
Where the PPSA does not apply
3.15 Generally, where the PPSA does not apply, the assignee or security interest holder will take their interest subject to a set-off agreement so far as it applies to a debt accrued and owing as a result of a transaction entered into before the party seeking to rely on the set-off has notice of the assignment or grant of the security interest.18 Whether the set-off agreement will be effective against an assignee or security interest holder where the transaction giving rise to the relevant debt arises after the notice is less clear.19 The question whether such a set-off agreement will be effective becomes a question whether the counterparty seeking to exercise the set-off right does in fact have an equitable interest in the asset which has priority over the assignee’s equity in that asset. This is a question of priorities between competing equities and the resolution of that question will depend on a range of factors.
3.16 In any event, a party seeking to rely on a contractual set-off agreement should usually include a term prohibiting an assignment or grant of security over these rights. Where the PPSA does not intrude there are good arguments that a properly drafted prohibition on parties dealing with rights the subject of the contractual set-off should be effective under Australian law to prevent the assignment or (p. 24) grant.20 This is useful not only to protect against these other claims arising, but also to protect the mutuality of dealings for the purposes of satisfying the requirements of insolvency set-off.21
Where the PPSA applies
3.17 If the agreement containing set-off rights is a security agreement, section 79 of the PPSA allows the collateral to be transferred by the grantor or by operation of law (including by sale, by creating a security interest, or under proceedings to enforce a judgment) despite a provision in a security agreement prohibiting the transfer or declaring the transfer to be a default. A transfer in accordance with section 79 of the PPSA is said not to prejudice the rights of the counterparty under the security agreement or otherwise (including the right to treat a prohibited transfer as an act of default),22 but it does weaken the effectiveness of provisions described in para 3.16 and increases the risk that such transfer could destroy mutuality for the purposes of insolvency set-off.23
• the terms of the contract between the account debtor and the transferor and any equity, defence, remedy or claim arising in relation to the contract (including a defence by way of a right of set-off), and
• any other equity, defence, remedy or claim of the account debtor against the transferor (including a defence by way of a right of set-off) that accrues before the first time when payment by an account debtor to the transferor no longer discharges the obligation of the account debtor under the PPSA to the extent of the payment. Section 80 goes on to provide that payment to a transferee discharges the obligation of the account debtor once notice has been given to the debtor in a form and in circumstances provided in the section.24
3.20 However, there is authority that this statutory recognition of the terms of the contract is not sufficient to preserve mutuality for the purposes of insolvency (p. 25) set-off where a PPSA security interest is taken over the rights of a party to the contract.25
3.21 Section 81 applies to a term in a contract between an account debtor and a transferor which restricts or prohibits transfer of certain (but not all) accounts and ‘chattel paper’ for currency due or to become due.26 Section 81(2) provides that such a term is binding on the transferor, but only to the extent of making the transferor liable in damages for breach of contract, and is unenforceable against third parties. Accordingly, if the account or ‘chattel paper’ which was purportedly the subject of a set-off were of the type described in section 81 of the PPSA, the term restricting or prohibiting the transfer would not be enforceable against third parties, and, as a result, mutuality required for the purposes of the insolvency set-off may not survive such a transfer.
3.22 Due to the issues regarding mutuality and the complicated analysis which arises under the PPSA, some entities use a security-based structure (rather than mere contractual set-off) to protect against the risks associated with the mutuality requirement inherent in insolvency set-off. Security-based arrangements are subject to a range of additional Australian legal issues (including rules set out in the PPSA in respect of creation, priority, and enforcement of security) and are outside the scope of this chapter.
Set-off agreements entered into in breach of agreements
3.23 If a set-off right is entered into contrary to a promise given by one of the parties, for instance a negative pledge which prohibits the creation of a right, interest, or arrangement which has the effect of giving another person a preference, priority, or advantage over other creditors, that would not generally affect the ability of the counterparty to exercise its rights of set-off. However, it is possible that the counterparty could be liable for inducing breach of contract if:
• The counterparty has sufficient knowledge of the terms of the negative pledge. There is some authority that the counterparty need not have actual knowledge and that constructive knowledge is sufficient.27
(p. 26) • The counterparty has the necessary intent to bring about the breach of the negative pledge. Necessary intent may be established where the counterparty knew that consent was necessary for the entry into the set-off arrangement and did not obtain it. However, the counterparty would not have necessary intent where it knew that consent was necessary but believed in good faith that consent would be forthcoming.28
3.24 If the counterparty induced the breach, then the counterparty may be liable for damages which would equal the loss suffered by the beneficiary of the negative pledge. If the counterparty has actual knowledge that the negative pledge prohibits set-off arrangement, the beneficiary of the negative pledge may be able to obtain an injunction restraining the counterparty from entering into the set-off arrangement or from exercising its rights under it.29
3.25 Under Part 5.3A of the Corporations Act, if the board of directors of a company consider that the company is insolvent or likely to become insolvent, then they may resolve that an administrator be appointed.30 The purpose of administration is to provide for the business of the company to be administered in a way that maximizes the chance of its business continuing or, if that is not possible, results in a better return for the company’s creditors and members than would result from an immediate winding up.31 The administrator is required within a certain period to convene a meeting of the company’s creditors to decide whether the company should execute a deed of company arrangement to govern the conduct of the company’s business for a period (the terms of which are approved at the meeting), or that the administration should cease or that the company be wound up.32
3.26 If an administrator is appointed to a company, contractual set-off rights in respect of the company will be subject to the administrator’s right of indemnity from, and lien over, the company’s assets for the liabilities incurred by the administrator and the remuneration owing to the administrator.33 Accordingly, rights to set off claims against a party in administration should be exercised as soon as possible to minimize the size of the administrator’s prior ranking claim.34
(p. 27) 3.27 If at the meeting convened by the administrator the creditors resolve to enter into a deed of company arrangement, the effect of that deed on contractual rights of set-off will depend on the terms of the deed. Under the usual form of deed, a creditor is precluded for the period of the deed from exercising any right of set-off to which it would not have been entitled had the company been wound up on the day when the administration began.35 In this case, the principles governing set-off against parties in insolvency, described in section C below, become relevant.
