The below article from 12 January 2015 has been provided by Annette Gaber, Gadens Lawyers.
On 17 December 2014, the Victorian Court of Appeal handed down its decision in Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd & Ors  VSCA 326. One of the main issues in the case was whether an amount of $1M paid into an interest bearing account pursuant to court order gave rise to a security interest under the Personal Property Securities Act 2009 (Cth) (PPSA).
The decision is the latest in a series of cases between Dura and Hue Boutique which are of relevance to the construction industry. However, this decision relates only to the rights and interests of the parties in money paid into an account by Dura as a condition of being granted a stay of execution of judgment pending an appeal.
In 2012, the Supreme Court entered judgment against Dura in favour of Hue Boutique for a sum in excess of $6M. Dura appealed the decision and applied for a stay of execution pending the determination of its appeal. A stay was granted on condition that Dura pay $1M into an interest-bearing account in the joint names of the solicitors acting for the parties pending hearing and determination of the appeal and to abide the outcome of the appeal. In August 2012, Dura paid the money into a joint account in compliance with the court order.
In September 2012, Dura granted a security interest over all of its present and after-acquired property in favour of an associated company.
In July 2013, the Court of Appeal dismissed Dura's appeal and ordered that it pay the costs of the appeal. An application by Hue Boutique for release of the funds in the joint account was adjourned.
In August 2013, Dura applied to the Court of Appeal for a further stay of execution pending the determination of an application by it for special leave to the High Court. However, prior to determination of the further stay application, Dura was placed into liquidation and the application was abandoned.
The question of who was entitled to the funds in the joint account remained outstanding. The liquidator for Dura filed submissions which contended that Hue Boutique had a PPSA security interest in the funds and, because the interest was not perfected, the funds vested in Dura on its liquidation. Following the filing of submissions, the liquidator played no further part in the application. The associated company of Dura appointed receivers to the assets of Dura who took over conduct of the matter. The receivers raised alternative arguments; in both scenarios they too contended that Hue Boutique held a security interest under the PPSA which it failed to perfect, with the result that the funds vested in Dura on its liquidation. Hue Boutique denied the applicability of the PPSA and challenged the entitlement of the receivers to the funds in the account.
The Court of Appeal (Santamaria JA, with whom Maxwell P and Whelan JA agreed) held that Hue Boutique had an equitable charge over the money paid into the joint account and that the PPSA did not apply for reasons given below. The Court indicated its intention to order the release of the funds to Hue Boutique and called for draft orders from the parties.
The Court conducted an analysis of the authorities dealing with the rights and interests of parties in moneys paid into court. At paragraph 86 of the decision, a summary of the propositions identified in the authorities was set out, including these:
- the authorities are unsettled on whether money ceases to be the property of a defendant when they make a payment in as a condition of being given leave to defend;
- upon the payment being made, the plaintiff acquires an equitable charge over the funds;
- where a summary judgment application has been made and the defendant is required to make payment in as a condition of being granted leave to defend, the money is regarded has having been paid on condition; the condition is that where the plaintiff succeeds the funds belong to the plaintiff to satisfy the judgment;
- whether the money is paid into court or into a joint account makes no difference;
- the payment in and interest acquired by the other party remains subject to the rules relating to voidable transactions in insolvency.
In considering what interest Dura retained, the Court said that consideration must be given to the circumstances in which the payment was made and the terms of the order pursuant to which the payment was made. In this case, the order was that the money be paid into an account "pending the hearing and determination of the appeal or further order and to abide the outcome of the appeal". It was held that the intention was for the Court to have full control over the dispensation of the fund and that, once Dura made the payment in, Dura was to be stripped of any proprietary interest. The rights retained by Dura included a right of due administration, a right to apply for repayment of the funds if it had succeeded on appeal and a right to redeem any surplus had the money paid in exceeded the judgment.
As Dura was found to part with its legal interest in the funds upon payment into the account, the only basis on which the receivers could make a claim to the fund was if they succeeded in their argument that Hue Boutique held a security interest in the funds under the PPSA which it failed to perfect. In considering the applicability of the PPSA, the Court looked at:
- the meaning of "security interest" given in s12, namely an "interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation ………"; and
- section 8(1) which sets out those interests not covered by the PPSA, including at s8(1)(c) "a lien, charge, or any other interest in personal property, that is created, or arises or is provided for by operation of the general law".
The meaning of the word "transaction" used in the definition of "security interest" was considered. There being no definition provided in the PPSA, the Court looked at its natural and ordinary meaning. It was observed that the word tends to be used to describe conduct giving rise to rights where the creation of those rights is consensual between the parties, as well as conduct resulting in rights arising by operation of the law notwithstanding the absence of consent. However, given that s8 excludes from the operation of the PPSA interests in personal property arising by operation of law, the term "transaction" in s12 was interpreted as referring to a consensual transaction. It was noted that the same view was given by Professor O'Donovan in Personal Property Securities Law in Australia (2009) and Duggan and Brown in Australian Personal Property Securities Law (2012). This interpretation is supported by other provisions in the PPSA which suggest that security interests arise within 'security agreements' (see discussion at paragraphs 117-120 of the decision).
The Court of Appeal ruled that the interest of Hue Boutique in the funds did not arise out of a consensual transaction between it and Dura and, as such, its interest was not a security interest under the PPSA. There was no transaction between the parties; the money was paid into court pursuant to a court order. Hue Boutique had not agreed to the stay of execution and did not agree to the order. Furthermore, the equitable charge held by Hue Boutique over the funds fell within the exception in s8(1)(c), namely it was a charge arising by operation of the general law.
Finally, it was not contended that the creation of the charge was an unfair preference in favour of Hue Boutique.