When it pays not to have a security interest
(Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd & Ors [2014] VSCA 326)
Imagine that you have been appointed Receiver over a company which is already in liquidation. Your appointer has an all assets charge and they tell you that the company transferred a million dollars into a solicitor’s trust account only shortly before your appointment. However, a third party is claiming a charge over the money, but they have not registered their interest on the PPSR!
Can the third party rely upon this equitable charge to obtain the money which would have, only one month before, been available in full to the appointer?
In the recent case of (Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd & Ors [2014] VSCA 326) (“Dura Constructions”) the Victorian Supreme Court of Appeal confirmed that an interest obtained by a party who is granted an equitable charge over property is not a security interest for the purposes of the Personal Property Securities Act 2009 (“PPSA”). As a result, the secured party does not need to register their equitable charge on the PPSR and any failure to do so will not prejudice their ability to call upon the charge, even in the event of the grantor’s liquidation.
In this case, Dura had been ordered to pay monies ($1,000,000) into Court as a condition to obtaining a stay of execution of a judgment. The monies were paid to a joint account in the names of the solicitors for the parties. The other party, Hue, was an unsecured creditor. Dura went into liquidation while the monies remained in that account.
The creditor with a perfected security interest (viz. registered on PPSR) appointed Receivers in relation to certain property of Dura. The Receivers submitted to the Court of Appeal that the interest of Hue in the monies paid into Court was a security interest and that pursuant to s 267 of the PPSA that security interest had vested in Dura, because it was unperfected at the time it was resolved that Dura be wound up. If the company had not been in liquidation, the Receivers would have had no case to argue, as s 267 of the PPSA applies on liquidations, administrations and bankruptcies.
The question for the Court was whether an interest in monies paid into Court constitutes a security interest for the purposes of the PPSA. If the interest did not constitute a security interest, Hue was not required to register its interest on the PPSR and s 267 of the PPSA would not apply. Hue would be $1,000,000 better off, subject to the Liquidator’s claim relating to preferential payments (e.g. s 588FA Corporations Act 2001).
Under s 12 of the PPSA a security interest is a transaction that secures payment or performance of an obligation. Certain interests (listed under s 8 of the PPSA) are explicitly excluded. For the purposes of this case, s 8 of the PPSA deems that a lien, charge or other interest in personal property that is created by operation of the general law is not a security interest.
In this case, and in at least one earlier case in 2014, the Victorian Supreme Court found that the transaction must also be consensual for the PPSA to apply. The conclusion that a transaction must be consensual is not drawn from the legislation itself as we note the PPSA does not define the term “transaction”.
Explaining the reason why the term “transaction” in s 12 PPSA is confined to only consensual transactions the Court in Dura Constructions drew attention to the following:
i. The PPSA excludes transactions that are not consensual (by operation of s 8);
ii. Other provisions (e.g. s 16) are premised upon the relevant transaction being consensual; and
iii. Authority from Canada also supports the idea that a transaction giving rise to a security interest must be consensual.
It is clear that the payment of monies into Court by Dura did not arise as a result of a consensual transaction. Dura was compelled by Court order to pay the money into Court (we query the result had the Orders been made by consent). Therefore, the interest Hue held in those monies was not a security interest. Hue’s interest was merely an equitable interest, enforceable at general law and not subject to the provisions of the PPSA.
The decision in Dura Constructions was consistent with that reached in Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd [2014] VSC 217 (14 May 2014). In that case the First and Third Defendants submitted that they had a claim for equitable relief that entitled them to a security interest in the personal property of the Plaintiff. The First Defendant registered its alleged security interest on the PPSR and refused to remove it. The Court found for the Plaintiff noting that the PPSA will not operate with regard to an equitable interest.