Administration and the PPSA
3.28 If a security interest is unperfected by the time required by the Corporations Act and the PPSA, and an administrator is appointed, the security interest vests in the grantor, ie it becomes void.36 This does not affect a mere contractual set-off agreement, as that is not a security interest. Where contractual set-off rights are included in a broader agreement that does amount to a security interest, it is arguable that these provisions will avoid only the features of the agreement which give rise to the security interest, leaving properly drafted contractual rights of set-off alone, although the point has not yet been judicially considered.
3.29 With certain exceptions, the appointment of an administrator stays the enforcement of a security interest over a specific asset of the company for the term of the administration.37 This does not affect a mere contractual set-off agreement, but where contractual set-off rights are included in a broader agreement that does amount to a security interest, the position is less clear.
Compromise or arrangement approved by the court
3.30 A counterparty’s ability to set off a debt owed by it to an entity subject to a compromise or arrangement against that entity’s credit balance with the counterparty may also be affected by a court-approved compromise or arrangement with the entity’s creditors.38 However, an arrangement is only implemented after certain procedural steps have been taken (including a court application, the convening of meetings of creditors and/or shareholders of the entity, and subsequent court approval). Accordingly, the counterparty should still be able to set off the debt against the entity’s credit balance if the counterparty exercises its contractual right to do so before becoming bound by any such compromise or arrangement.39
3.32 For example, in the State of Victoria, there are procedural rules that permit monetary cross-demands to be included in a defence and set off against the plaintiff’s claim for the recovery of a debt or damages.40 The set-off may be relied on as a defence to the whole or part of the plaintiff’s claim and may be included whether or not the defendant also counterclaims for that debt or damages. However, the ability to set off unliquidated cross-demands under these rules is subject to some restrictions.41
3.33 In all Australian States,42 a set-off may also proceed under the right of set-off derived from the Statutes of Set-off enacted in England in 1729 and 1735.43 However, the right of set-off under the statutes is limited in scope to mutual debts that are both liquidated and due and payable. In the absence of an insolvent liquidation or a contractual right of set-off or a procedural set-off (if such a set-off exists in the relevant State or Territory), unliquidated cross-demands may be set off only if the situation gives rise to an equitable set-off.
3.34 An equitable set-off may be available in respect of both liquidated and unliquidated cross-demands, but only if the demands are so closely connected that the creditor’s title to prosecute their demand is impeached.44 The concept of impeachment has not been precisely defined. However, in the absence of some other equitable ground for being protected (such as fraud), generally, impeachment requires that there is a sufficiently close connection between the demands that it would be unjust to allow the creditor to enforce its claim.45
(p. 29) 3.35 Australian law also recognizes certain rights that are analogous to set-off, such as the right of a bank to combine accounts held by a customer. This is not a right of set-off in the true sense because it does not involve a set-off of independent debts. Rather, the right to combine accounts recognizes that there is a single debt owing which is the balance of all the customer’s accounts.
3.36 Australian law also recognizes that contractual provisions may exclude rights of set-off that may arise under procedural or equitable set-off. These can assist a claimant to obtain summary judgment on its claim while compelling the cross-claimant to prove its claim at trial.46 It is not open by contract to exclude mandatory insolvency set-off.
1. Set-off under section 553C of the Corporations Act
3.37 If one of the parties to cross-demands is in insolvent liquidation, set-off is governed by section 553C of the Corporations Act. (There is an analogous right of set-off in the case of a bankrupt individual.47) There is authority that in an insolvent liquidation, section 553C is an exclusive code governing set-off and displaces equitable and contractual rights of set-off.48
3.38 Under section 553C, mutual credits, mutual debts, and other mutual dealings between an insolvent company and a creditor are set off. The set-off is mandatory, takes effect automatically on liquidation of the company, is self-executing, and overrides any contractual set-off arrangements.49 However, section 553C applies only to claims which are existing at the commencement of the company’s liquidation, which are commensurable, and which are mutual.
Existence of claims
3.39 Claims must exist at the commencement of liquidation for set-off to apply under section 553C. As a general rule, all debts and liabilities, present or future, certain or contingent, to which the company is subject at the commencement of the (p. 30) liquidation, or which subsequently arise out of prior circumstances, will ‘exist’ for the purposes of set-off under section 553C.
3.40 Thus, section 553C not only applies to setting off debts due and payable at the commencement of liquidation. A contingent debt that exists but is not payable at the commencement of the liquidation will be capable of set-off under section 553C provided it matures into a pecuniary demand on or before the final date on which the liquidator calls for proofs of debts. It is not necessary that this occurs automatically, but there must be an actual debt due and payable before the final date fixed by the liquidator for proof of debts by a creditor.50
3.42 Commensurability of cross-demands requires that the demands are capable of being brought together ultimately into a money account, establishing a liability on each side which is pecuniary in nature. This requirement is readily satisfied in respect of simple debts and other pecuniary claims that are capable of being brought into an account.
3.43 For set-off to apply under section 553C, the cross-demands must be mutual. Mutuality does not require that the demands should have arisen at the same time, nor does it require some causal connection between them.51 It is also irrelevant that cross-demands may be of a different nature.52 Rather, mutuality requires that the demands are between the same parties and held by those parties in the same capacity.53 That is, the parties must hold the benefit and be subject to the burden of those demands in the same capacity. In other words, each party must be both personally liable for its obligations and personally and beneficially entitled to performance of the other party’s obligations.54
(p. 31) 3.44 The question whether demands are held by parties in the same capacity is determined by reference to the equitable interests of the parties rather than their bare legal rights.55 As a result, the beneficial owner of a debt may set off that debt against an obligation owing by it to the debtor.56 For example, the beneficiary under a bare trust will be able to set off a debt which it is beneficially entitled to under that bare trust against a cross-demand for which the beneficiary is personally liable. In this case, the beneficiary both is liable for the cross-demand and holds the beneficial interest in the right of action in its personal capacity.
