A Guide to the Law of Securitisation in Australia - Clayton Utz

8 Set-off and securitisation8.1 IntroductionA common type of securitisation in Australia involves an ADIselling (by way of an equitable assignment) a pool of its loans orother receivables to a special purpose vehicle (usually a trustee).Typically, the ADI remains as servicer of the loans and the ADI’scustomers are unaware of the assignment. Customers will onlybe given notice of the assignment if the special purpose vehicleperfects its title to the loans (ie. it takes a legal assignment ofthe loans).Set-off is an important issue where ADIs securitise their assets.In particular, the issue is whether a customer, on its ADIbecoming insolvent, can set off the amount standing to the creditof its deposit account(s) with the ADI against the customer’s loanassigned by the ADI to the special purpose vehicle.The rating agencies and investors are principally concerned withthis issue. It is important that the special purpose vehicle’s assets(ie. the assigned loans) are not detrimentally affected by (and areinsulated from) the ADI’s insolvency.The following sections deal with the four types of set-off(statutory set-off, equitable set-off, contractual set-off andinsolvency set-off), mutuality in set-off, contracting out of set-offand, in conclusion, the application of these principles to theresolution of this issue.8.2 Statutory set-offThe statutory right of set-off is based upon the English Statutesof Set-Off of 1729 and 1735. These were incorporated into thelaw of the Australian States when they were established asBritish colonies. They have since been repealed in New SouthWales and Queensland (although it is arguable that inQueensland the principles of statutory set-off still apply). In allother States, the Statutes of Set-Off remain in operation.The statutory right of set-off is a defence to an action forpayment of a debt owing by the defendant to the plaintiff. Itenables the defendant to set off against the plaintiff’s claim theindebtedness of the plaintiff to the defendant.Statutory set-off only applies where both demands are liquidatedand are due and payable before the date of the relevant action.The claims that we are considering here (ie. the customer’sindebtedness to an ADI under its loan and the ADI’s liability forthe amount of the customer’s deposit accounts in credit) wouldnormally satisfy both of these requirements. The claims must alsobe mutual. Mutuality is discussed in section 8.6.8.3 Equitable set-offEquitable set-off was developed by the Courts of Equity toprotect a party denied statutory set-off where this would resultin an injustice or an inequitable result. The classes of equitableset-off are not closed and there are some differences betweenthe approach adopted by the courts in England and Australia.However a prerequisite for the application of equitable set-off isnormally that either:• the claim and the cross-claim arise out of the sametransaction; or• the claim and cross-claim arise out of transactions that areinseparably connected.It appears (although the authorities diverge on this point) thatthe courts may also require that the cross-claim must impeachthe claim. That is, it may not be sufficient that the claim and thecross-claim arise out of the same or inseparably connectedtransactions, but rather the cross-claim must in some wayundermine the very basis of the claim.In addition, an equitable set-off may be denied by the courts evenwhere these tests have been satisfied, if in the circumstances, itwould be unjust or inequitable to allow a set-off to occur.There have been mixed results in cases where equitable set-offhas been claimed in defence to the enforcement of a mortgageloan.In some cases the courts have protected the mortgagee’s right torepayment of the mortgage debt free of set-off. In other casesthe courts have permitted a customer to set off its mortgage debtagainst damages for breach of contract where (in one case) thebreach rendered the customer unable to repay the mortgage debtand (in another case) the claim for damages far exceeded themortgage debt. It is conceivable that a default by an ADI on adeposit account could produce a similar result to either of thesefact situations. An equitable set-off of a deposit account againsta mortgage loan might be available, for instance, in the followingcircumstances:• an ADI may offer to customers the ability to offset theinterest liability on their mortgage loan against the interestearned on a nominated deposit account. Such an accountcould be construed as inseparably connected with thecorresponding mortgage loan from the ADI; or48