Focus: Court considers the Personal Properties Securities Act 2009 (Cth)
Services: Dispute resolution & litigation, Financial services, Insurance, Property & projects
Industry Focus: Financial services, Insurance, Property

In the recent case of Dura v Hue1 the Victorian 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 Court of Appeal considered in depth the application of the Personal Property Securities Act 2009 (Cth) (PPSA) in relation to the rights to the funds. Despite the Court finding that no security interest in the funds existed due to the absence of a 'consensual transaction', the case presented helpful guidance on the interpretation of the PPSA in relation to security interests over funds placed in a jointly controlled separate account.

Case summary

In order to secure a stay of the execution of a judgment debt pending the hearing and determination of its appeal, a judgment debtor (Dura) paid $1 million into an interest bearing account in the joint names of Dura's solicitors and those of the judgment creditor (Hue).

Under the terms of the order pursuant to which the payment was made, the money was 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 money was paid, the judgment debtor entered into a security deed with a company associated with it which was registered on the PPS Register.

The appeal was unsuccessful. During the application for a further stay of execution pending an application for special leave to appeal to the High Court of Australia, the judgment debtor was placed into liquidation. A dispute then arose as to the entitlements to and disposition of the funds in the interest bearing account.

The principal issues in the case were whether, upon the payment into the account:

  • the judgment debtor retained an interest in the money that it was capable of charging in favour of another party
  • the judgment creditor acquired any interest in the monies in the joint account
  • in the event that the judgment creditor acquired an interest in the monies in the joint account, that interest was a 'security interest' under the PPSA, and
  • the judgment debtor was the 'grantor' of that interest within section 267(2) of the PPSA.

Case decision

The Court held that:

  • Hue acquired an equitable charge in the monies in the joint account
  • when the monies were paid into the joint account, Dura retained rights of due administration and an equity to redeem any monies found to be unnecessary to satisfy Hue's rights as a judgment creditor
  • because the interest acquired by Hue in the monies in the joint account:
    • was a charge that arose by operation of the general law, and
    • was not 'provided for by a transaction',

    it was not a 'security interest' under section 12 of the PPSA, and

  • in so far as the interest acquired by Hue was not a 'security interest', section 267(2) of the PPSA did not operate to vest its interest in the liquidator of Dura.

Application of the PPSA

The case clarified the application of the term 'transaction' in the definition of a 'security interest' in section 12(1) of the PPSA and confirmed that a security interest as defined in section 12(1) can only arise under a consensual transaction between parties.

In this case, as there was no consensual agreement or transaction (the order granting a stay upon conditions was imposed upon the parties), there was no security interest in the funds under section 12(1) of the PPSA.

The main lesson following from the decision in this case is that if parties make a consensual agreement by which funds are set aside in a bank account to be applied for specified purposes, and if under the agreement a party 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.

Practical application to recent matter

The findings in this case assisted one of our clients in establishing and perfecting a security interest in funds that were placed in a controlled monies account as a result of an agreement between the parties. The agreement provides that those funds are to be held in the account pending the outcome of an expert determination.

Our client, with guidance from the Victorian Court of Appeal's decision, established that there was a security interest in the funds held in the controlled monies account as there was a consensual transaction and agreement between the parties to place the funds into an account.

The PPSR registration was then made to perfect the security interest of our client over the funds held in the account and prevent those funds being vested in the grantor pursuant to section 267 upon a corporate grantor being placed into administration or liquidation, or if an individual grantor, bankruptcy.

Footnotes

1 Dura (Australia) Constructions Pty Ltd (in liq)(receivers and managers appointed) v Hue Boutique Living Pty Ltd (formerly SC Land Richmond Pty Ltd) [2014] VSCA 326.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.