3.45 Conversely, a set-off will be denied if one of the parties to the proposed set-off holds its right of action only as trustee for a third party, or if it has assigned its right of action or has created a security interest in favour of a third party.57 For example, a trustee who holds a right of action on trust or an assignor who assigns a right of action may retain legal title to that right, but the beneficial interest in that right will be held by the beneficiary of the trust or assignee respectively. In this case, the trustee or assignor would remain personally liable for the cross-demand and, as a result, set-off of the cross-demand would be denied. There will be no mutuality even where the other party has no notice of the trust, assignment, or security interest.58 Set-off agreements often contain provisions aimed at precluding dealings that would give rise to interests that would adversely affect mutuality. The effectiveness of these provisions has been discussed at paras 3.15–3.16 (where the PPSA does not apply) and 3.17–3.22 (where the PPSA applies). Where a PPSA security interest has attached to the right of action, the holder of the security interest has a proprietary interest in that right, and that interest destroys the mutuality required for a set-off under section 553C of the Corporations Act.59 There is authority that this is so even where the terms of the security interest allow the grantor of the security interest to deal with the right the subject of the security interest, or where the secured party’s rights would have been subject to the ‘equities’ of the rights of the party seeking to assert the set-off outside liquidation (eg due to section 80(1) of the PPSA).60 However, if the debt owed to the secured party is paid off, including by the application or reduction of the right that is the subject of the security, the balance of the right available to the grantor may be the subject of set-off between the grantor and its contractual counterparty.61
(p. 32) 3.46 To establish mutuality, the cross-demands must be between the same parties. This will not be the case where there is a joint demand on one side and a separate demand on the other. For example, in the case of a partnership, the joint indebtedness of the partners may not be set off against a debt owing separately to one or more of the partners,62 and the separate indebtedness of one of the partners may not be set off against an obligation owing to the partnership.63
2. Restrictions on set-off against parties in insolvency
Notice of insolvency
3.48 Set-off of mutual credits, mutual debts, and other mutual dealings will not be available under section 553C if, at the time of giving credit to or receiving credit from the company in liquidation, the counterparty had notice of the fact that the company was insolvent.64
3.49 This rule is not always easy to apply. Suppose a person acquires a debt from an existing creditor of a company. When the debt was created the existing creditor had no notice of insolvency, but when the debt is sold the acquirer knows the debtor is insolvent. By purchasing the debt the acquirer has not, in the ordinary sense, provided credit to the debtor. However, for the purposes of this rule, credit is taken to be given at the time the debt is acquired and, since the debt is acquired with notice that the debtor is insolvent, set-off in the liquidation of the debtor will be denied.65 Or suppose parties enter into an agreement under which one has an option to purchase the other’s property on termination of the agreement. The agreement is terminated when one party becomes insolvent and the other party exercises the option with knowledge of that fact. Is the purchase price payable by the party exercising the option able to be set off against a debt owing by the insolvent party? The answer is yes, if the contract in which the option is contained is entered into without knowledge of the insolvency. For the purposes of this rule, credit is given when the contract is entered into, not when the option is exercised.66
3.50 Once the time of giving or receiving credit is determined, the question is whether the counterparty had notice of the company’s insolvency at that time. That is, (p. 33) whether the counterparty had notice of the fact that the company was not able to pay its debts as and when they became due and payable.67 Generally, actual notice must be established.
3.51 Intervening creditors of a counterparty may seek to attach, execute, levy execution, or otherwise exercise a creditor’s rights (whether before or after judgment) over or against the counterparty’s claim which is to be set off. Such intervening creditors are distinguishable from assignees on the basis that any rights they may have do not arise as a result of any purported assignment. Rather, their rights arise as a consequence of their position as creditors of the counterparty.
3.52 Intervening creditors should not affect set-off provided the reciprocal claims that are sought to be set off arose from transactions entered into before the party seeking to enforce the set-off knew or ought to have known about the intervener.68
Banks and certain other counterparties
3.53 There is also a risk that insolvency set-off under section 553C may not be available in respect of certain counterparties, principally banks (or more accurately, ADIs as defined in the Banking Act), superannuation entities, and life and other insurance companies.
3.54 Specific legislation relating to these entities provides that if they are unable to meet their obligations or they suspend payment, their assets in Australia must be used to meet particular liabilities in Australia in priority to all other liabilities.69 This creates some uncertainty as it is not clear whether ‘assets’ in this context means the assets before or after section 553C of the Corporations Act is applied. If the former, it is possible that insolvency set-off against such entities would be denied to the extent that it would affect assets in Australia.70 In addition, these entities are subject to provisions which restrict a party’s ability to ‘close out a transaction’ where the prudential regulator has taken control of the company’s business.71
3.56 The first condition is that the cross-demands under the contractual set-off must have been set against each other, and a balance struck, before the commencement of the winding up.72 A contractual set-off arrangement will not operate after the commencement of liquidation because this would be contrary to the statutory injunction in section 501 of the Corporations Act that the property of a company should be applied in its winding up in satisfaction of its liabilities pari passu. That is, from the commencement of winding up, the only set-off that is permitted is set-off under section 553C of the Corporations Act.73
3.57 The second condition is that the contractual set-off must not constitute a voidable preference.74 There is a risk that a contractual set-off will constitute a voidable preference if it produces a different result to section 553C of the Corporations Act (for example, if it permits a set-off in circumstances where no set-off would have been available under section 553C).75 However, even if the contractual set-off does produce a different result to section 553C, it will not be a voidable preference if the party seeking to enforce the set-off in the counterparty’s liquidation can establish each of the following:76
• it entered into the contractual set-off in good faith (in general, good faith would be absent if there was fraud or an intention to obtain an advantage relative to other creditors of the counterparty);
• at the time the set-off was effected, it had no reasonable grounds for suspecting the counterparty was insolvent (in the sense of not being able to pay all its debts as and when they became due and payable) or would become insolvent if the set-off were effected; and
(p. 35) • it changed its position in reliance on the contractual set-off or provided valuable consideration for it (namely consideration that is real and not colourable in the sense of being contrived or without substance).
