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

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• an ADI’s default in respect of a customer’s deposit may resultin the customer defaulting on its mortgage loan. In thissituation, the mortgage loan and the deposit could beregarded as so closely connected that it would be unjust notto allow the customer to set off the deposit against themortgage loan.Generally speaking, the more closely the contracts under whichthe claims arise are related, the more likely it will be that anequity will arise to allow a set-off.8.4 Contractual set-offTwo parties can enter into an agreement to set off theirrespective liabilities to each other so that there is only, asbetween them, a single liability for the balance. Contractual setofftakes effect according to its terms and is enforceable untilone of the parties to the agreement becomes bankrupt orinsolvent.In the context of the relationship between an ADI and one ofits customers, contractual set-off will only apply if there is anagreement to this effect in the documents regulating the rightsbetween them. It is usual that the documentation in relation to amortgage loan will provide the ADI with a right to combine theaccounts of the customer. The correct classification of such acombination of accounts clause is that it is a form of contractualset-off.8.5 Insolvency set-offInsolvency set-off arises where one of the claimants is insolventor bankrupt. Insolvency set-off is governed by statute (section 86of the Bankruptcy Act 1966 for individuals and section 553C ofthe Corporations Act for companies).The two sections are identical and provide that where there havebeen mutual credits, mutual debts or other mutual dealings (seesection 8.6) between the bankrupt (or insolvent) person and aperson claiming a debt in the bankruptcy (or insolvency):“(a) an account will be taken of what is due from one party tothe other in respect of those mutual dealings;(b) the sum due from one party must be set off against any sumdue from the other party; and(c) only the balance of the account may be claimed or ispayable.”Insolvency set-off, when it applies, is mandatory and applies tothe exclusion of statutory, equitable and contractual set-off.Unlike other forms of set-off it cannot be excluded by agreementbetween the parties (see section 8.7).8.6 MutualityFor statutory set-off or insolvency set-off to be permitted theremust be mutuality. The general principle underlying mutuality isthat the claim of one person should not, without agreement, beused to satisfy the liability of another ie. “one man’s money shallnot be applied to pay another man’s debt” (Jones v Mossop(1844) 3 Hare 568).For there to be mutuality, each claimant must be the beneficialowner of the claim owed to it. Generally, set-off will not beavailable if the claims are legally mutual, but not equitablymutual. For example, a debt due to a party in its own right cannotbe set off against a sum owed by the party in its capacity astrustee.In the securitisation of loans outlined above, and prior toperfection of title, the ADI is the legal owner of the sold loans,but the special purpose vehicle is the owner in equity. Afterperfection of title, the ADI will be neither the legal nor equitableowner of the sold loans.The mutuality principle therefore, on its face, seems to preventstatutory or insolvency set-off by the customer as a result of thechange in equitable ownership of the loan. Generally the time fordetermining mutuality is when the set-off is being asserted (or,for insolvency set-off, as at the commencement of theinsolvency). The most important variation from this principle is inthe context of the assignment of a debt (which is relevant here).Where there is an assignment of a primary debt, the assigneetakes subject to the equities. This means, in the situation underdiscussion, that the special purpose vehicle takes a sold loansubject to the right of the customer to assert against the specialpurpose vehicle the same set-off rights that it could haveasserted against the ADI. However, once the customer receivesnotice of the assignment, this crystallises the equities and thecustomer cannot thereafter set up as against the special purposevehicle any new and independent equities which subsequentlyarise (subject to some exceptions which are not relevant here). Inpractice, this means that once the customer is advised of theassignment of its loan it will not be able to claim a set-off for anynew deposits that it makes with the ADI (but will retain its rightsin relation to any existing deposits).49
50However, this result and the principle that an assignee takessubject to the equities, does not apply if the customer agreesotherwise. Often, loan documentation explicitly states that theADI may assign the loan free of all equities. A provision of thistype is effective subject to the matters discussed in section 8.7.The absence of mutuality is relevant only for statutory andinsolvency set off. Strictly speaking, mutuality is not an essentialingredient for contractual set-off. There is no principle of lawpreventing A, B and C agreeing that A’s liability to B can be setoff against B’s liability to C.Mutuality also is not strictly essential for equitable set-off (but inmost circumstances mutuality will effectively be required as itwill usually be inequitable to apply one person’s rights againstanother’s debts).8.7 Contractual exclusion of set-offBoth statutory set-off and equitable set-off can be excluded byan express contractual provision to this effect.In some early English cases it was held that statutory set-offcould not be excluded by agreement. These cases are no longergood law. This was confirmed by the