The Supreme Court of Victoria Court of Appeal recently handed down its decision in Dura (Australia) Constructions Pty Ltd (ACN 004 284 191) (In Liquidation)(Receivers and Managers Appointed) v Hue Boutique Living Pty Ltd (Formerly SC Land Richmond Pty Ltd) (ACN 106 117 506) & Ors [2014] VSCA 326, which dealt with the issue of whether a payment into court is a security interest for the purposes of the Personal Property Securities Act 2009 (Cth)(PPSA). Ultimately, the Court decided that a $1M payment into court by a judgment debtor was not a security interest within the meaning of section 12 of the PPSA but gave rise to an equitable charge that arose by operation of the general law which was not ‘provided for by a transaction’.

Facts

In April 2012, judgment was entered against Dura in favour of Hue for the amount of $6.1M. Dura sought a stay of judgment pending appeal and the stay was granted on the condition that Dura pay $1M (Funds) into a bank account held jointly in the names the solicitors of both parties, which it did in August 2012. The terms of the court order for that payment included that the funds were to remain in the account ‘pending the hearing and determination of the appeal.’

The $1M was advanced by Dura’s parent company, Dura Asia-Pacific, which took security over Dura’s assets by way of a company security deed (Security Deed) which was registered on the PPSR.

In July 2013, Dura’s appeal was dismissed by the Court of Appeal and it then sought an extension of the stay to seek leave to appeal to the High Court. However, in August 2013, before the further appeal could be heard, Dura was placed into liquidation. Subsequently, receivers and managers were appointed to Dura by Dura Asia-Pacific.

Hue claimed entitlement to the funds. Dura, through its receivers, rejected Hue’s claim on the basis that it had an interest in the funds in the form of a security interest under section 12(1) of the PPSA and because the interest had not been perfected, the funds vested in Dura upon its liquidation pursuant to section 267(2) of the PPSA.

Issues

Relevantly, among the issues before the Court were:

  • whether, when Dura entered the Security Deed, it had any interest in the Funds that it was capable of charging in favour of Dura Asia-Pacific; and
  • whether Hue held a security interest as defined in s 12(1) of the PPSA, in respect of the funds in the joint account. 

The Court of Appeal considered the interests that might arise in occasions on which funds might be paid into court.  In particular, payments:

  • as a condition of stay of execution of a judgment pending the hearing and determination of an appeal;
  • for security for costs;
  • by way of interpleader; and
  • as an alternative to a freezing order.

Held

After an exhaustive review of authorities, the Court found that a charge was created when funds are paid into court or into accounts pursuant to court order, conditional upon certain outcomes such as an appeal.    

The Court observed that there were unresolved differences in the authorities as to whether a defendant who pays funds into court on the condition of being granted leave relinquishes its property rights in the funds.

However, the clear intention of the rule contained in the order was that the fund was to ‘abide the outcome of the appeal’ and that, pending the hearing and determination of the appeal, the Court was to have complete control over the dispensation of the fund.  Accordingly, the Court concluded that once Dura made the payment in, it was to be divested of any proprietary interest in the fund. 

Accordingly, the Court held that Hue acquired an equitable charge over the Funds and it was not a security interest within section 12(1) of the PPSA.  In reaching this finding, the Court held that an equitable charge which arises by the operation of the general law falls under section 8(1)(c) of the PPSA which deems such interests outside the application of the PPSA.

Dura only held a right of due administration and a right to apply for repayment of the funds if it had succeeded on appeal and a right to redeem any surplus had the funds paid in exceeded judgment.

The Court said that there was no distinction between funds paid into Court and funds held by solicitors on trust pursuant to court order.

Comparatively, the Court noted that funds paid for security for costs continue to be the general property of the person or party who has given the security.

The Court also considered whether Dura provided the funds into court by a ‘transaction’ for the purposes of section 12(1) of the PPSA. The Court concluded that as the funds were paid pursuant to Court order, rather than on a consensual basis between the parties, the payment was not a ‘transaction’ under the PPSA.

As the Funds were not a ‘security interest’ for the purposes of section 12 of the PPSA, section 267(2) the PPSA did not operate to vest Hue’s interest in the liquidator of Dura.