3.58 If these three requirements are not established, the set-off may be voidable by a liquidator to the extent that it has the effect of preferring the party seeking to enforce it (in the sense that it produces a result more favourable to that party than section 553C). However, the set-off is generally voidable by a liquidator only if it is entered into within the six months ending on the relation-back day (which is defined according to section 91 of the Corporations Act).77 The ‘suspect period’ of six months may be extended to four years if a related entity of the company in liquidation was involved in the set-off, or to ten years if the set-off arrangement was entered into for the purpose of defeating, delaying, or interfering with creditors’ rights on a winding up.78
3.59 Even if both conditions are satisfied, there remains a risk that a liquidator may seek to disclaim a contractual set-off arrangement on the basis that it is an unprofitable contract.79 However, even if a liquidator succeeded in disclaiming a set-off agreement, the counterparty would be able to claim damages which would probably be equivalent to the benefit that it would otherwise have obtained under the set-off agreement.80 These damages would be able to be set off against a liability owing to the insolvent company under section 553C.
3.60 The law of set-off and netting in Australia received a significant boost in 1998 with the enactment of the Netting Act. This Act provides protection to ‘close-out netting contracts’ governed by Australian law or where the insolvency of a party is regulated by Australian law.81 Significantly, the protection afforded under the Netting Act is not restricted by the requirement of mutuality which applies to set-off against insolvent companies in liquidation under section 553C;82 all that is required is the presence of a close-out netting contract.
3.61 The Netting Act defines a ‘close-out netting contract’ as (subject to certain exceptions):83
(b) a contract declared by the regulations to be a close-out netting contract for the purposes of this Act.84
3.62 The Netting Act provides that the termination provisions of a close-out netting contract are to apply according to their terms despite any other law.85 As a result, close-out netting contracts will be enforceable in accordance with their terms, including in the case of insolvency of a party to the netting contract.
3.63 In 2016, the Netting Act was amended to clarify the manner in which the protections afforded to close-out netting under close-out netting contracts (and approved netting arrangements and market netting contracts) interacted with stays imposed on counterparties closing out transactions in reliance on specified resolution-related events (such as a statutory manager taking control of an ADI’s business under the Banking Act).86 The circumstances in which parties to a contract, or a contract, can close out transactions relating to the contract under the amended Netting Act are:
intended to reflect international developments such as the Stay Protocol as closely as possible, particularly the requirements set out in the elements of paragraph (e) of the definition of ‘Protocol-eligible Regime’ in the Stay Protocol which relates to any ‘Close-out Stay’ (as that term is defined in the Stay Protocol), whilst also reflecting concepts recognised in Australian law.87
Contractual set-off (and contractual exclusion of set-off)
3.66 Australian law respects a choice of law made by the parties to govern a contract, provided the choice is made in good faith and is not contrary to Australian public policy or other mandatory rules of Australian law.88
3.67 Where a contract is subject to an effective choice of foreign law, an Australian court will consider the construction and effect of that contract as governed by that foreign law. This is subject to proof of foreign law and any mandatory rules of Australian law to the contrary.
3.68 Generally these principles should apply to a contractual agreement to set off and also to a contractual agreement excluding the right of a party to raise a set-off or counterclaim. An Australian court should refer the effect of a contractual prohibition on assignment to the governing law of the contract, although there is older authority in favour of applying Australian law at least in the case where assignor and assignee are in Australia.89
Where the PPSA applies
3.69 Again, the PPSA may intrude to modify these principles in particular cases. The PPSA is not limited to cases governed by Australian law. Potentially relevant to agreements containing set-off rights,90 where there is a security interest in ‘intangible property’ (including an ‘account’ or an ‘ADI account’)91 the Act applies if the grantor is an Australian entity, or if the account is payable in Australia, or is an ADI account (wherever payable).92 The PPSA then prescribes choice-of-law rules governing the validity and perfection of the security interest.93
3.70 It seems that, for the purposes of characterizing the transaction as giving rise to a security interest, an Australian court will apply the definition of a security interest in the PPSA, notwithstanding that the arrangement is not considered a security interest under the law expressed to govern it.94 However, Australian law will have regard to the rights and obligations which are actually created under the law expressed to govern those rights and obligations in applying the concepts in the PPSA. For example, an English-law-governed contract which creates (p. 38) rights and obligations which Australian law would characterize as a flawed asset arrangement and which includes set-off rights over an ‘account’ might be considered a ‘security interest’, regardless of its character in English law. Further, if an Australian company is the putative grantor of that interest, Australian law will determine whether it is valid and perfected and the consequences if it is not, whatever the governing law of the account.95 However, if the ‘security interest’ is over an ‘ADI account’, these matters are determined not by the law of the grantor’s location but by the law governing the ADI account.96 Finally, the PPSA legislates the effect of transfers of collateral, the rights of a transferee of certain ‘accounts’, and the effect of provisions restricting transfer.97
3.71 No provision in the PPSA limits the application of sections 79 or 81 to contracts that are governed by Australian law and, while there is a rebuttable presumption that a statute affecting obligations is to read down in that way,98 it is at least arguable that the PPSA is not limited in that way but rather directs the Australian court as to how to treat any contract, whatever its governing law, where there is a connection with Australia within section 6 of the Act.