English Court of Appeal inCoca-Cola Financial Corporation v Finstat International Ltd [1996]3 WLR 849 (and, effectively, by the House of Lords in refusingleave to appeal the decision in this case). There have also been anumber of Australian cases that confirm that statutory set-offmay be excluded by agreement.Contractual set-off is purely a creature of contract and will applyto the extent agreed.In contrast to other forms of set-off, insolvency set-off ismandatory and may not be excluded by contract. Further, in thecase of loans governed by the Consumer Credit Code (whichincludes all owner occupied mortgage loans originated after 1November 1996), the stated principles are subject to theapplication of section 166 of the Code. Section 166(2) providesthat a “debtor, mortgagor or guarantor has and may exercise thesame rights in respect of [a] credit contract, mortgage orguarantee against the assignee [of the credit contract, mortgageor guarantee] as the debtor, mortgagor or guarantor has againstthe credit provider.”The operation of the Code cannot be excluded by contract.It is not clear that section 166(2) applies to rights of set-off.Nevertheless section 166 throws doubt upon the operation ofprovisions in loans governed by the Code that allow the loan tobe assigned by the ADI free of any equities. The section does nothave any impact on clauses in a loan that provide for payments tobe made by a customer free of set-off, deduction or counterclaimas such clauses apply equally to the original credit provider andan assignee.8.8 Customer’s ability to set-off against an insolvent ADIFor practical purposes a customer’s rights to set-off will only berelevant upon the insolvency of the ADI. If a customer exercises aright of set-off prior to the ADI’s insolvency, the agreementbetween the special purpose vehicle and the ADI will usuallyprovide that the ADI must compensate the special purposevehicle for, or make payments to the special purpose vehicle clearof, amounts set-off by the customer.If the ADI becomes insolvent, the special purpose vehicle willthen immediately perfect its title to the assigned loans. In thesecircumstances the customer will be endeavouring to set-off inrespect of its obligations to the special purpose vehicle under itsADI loan and the insolvent ADI’s obligations to it in respect ofdeposit accounts. Applying the rules of set-off discussed aboveleads to the following conclusions:Statutory set-offWhen the customer’s loan is assigned in equity to a specialpurpose vehicle the customer will lose any rights of statutory setoffthat it may have in relation to the loan and a deposit accountheld with the ADI. This is because there will no longer be anymutuality between the beneficial interests in respect of the ADI’srights under the loan and obligations under the deposit account.Also, a customer will be bound by any provision in the loan ordeposit account documentation that excludes the customer’srights of statutory set-off or (subject to the possible applicationof section 166 of the Consumer Credit Code) allows the ADI toassign the mortgage loan free of such rights.Equitable set-offIn certain circumstances, a customer may have a right ofequitable set-off against its loan in respect of a deposit accountheld by the customer with the ADI. This may be the case notwithstanding the lack of mutuality of beneficial or legal interestswith respect to the loan and that deposit account. However, thecustomer will not have any right of set-off in respect of depositsmade after the customer becomes aware of the assignment of theloan. Further, this result is subject to any provision in the mortgageloan or deposit account documentation that excludes thecustomer’s rights of equitable set-off or (subject to the possibleapplication of section 166 of the Consumer Credit Code) allowsthe ADI to assign the mortgage loan free of such rights.
Page 6: 12.7.3 Euroentitlements............
Page 9 and 10: 1 General overview of the nature of
Page 12: An interest in a managed investment
Page 15 and 16: 142.3.4 Provision of a financial se
Page 17 and 18: 3 The disclosure and civil liabilit
Page 19 and 20: 18The statutory source for this ste
Page 21 and 22: The implication of this approach in
Page 23 and 24: Interestingly, the majority then we
Page 25 and 26: 4 Stamp duty and securitisation244.
Page 27 and 28: 264.8 Relief for mortgage-backed se
Page 29 and 30: 4.10 ConclusionStamp duty is a very
Page 31 and 32: Despite the absence of an express a
Page 33 and 34: 32share of the profits of the compa
Page 35 and 36: (d) before the issue:(i) the compan
Page 37 and 38: 365.4 Debt/equity rulesDivision 974
Page 39 and 40: Entities that make GST-free supplie
Page 41 and 42: • “ enterprise” is defined in
Page 43 and 44: 6 The Consumer Credit Code andsecur
Page 45 and 46: 7 The regulation of the participati
Page 47 and 48: inclusion within the ELE depends on
Page 49: 8 Set-off and securitisation8.1 Int
Page 53 and 54: 9 Insolvency and securitisation529.
Page 55 and 56: 54• if the trustee has not limite
Page 57 and 58: Section 588FG provides a measure of
Page 59 and 60: 10 Issues relating to debt securiti
Page 61 and 62: 60indemnity existed) and had no han
Page 63 and 64: The effect of the decision has been
Page 65 and 66: the ASX has discretion to ask the e
Page 67 and 68: • Public Trustee Members - for pr
Page 69 and 70: When Austraclear receives notificat
Page 71 and 72: have been completed in relation to
Page 73 and 74: Some CMBS transactions allow the is
Page 75 and 76: 14.3 GamingIn the past, another con
Page 77 and 78: 16 Clayton UtzOur securitisation te

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

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