In brief

In a recent decision the Victorian Court of Appeal has supplied some helpful insights for identifying security interests that are the subject of the Personal Properties Securities Act 2009 (Cth) (PPSA).

Key findings in the judgment can be summarised as follows:

  • for the purposes of the PPSA, a transaction can only give rise to a security interest if it is a 'consensual' transaction between the grantor and the secured party, and
  • not all rights or interests in the nature of security are security interests to which the PPSA applies.

Background

In Dura v Hue1 the Court of Appeal considered the rights of a judgment creditor to funds that had earlier been set aside by the judgment debtor as a condition of a stay of execution of judgment. The arrangement arose following an appeal by the judgment debtor against a decision of the trial division in which the judgment creditor was awarded a sum in excess of $6 million.

The Court of Appeal had ordered a stay of execution of judgment if the judgment debtor paid $1 million into a bank account in the joint names of the solicitors for the parties, ‘to abide the outcome of the appeal’. The judgment debtor made this payment.

When the judgment debtor’s appeal was later dismissed, the judgment creditor applied for orders for payment of the monies to it from the bank account. However, before those orders were made a liquidator was appointed to the judgment debtor. Receivers and managers were also later appointed by a secured creditor.

What was the judgment creditor’s interest in the funds?

The liquidators, and subsequently the receivers, argued that the judgment creditor was not entitled to the monies held in the bank account on the grounds that:

  • the judgment creditor’s rights were in the nature of a security interest for the purposes of the PPSA, and
  • that security interest had not been perfected, with the consequence that the funds had vested in the debtor company upon liquidation.

The Court undertook an extensive review of authorities, demonstrating that the proper legal analysis will differ depending on the circumstances in which a payment is made. In the present circumstances, the Court held that:

  • the payment of monies into the bank account in the names of solicitors is not to be treated any differently to the payment of monies into court (the creation of the bank account arrangement in the joint names of the law firms for the parties was for administrative and commercial convenience only),
  • upon payment in, the judgment debtor parted with any legal interest in the monies and was, at best, entitled to insist on administration of the funds in the bank account consistently with any subsequent order of the court, and
  • also upon payment in, the judgment creditor acquired a charge over the monies in the joint account. The charge arose in equity and operated to secure those monies to meet the judgment debt should the judgment creditor successfully defend the appeal and become entitled to enforce its judgment.

Application of the PPSA

Of central interest in this case was the potential application of the PPSA to the funds. Did the creation of the joint account arrangement constitute a security interest under the PPSA, as argued by the receivers? And in any event, was the equitable charge (described in 3 above) a security interest to which the PPSA applies?

If the arrangement was a security interest, or if the PPSA does apply to an equitable charge of this type, the judgment creditor’s charge would vest in the judgment debtor under section 267 of the PPSA, because the judgment creditor had not registered a financing statement on the Personal Properties Securities Register.

In examining this question the Court made two critical determinations which provide some long awaited guidance in relation to the scope of application of the PPSA.

First, although the term ‘transaction’ is a word with a wide meaning covering a comprehensive range of agreements and events, its use in section 12(1) of the PPSA is constrained by its context. A security interest as defined in section 12(1) can only arise under a consensual transaction between parties. Having regard to the requirements of sections 19 and 20 of the PPSA, this must involve the making of an agreement between a grantor and a secured party. Here, there was no such agreement (the order granting a stay upon conditions was imposed upon the parties), and the requisite element of consensuality was absent.

Second, although there was no transaction of a kind that could give rise to a security interest for the purposes of section 12(1), the judgment creditor did obtain rights in the nature of a charge. Those were rights to an equitable charge which arose by operation of the general law. A charge of this character is recognised in equity only because of the context in which the funds are set aside by a party to a claim (such as the judgment debtor). Section 8(1)(c) provides that the PPSA does not apply to a charge that arises in this way.

Because:

  • the creation of the joint account arrangement and the making of the payment by the judgment debtor was not a security interest for the purposes of section 12(1), and
  • the PPSA did not apply to the charge,

the rights of the judgment creditor did not vest in the judgment debtor. For the same reasons, the priority rules under Part 2.6 of the PPSA also did not apply to the charge. The judgment creditor was therefore entitled to the monies in the bank account held in the joint names of the law firms for the parties.

The Court noted that it was not suggested in argument that the creation of the charge constituted an unfair preference. However, we observe that payment by the judgment debtor into the joint bank account occurred before the commencement of the period of relation back applicable to voidable preferences, with the result that the payment was unlikely to be susceptible to challenge under Part 5.7B of the Corporations Act 2001 (and in particular under sections 588FA and 588FE of that Act).

Practical implications

The obvious corollary of this decision is that if parties make an agreement by which funds are set aside in a bank account to be applied for specified purposes, and if under the agreement a party (other than the payer) is given rights to those funds that are intended to secure performance of an obligation, there is likely to be a security interest for the purposes of section 12(1) of the PPSA. This is so even if the arrangement involved the secured party holding the funds in a bank account in its own name. In the present context, if the parties had agreed to the joint account arrangement (or even to the judgment creditor holding the funds) in the absence of a court order, the arrangement and payment in would likely have constituted a transaction giving rise to a security interest. The precise form of the arrangement would then dictate whether the exclusion under 8(1)(c) would apply. 

The decision is therefore highly relevant to litigants seeking to acquire security for the performance of an obligation such as a judgment debt. The decision will also clearly be of broader application and the principles discussed will apply to a range of interests such as 'security deposits' payable under leases of premises, hiring of equipment and to other similar arrangements.

This article was written by  Carla Aumann, Senior Associate, Melbourne.