Set-off as procedure or substance
3.72 It is a general principle of Australian private international law that matters of procedure are governed by the law of the forum, ie the Australian court. While Australian law allows parties to choose a law to govern their contractual obligations and the forum in which they agree to litigate, it does not allow the parties to choose a law governing non-contractual obligations, or to choose by contract rules of procedure or remedies other than the rules of the forum.99
3.73 So, for example, whether a set-off would be available under the procedural rules of the Australian jurisdictions described in paragraphs 3.32 and 3.33 would be decided by those rules, not by the laws governing those obligations.100
3.74 If, however, an obligation is governed by a foreign law and a substantive rule of the foreign law provides that the obligation is in substance reduced by the setting off of the amount of a claim owed by the obligee to the obligor, then an Australian court should give effect to that set-off as a corollary of according recognition to the governing law of the obligation, as that law governs when that obligation is discharged.101
(p. 39) 3.75 Australian authority favours the view that equitable set-off in accordance with the principles in paragraph 3.34 is substantive and not merely procedural.102 There does not appear to be any case which has tested whether an equitable set-off allowed under a foreign law would be characterized as substantive and enforced in Australian proceedings in circumstances where it would not have been allowed in Australia.
3.76 In the winding up of an insolvent Australian company, the operation of section 553C is mandatory and its operation is not excluded or varied by the choice of a foreign law to govern any of the obligations that are considered to be mutual dealings. This should be the case even if the Australian company were found to have its centre of main interests abroad and foreign insolvency proceedings were recognized as the main proceeding.103
3.77 Where a foreign company is the subject of insolvency proceedings before a foreign court, questions arise as to the relevance of Australian law to any application of rules of set-off, or denial of set-off, by the laws of the foreign jurisdiction.104
3.78 In order to understand the position it is first necessary to appreciate that the basis for the recognition of foreign insolvency laws in Australia is not some broad general principle. Rather it occurs under a patchwork of statutory provisions applying in particular circumstances, against a backdrop of common law decisions according some measure of recognition of the appointment of foreign liquidators, but where the precise extent of that recognition or assistance was not settled.105 Some account of the statutory provisions and of that common law is necessary to understand the effect of set-off. A short outline follows.
3.79 The Cross-Border Insolvency Act (CBIA) gives grounds for the recognition of foreign insolvency proceedings in respect of a body corporate. An Australian court may grant an order recognizing a foreign insolvency proceeding in respect of a body corporate as a foreign main proceeding. The CBIA does not apply to any body corporate licensed in Australia as an ADI or insurer.
3.80 A foreign insolvency proceeding will be the foreign main proceeding if it is taking place in the jurisdiction in which the foreign company has the centre of its main interests.106 If a foreign proceeding is recognized as the foreign main proceeding, and no Australian insolvency proceeding is taking place at the time the application for recognition is filed:
a. the commencement or continuation of individual actions or individual proceedings concerning the foreign company’s assets, rights, obligations, or liabilities is automatically stayed;
b. execution against the foreign company’s assets is automatically stayed;
c. the right to transfer, encumber, or otherwise dispose of any assets of the foreign company is automatically suspended,
in each case to the same extent as if such a stay or suspension arose under the relevant applicable parts of Chapter 5 of the Corporations Act.107 If a foreign proceeding is recognized as a foreign non-main proceeding or the foreign main proceeding at a time when an Australian insolvency proceeding has commenced, then an Australian court may grant relief upon request from the foreign insolvency official where it is necessary to protect the assets of the foreign company or the interests of its creditors.108 In these circumstances, the foreign insolvency official does not have the benefit of the automatic stays and suspension provided by Article 20 of the Model Law and any relief that may be granted by an Australian court must be consistent with the concurrent Australian insolvency proceeding.109 Such relief may include entrusting the administration or realization or distribution of all or part of the foreign company’s assets located in Australia to the foreign insolvency official or another person designated by the court, provided the court is satisfied that the interests of Australian creditors are adequately protected.110
(p. 41) 3.81 The Model Law prevails over the letter of request procedure and an ancillary winding up under Pt 5.7 of the Corporations Act, to the extent of any inconsistency, but is said not to derogate from an ancillary winding up under section 601CL.111 It supersedes the common law to the extent of inconsistency, but does not abrogate it.112
Letter of request
3.82 Section 581(3) of the Corporations Act provides that where a letter of request from a court of a country other than Australia, requesting aid in a winding up, insolvency, or other ‘external administration matter’,113 is properly lodged with the appropriate Australian court, the Australian court may exercise such powers with respect to that matter as it could exercise if that matter had arisen within the Australian court’s own jurisdiction.
3.83 If the letter of request is received from a court of a prescribed country, the Australian court must act in aid of that foreign court.114 If the letter of request is received from a court of a non-prescribed country, the Australian court has discretion whether to assist.115
3.84 The effect of the letter of request procedure is to place the foreign liquidator in a position of being able to exercise the powers available to Australian liquidators under the Corporations Act. That means that the foreign liquidator would have to deal with assets of the foreign company in liquidation in the same way as an Australian liquidator would in the liquidation of an Australian company under Australian law.
