If it walks like a Security Interest and talks like a Security Interest, it still might be a duck. So says the Victorian Court of Appeal in the recent decision of Dura (Aust) Constructions Pty Ltd (in liq) v Hue Boutique Living Pty Limited1 in which the Court determined that money paid into an account pursuant to a Court order did not give rise to a “Security Interest” for the purposes of the Personal Property Securities Act 2009 (Cth) (PPSA).
Chronology of Events
- Judgment made against Dura (Aust) Constructions Pty Ltd (in Liq) (Dura) in favour of Hue Boutique Living Pty Limited (Hue) in the amount of $6.17 million.
- Dura sought a stay of execution pending appeal. The Court granted the stay on the condition that Dura pay $1 million into an interest bearing trust account in the joint names of the parties’ legal representatives to “abide the outcome of the appeal”.
- Dura paid the $1 million into a complying account.
- Dura then entered into a Company Security Deed with a related entity, and perfected this by registering a financing statement on the Personal Property Securities Register.
- Dura’s appeal was dismissed. Dura applied for a further stay pending its application for special leave to appeal to the High Court of Australia.
- Dura was then placed into liquidation and no longer pursued the stay application (and orders were made refusing it).
- Both Hue and Dura (first through its liquidator and then its receiver) made claims to the $1 million.
- Dura submitted that the $1 million payment was a Security Interest in favour of Hue under the PPSA, unperfected by Hue and therefore (by virtue of s267(2) of the PPSA) when Dura was placed into liquidation the interest vested in Dura as the grantor.
- Hue submitted that the $1 million payment was not the subject of a Security Interest granted by Dura under the PPSA because Dura relinquished its rights outright at the time the money was paid in. Accordingly, at the time the Company Security Deed was entered into, Dura did not have any rights in the $1 million.
Santamaria JA (Maxwell P and Whelan JA agreeing) determined that the payment was not a Security Interest under the PPSA. The Court ordered that the funds, which included all accrued interest, would be paid to Hue.
- For this issue, it makes no difference whether moneys are paid into Court or into a joint account.
- A Security Interest under the PPSA means an interest created by a “transaction”, and a transaction for the purposes of the PPSA must be consensual as between the parties.
- The transaction the subject of these proceedings arose by order of the Court, and therefore was not consensual.
- s8(1)(c) of the PPSA provides that the PPSA does not apply to a lien, charge, or any other interest in personal property that is created, arises or is provided for by operation of the general law.
- Upon payment in, Dura relinquished its rights outright (with the possible exception of an entitlement to insist on administration of the funds consistently with any Court order) and Hue acquired an equitable charge over the money by operation of law.
- Hue’s interest was therefore not a security interest under the PPSA, and was not required to be perfected under section 21 of the PPSA. As a result, s267(2) of the PPSA did not apply.
Protecting Your Interests
In circumstances such as these, a prudent judgment debtor should (prior to seeking a stay of execution pending the hearing and determination of an appeal), seek the agreement of the judgment creditor to pay an amount securing the judgment debt into an account in the joint names of the parties’ solicitors (or even into the judgment creditor’s account). The order and the agreement should also make clear that the debtor retains an interest in the money.
Such steps, as opposed to the factual circumstances of the Dura case, could satisfy the requirement for there to be a consensual transaction for the purposes of s12(1) of the PPSA, circumvent the restrictions imposed by s8(1) of the PPSA and be more likely to give the judgment debtor the benefit of s267(2).
Conversely, a prudent judgment creditor should resist such a proposal and instead seek orders mandating the payment of the money and without any interest being retained.