On 17 December 2014 the Supreme Court of Victoria Court of Appeal 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) [2014 VSCA 326. The decision dealt with an issue fundamental to the Personal Property Securities Act 2009 (Cth) (PPSA) – the definition of a security interest and when a security interest is ‘provided for by a transaction’ within the meaning of section 12(1) of the PPSA.
The Court of Appeal stated that a transaction for the purposes of section 12(1) of the PPSA requires there to be a consensual transaction between the grantor and the secured party. This decision:
(a) clarifies that agreements between solicitors for the parties to place funds in a joint trust account as security for the outcome of a proceeding or an interlocutory application, will be transactions for the purposes of the PPSA unless the payment is made pursuant to a court order; and
(b) potentially impacts secured parties that are granted security by way of deed poll (being a document which is signed by, and binding only on, a single party), rather than by way of a security agreement between parties.
As a consequence, insolvency practitioners should be alert to the way in which a security interest has arisen in the relevant transaction documents to determine whether it is a valid and binding security interest captured by the PPSA.
The application had a somewhat unconventional journey to the Court of Appeal. In order to secure a stay on the execution of a c. $6 million judgment debt pending the hearing and determination of its appeal, a judgment debtor (Dura) was granted a stay on the condition that it paid the sum of $1 million (Funds) into an interest bearing trust account in the joint names of its solicitors and those of the judgment creditor (Hue).
Under the terms of the order pursuant to which the payment was made, once the Funds were deposited into the trust account they were to remain in the account ‘pending the hearing and determination of the appeal or further order and to abide the outcome of the appeal’. After the Funds were deposited into the trust account, Dura was granted a loan by its parent company and an ALLPAAP security interest was granted by Dura to secure repayment of this loan.
The appeal was unsuccessful and Dura was placed into liquidation. Subsequently, receivers and managers were appointed to Dura by Dura’s parent company.
Hue sought an order that the Funds be paid to it. Dura, first through its liquidators and subsequently its receivers, resisted the payment out on the basis that Hue had an interest in the Funds which was a security interest within section 12(1) of the PPSA. Dura’s receivers alleged that as Hue had failed to perfect its security interest in the Funds, Hue’s security interest vested in Dura upon its winding up pursuant to section 267(2) of the PPSA and was therefore subject to the secured creditors ALLPAAP security interest.
The Court of Appeal unanimously found that while Hue acquired an equitable charge over the Funds upon payment in, the interest acquired by Hue was not a security interest within the meaning of section 12(1) of the PPSA. As the interest was not a security interest, it did not vest in Dura pursuant to section 267(2) of the PPSA.
It is apparent from the judgment that there were two overlapping grounds on which the Court of Appeal found in favour of Hue. First, the Court held that an equitable charge such as that acquired by Hue over the Funds “naturally falls” under the description of a ‘lien, charge or any other interest in personal property, that is created, arises or is provided for by operation of the general law’ found in section 8(1)(c) of the PPSA.
Secondly, and more pertinently, the Court also considered whether the act of payment in by Dura pursuant to the terms of the order was a transaction for the purposes of section 12(1) of the PPSA.
‘Transaction’ is not a defined term in the PPSA. However the Court considered that the exclusion from the application of the PPSA, by operation of section 8, of interests in personal property which arise by operation of law, notwithstanding that they may be said to arise from transactions (using that term in the broadest possible sense), “strongly suggests that the use of the term transaction in section 12 is confined to consensual transactions inter partes”. In other words, the security interest must arise as the result of a consensual transaction, rather than by operation of law.
The Court also noted that other provisions of the PPSA also seem to be premised on the transaction being consensual. In this regard the Court stated that in section 19 of the PPSA (which deals with attachment of security interests) the concepts of ‘grantor’ and the ‘transfer of rights in collateral to the secured party’ presuppose there being an agreement inter partes. The Court went on to state that absent an agreement between the person who has the power to transfer rights in the collateral in return for value being provided by the transferee, the security interest cannot attach to the collateral.
The Court concluded that because the interest of Hue in the Funds paid into Court did not arise out of a consensual transaction between it and Dura, Hue’s interest in the Funds was not a ‘security interest’ within the meaning of section 12 of the PPSA.
Importantly, the Court said that there was no contractual or any other transaction or arrangement between the parties; Hue did not agree to the order and did not agree to a stay of its judgment in exchange for the payment into the joint account.
Furthermore, applying the analysis adopted by the Court of Appeal, a security interest arising by way of a deed poll executed by a grantor may not satisfy the element of a consensual transaction between the grantor and the secured party. Insolvency practitioners will need to give careful consideration to the circumstances in which a security interest is said to arise to determine whether that interest, in fact, falls within the ambit of the PPSA.