Ancillary liquidation order pursuant to section 601CL(14) of the Corporations Act
3.85 A foreign liquidator appointed in the foreign company’s home jurisdiction or the Australian Securities and Investments Commission (ASIC) can obtain a concurrent Australian liquidation order under section 601CL(14),116 if:
a. the foreign company is registered as carrying on business in Australia under Division 2 of Part 5B.2 of the Corporations Act;117
c. the foreign liquidator has been appointed in the foreign company’s home jurisdiction.118
3.86 Where an ancillary winding up under section 601CL(14) is commenced, the local liquidator is obliged to ‘recover and realise the property of the foreign company in Australia’ and to ‘pay the net amount so recovered and realised to the liquidator of the foreign company for its place of origin’.119
3.87 The requirement of section 601CL(15) that the ‘net amount’ be paid to the foreign liquidator refers to the proceeds derived from the collection and realization of property (whether movable or immovable) in Australia, minus those amounts necessary to satisfy all claims entitled to preferential treatment under Australian law.120
3.88 There is no requirement to pay Australian creditors first.121 However, it appears that an Australian court might not allow funds to be remitted to a foreign liquidator to the detriment of local creditors.122
Winding up under Part 5.7 of the Corporations Act
3.89 The court may order the winding up of a foreign company under Part 5.7 on the application of, among other persons, a creditor or foreign liquidator if the foreign company either is registered in Australia as a foreign company or carries on business in Australia, and if one of the following is the case:123
a. the foreign company is not able to pay its debts,124 has been dissolved or deregistered, has ceased to carry on business in Australia or has a place of business in Australia only for the purpose of winding up its affairs;
c. ASIC has stated in a report that the foreign company cannot pay its debts and should be wound up or that it is in the interests of the public, of the members (p. 43) (of the foreign company), or of the creditors that the foreign company be wound up.125
3.90 A foreign company may be wound up under Part 5.7 whether or not it is being wound up or has been dissolved or has otherwise ceased to exist under the laws of its home jurisdiction.126 If an Australian court has recognized the winding up of a foreign company under the laws of its home jurisdiction as being the ‘foreign main proceeding’ for the purposes of the Model Law,127 then a winding up under Part 5.7 may be commenced only if the foreign company has assets located in Australia and the effect of the winding up will be restricted to those Australian assets.128
Where a foreign company is wound up under Part 5.7, the local winding up is governed by Australian insolvency law even though it is being wound up under the laws of its home jurisdiction.129
Order recognizing foreign liquidation order at common law
3.91 A foreign liquidator may obtain an order from an Australian court allowing the foreign liquidator to deal with property in Australia without taking any of the statutory proceedings described above. However, the court is unlikely to make an order in favour of the liquidator that operates to the detriment of local creditors.130
3.92 None of these bases of recognition or assistance import foreign insolvency law directly into Australian law. The conduct of any Australian proceeding is expected to apply the Australian principles of insolvency set-off and to apply (or not apply) them regardless of the set-off rules in the foreign proceeding.
3.93 In the case of the Model Law, the CBIA is silent as to set-off.131 That Australian set-off rules are preserved follows from the general principle in section 16 of the Act, that the stay or suspension has the same effect as it would have if the suspension arose under Chapter 5 of the Corporations Act. This requires the Australian court to characterize the foreign proceeding in terms of Australian law, usually as either an administration or a liquidation and then apply a stay or suspension (p. 44) to the same extent as if an Australian proceeding of that kind were in progress.132 As we have seen, an administration does not stay a contractual right of set-off (at least where the rights are not coupled with other features that amount to a PPSA security interest). It does, however, stay the enforcement of a security interest.133 Similarly, liquidation does not stay a set-off, to the extent that the requirements of section 553C are met.134 On the other hand, a set-off contrary to insolvency principles may be disallowed.135
In the case of the letter of request, the legislation directs the court to exercise its powers as if the matter had arisen in its own jurisdiction, and this should mean that set-offs are respected to the extent Australian insolvency law would allow them.
3.94 In the case of an ancillary winding up, either under Pt 5.7 or under section 601CL(14), it is likely that an Australian court would follow English authority to the effect that insolvency set-off rules are mandatory rules of the Australian winding up. It is unlikely that any order would be made in the exercise of common law jurisdiction inconsistent with that approach.136
3.95 Outside insolvent liquidation, the key form of set-off is contractual. Generally, a mere contractual right of set-off is enforceable under Australian law if neither party is in insolvent liquidation. However, it is subject to certain restrictions if a party to the set-off has assigned or granted a security interest over a debt the subject of the set-off, goes into administration, or enters into a court-approved compromise or arrangement with its creditors. If one of the parties to the set-off is in insolvent liquidation, then set-off is governed by section 553C of the Corporations Act. Section 553C is mandatory, takes effect automatically, and overrides any contractual set-off. However, set-off under section 553C requires the existence of mutual, commensurable claims and is subject to certain restrictions (such as notice of insolvency and intervening creditors as described in section C above). A contractual set-off effected before the commencement of a winding up may survive the liquidation process so long as it does not constitute a voidable preference (which requires, among other things, that the contractual set-off does (p. 45) not produce a different result to section 553C). In addition, the Netting Act protects the enforceability of certain ‘close-out netting contracts’ against an insolvent party without requiring mutuality or any of the other conditions to set-off under section 553C. Where contractual rights of set-off are combined with other rights having the substantive effect of security, the arrangement may give rise to a security interest for the purposes of the PPSA and the effect of that legislation on the arrangement will require careful consideration. Where there are dealings with rights the subject of the contractual set-off arrangement, the PPSA may also affect whether the mutuality requirements for insolvency set-off are satisfied. Contractual set-off rights may be governed by foreign laws and enforced where there is a foreign element in the transaction, but careful consideration of the facts of any case is required.(p. 46)
2 This covers set-off against companies. There is an equivalent to s 553C for individuals in s 86 of the Bankruptcy Act 1966 (Cth). However, this chapter deals only with set-off and netting involving companies, and accordingly only insolvency proceedings applicable to companies under Australian law are considered.
4 A full discussion of the intricacies of the PPSA is outside the scope of this chapter. For a detailed description see Anthony Duggan and David Brown, Australian Personal Property Securities Law (2nd edn, LexisNexis 2016). The interaction between the PPSA and insolvency set-off under the Corporations Act has recently been considered in Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liq) (receivers and managers appointed)  WASC 152 (Hamersley v Forge).
5 PPSA, s 12. In Hamersley v Forge, a security interest under the PPSA was characterized as a ‘statutory interest that is proprietary in nature’ (at ) and that the interest ‘has this characteristic for all purposes’ (at ).
