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

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.