8 PPSA, s 12(3A). For netting contracts, an equivalent provision now appears in s 5A of the Netting Act. Before this, the weight of Australian case law favoured the view that a charge-back was conceptually impossible: Broad v Commissioner of Stamp Duties (1980) 2 NSWLR 40; Jackson v Esanda Finance Corporation Ltd (1992) 59 SASR 416, 418; Griffiths v Commonwealth Bank of Australia (1994) 123 ALR 111, 120; Wily v Rothschild Australia Ltd (1999) 47 NSWLR 555, 564 –; but in Cinema Plus Ltd (Administrators Appointed) and Another v Australia and New Zealand Banking Group Ltd (2000) 49 NSWLR 513, Spigelman CJ stated that ‘[t]he matter must now be revisited in the light of the House of Lords decision in Re Bank of Credit & Commerce International SA (No 8)  AC 214’ (518 ).
12 PPSA, s 10. Excluded from the definition of account are claims in respect of an ‘ADI account’, debentures, derivatives and bills of exchange, and ‘chattel paper’. Whether a simple loan falls within the definition is uncertain (Duggan and Brown, Australian Personal Property Securities Law (n 4) para 3.32).
14 PPSA, s 10. ADI has the meaning given in the Banking Act 1959 (Cth) (Banking Act) and covers banks authorized to conduct business in Australia, both Australian incorporated and foreign, but not other financial institutions.
17 See Rory Derham, The Law of Set-Off (3rd edn, Oxford University Press 2003) para 17.38–46 and 17.73ff; J Heydon, M Leeming, and P Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (5th edn, LexisNexis 2015) para 29.205ff.
18 Derham (n 17) para 17.41.
19 Derham (n 17) para 17.42.
20 See, for example, Helstan Securities Ltd v Hertfordshire County Council  3 All ER 262 (QB); Linden Gardens Trust Limited v Lenesta Disposal Limited; St Martin’s Property Corporation Limited v Robert McAlpine Limited  3 WLR 408 (HL); Macintosh v Turner Corporation Limited (in liquidation) (1995) 13 ACLC 1314; Berata Air System Pty Limited v FAI Insurance Limited (unreported, Supreme Court of New South Wales Equity Division, Brownie J, 17 February 1995); Pacific Brands Sports & Leisure v Underworks Pty Ltd  FCAFC 40; Parmalat Australia Ltd v Norco Co-operative Ltd  QCA 118; Whyked Pty Ltd v Yahoo Australia and New Zealand Pty Ltd  NSWSC 850; CT Money Pty Ltd v AFIG Wholesale Pty Ltd  NSWSC 1336; cf Anning v Anning  4 CLR 1049.
21 See paras 3.43–3.46.
23 See section C (Set-off against Parties in Insolvency).
25 See para 3.45.
26 PPSA, s 81(b): the relevant accounts are broadly accounts that are the proceeds of inventory or that arise from the grant of rights or services in the ordinary course of business, or the proceeds of such an account.
27 The counterparty may have constructive knowledge if, for example, it is aware of an agreement and its failure to ascertain the terms of the agreement amounts to ‘wilfully shutting one’s eyes’ as to the possible existence of a prohibition restricting entry into a set-off arrangement. See British Industrial Plastics Limited v Ferguson  1 All ER 479 (HL); Woolley v Dunford (1972) 3 SASR 243; cf Swiss Bank v Lloyd’s Bank Corporation  Ch 548. The fact that a security interest has been registered on the PPSA register does not give persons constructive notice of the existence or contents of the registration: PPSA, s 300.
33 These rights arise under sections 443E and 443F of the Corporations Act. Their interaction with a contractual right of set-off is discussed in Cinema Plus Ltd (Administrators Appointed) & Anor v ANZ Banking Group Limited (2000) 49 NSWLR 513; Lockwood v White  VSCA 30.
34 It is noted that the Commonwealth has passed legislation to limit rights to take action under a contract merely because an administrator has been appointed: Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017 (Cth).
39 The Commonwealth reform noted in n 34 in relation to administration applies to a scheme of arrangement.
42 The Imperial Acts Application Act 1969 (NSW) and the Imperial Acts Application Act 1984 (Qld) repealed the English Statutes of Set-off of 1729 and 1735 in the States of New South Wales and Queensland respectively. The Statutes of Set-off have been substantially re-enacted in s 21 of the Civil Procedure Act 2005 (NSW) and in s 20 of the Civil Proceedings Act 2011 (Qld). See Downsouth Construction v Jigsaw Children  NSWSC 597; and Westpac Banking Corporation v Zilzie Pty Ltd and Others  QSC 238.
45 See, for example, Federal Commerce & Navigation Co. Ltd v Molena Alpha Inc  QB 927 (CA); Compania Sud Americana de Vapores v Shipmair BV (The Teno)  2 Lloyd’s Rep 289 (QB). The Australian authorities on this issue are considered in some detail in Hawes v Dean  NSWCA 380. For a recent application of the principles of equitable set-off, see Chamberlain Early Learning Centre Pty Limited v Precious 1 Pty Limited in its own right and as trustee for The 4 Chamberlain Holdings Family Trust  NSWSC 189.
49 Stein v Blake  AC 243 (HL); Gye v McIntyre (1991) 171 CLR 609; Krishell Pty Ltd v Nilant  WASCA 223; Reed Construction Australia Ltd v DM Fabrications Pty Ltd  NSWSC 1190; Independent Civil Construction Pty Ltd v JGE Earthmoving Pty Ltd  NSWSC 132; MK Builders Pty Ltd v 36 Warrigal Road Pty Ltd & Ors  VSC 149.
50 Hiley v Peoples Prudential Assurance Co. Ltd (in liq) (1938) 60 CLR 468; Day & Dent Constructions Pty Ltd (in liq) v North Australian Properties Pty Ltd (1982) 40 ALR 399; Gye v McIntyre (1991) 171 CLR 609; JLF Bakeries Pty Ltd (in liq) v Baker’s Delight Holdings Ltd  NSWC 894; MK Builders Pty Ltd v 36 Warrigal Road Pty Ltd & Others  VSC 149; Hamersley Iron Pty Ltd v James  WASC 10.
60 Hamersley v Forge,  and . See paras 3.18–3.20 in relation to section 80 of the PPSA. This differs from the position under the pre-PPSA law and it remains to be seen whether the decision in Hamersley v Forge in these respects will be followed by other Australian courts.
66 See, for example, Shirlaw v Lewis (1993) 10 ACSR 288, 295–296; JLF Bakeries Pty Ltd (in liq) v Baker’s Delight Holdings Ltd  NSWC 894; Grapecorp Management Pty Ltd (in liq) v Grape Exchange Management Euston Pty Ltd  VSC 112.
67 Corporations Act, s 95A. See Jetaway Logistics Pty Ltd and Others v Deputy Commissioner of Taxation  VSCA 319 in relation to notice of insolvency in the context of sections 95A and 553C(2) of the Corporations Act.
69 For example, the Banking Act, ss 11F and 13A; Insurance Act 1973 (Cth), ss 28 and 116(3); Life Insurance Act 1995 (Cth), s 187; and Superannuation Industry (Supervision) Act 1993 (Cth), s 142. As to when assets or liabilities may be in Australia, see Assetinsure Pty Ltd v New Cap Reinsurance Corporation Ltd (in liq)  HCA 13.
71 For banks, see s 15C of the Banking Act; for general insurers, see s 62V of the Insurance Act 1973 (Cth); for life insurers, see s 165B of the Life Insurance Act 1995 (Cth). The interaction of these provisions with the Netting Act is a complex matter outside the scope of this chapter.
72 Ex parte Mackay (1873) LR 8 Ch App 643 (CA); British Eagle International Airlines Ltd v Compagnie Nationale Air France  1 WLR 758 (HL); International Air Transport Association v Ansett Australia Holdings Ltd  HCA 3.
73 See para 3.37. That may not be a significant concern in so far as the operation of the section is to produce the same result as the agreement would have, had the right been exercised before the winding up commenced.
75 Section 588FA of the Corporations Act provides that a transaction is an unfair preference if it is a transaction to which a company and a creditor are parties and which results in the creditor receiving a larger number of cents in the dollar than it would have received in respect of an unsecured debt if the transaction were set aside and the creditor were to prove for the debt in the winding up of the company.
84 Typically, master agreements for financial markets transactions (such as the Master Agreements published by the International Swaps and Derivatives Association, Inc. and the Australian Master Securities Lending Agreement). See Re Lindholm  FCA 1425.
89 Davies, Bell, and Brereton, Nygh’s Conflict of Laws in Australia (n 88) para 33.68.
90 See the discussion at paras 3.17–3.22.
91 See the discussion at para 3.12.
94 Duggan and Brown, Australian Personal Property Securities Law (n 4) para 14.9.
97 PPSA, ss 79–81, described at paras 3.17–3.22.
99 Davies, Bell and Brereton, Nygh’s Conflict of Laws in Australia (n 88) para 16.3 and 20.2.
102 Miwa Pty Ltd v Siantan Properties Pte Ltd  NSWCA 297, [53–56]; Chamberlain Early Learning Centre Pty Limited v Precious 1 Pty Limited in its own right and as trustee for The 4 Chamberlain Holdings Family Trust  NSWSC 189,  (Emmett AJA); Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd  2 NSWLR 514,  (Hutley JA); cf Blacksheep Productions v Waks  NSWC488, ; and the position in England in Muscat v Smith  EWCA Civ 962,  1 WLR 2853; Heydon, Leeming, and Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (n 17) 1105–6.
103 See the discussion of the effect of the Model Law at paras 3.79–3.81; Buccaneer Energy Ltd v Buccaneer Energy Ltd  FCA 711.
104 A foreign company registered under the Corporations Act may also be the subject of a compromise or arrangement under Part 5.1 of the Corporations Act (discussed in paragraph 3.30). As the effect on set-off rights depends on the terms of the arrangement or compromise we do not discuss this further.
106 Under the Model Law, a foreign company’s centre of main interests, in the absence of evidence to the contrary, will be presumed to be the jurisdiction in which the foreign company’s registered office is located.
107 Model Law, art 20; CBIA , s 16. The Model Law does not apply to Part 5.2 (which concerns receivers and other controllers) or Part 5.4A (which concerns winding up effected by the court other than in insolvency) of the Corporations Act.
114 Corporations Act, s 581(2)(a). Prescribed countries are those countries which are prescribed by reg 5.6.74 of the Corporations Regulations 2001 (Cth) and presently include Canada, Malaysia, Singapore, New Zealand, Switzerland, the United Kingdom, the United States of America, Papua New Guinea, and Jersey.
117 Section 601CD of the Corporations Act provides that a foreign company may not carry on business in Australia unless it is registered under that Division or has a registration application pending under that Division.
118 Section 601CL(14)(b) of the Corporations Act provides that the court shall, on application by the person who is the liquidator for the foreign company’s place of origin, or by the Australian Securities and Investments Commission, appoint a liquidator of the foreign company.
124 Inability to pay debts may be established with the assistance of certain statutory presumptions in s 585 of the Corporations Act and if an Australian court has recognized a foreign insolvency proceeding as being the ‘foreign main proceeding’ for the purposes of the Model Law, then (in the absence of evidence to the contrary) such recognition is proof of the foreign company’s insolvency for the purposes of commencing a winding up under Part 5.7. Model Law, art 31.
127 Under the Model Law, a foreign company’s centre of main interests, in the absence of evidence to the contrary, will be presumed to be the jurisdiction in which the foreign company’s registered office is located.
133 See the discussion in para 3.29.