Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd & Ors [2014] VSCA 326

Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd & Ors [2014] VSCA 326 - VSCA 2014 case summary — Zoe

[5]

The PPSA is aimed at establishing a 'a single national law governing security interests in personal property'.[6] It came into effect on 30 January 2012. It is based, proximately, on Canadian provincial legislation and, remotely, on Article 9 of the United States Uniform Commercial Code.[7] It provides for the creation and registration of security interests in personal property and their enforcement against those that have granted them and against third parties.
Some general observations can be made about the PPSA:
- 'Personal property' is any form of property other than land and certain licences.
- The definition of 'security interest' is fundamental. It is a 'functional definition'. It means an interest 'in personal property that is provided for by a transaction that, in substance, secures payment or performance of an obligation'. ' Transaction' is not defined in the PPSA.
- Although the PPSA lists a series of familiar security interests, such as a fixed charge or a floating charge, these are said to be only examples of the 'functional' concept.
- The holder of a 'security interest' is referred to as the 'secured party'.
- The PPSA distinguishes a 'debtor' from a 'grantor'; the former is the person who owes payment or performance of an obligation that is secured by a security interest in personal property; the latter is a person who has the interest in the personal property to which a security interest is attached. More often than not, the debtor and the grantor will be the same person.
- Security interests are effective and enforceable against grantors where those interests have attached to the collateral that is the subject of the interest; they are enforceable against third parties where they have been perfected.
- A security interest attaches to collateral when the grantor has rights in the collateral, or the power to transfer rights in the collateral, and value is given or the grantor does an act that creates the security interest.
- A security interest in particular collateral is perfected when the interest has attached to the property and the secured party has either taken possession or control of the property or has registered it on the PPS Register established under s 147 of the PPSA.
- The PPSA also sets up rules for the determination of priorities between security interests. In particular, a perfected security interest has priority over an unperfected security interest and the security interest that has been continually perfected for the longest time generally has the highest priority.
- Finally, unperfected security interests held by a secured party vest in the grantor upon the bankruptcy or the winding up of the latter.
In the present application, the receivers are proceeding on the premises that Hue was 'the secured party', that the interest it held in the funds in the joint account was a 'security interest' of which Dura was 'the grantor' and that the security interest remained unperfected upon the resolution for the winding up of Dura.

[13]

As a result, the funds 'simply did not form part of the property of Dura at the time that Dura and [Dura Asia-Pacific] entered into the Security Deed'.[12]
It will be noticed that the definition of 'Property' in the Security Deed[13] also included property acquired by Dura after the creation of the Deed. In view of this, Hue also contended that the funds 'did not become part of the property of Dura after the alleged Security Deed was entered into'. Dura's interest in the joint account did not constitute 'Property' or, if it did, the interest was worthless after the Court of Appeal dismissed Dura's appeal.
In short: the secured creditor's alleged security interest could not have attached, and never had attached, to the trust funds and was unenforceable in relation to the trust funds.
The second part of the reply submission addressed the PPSA. Under s 19(1) of the PPSA, a security interest 'is enforceable against a grantor or third party in respect of particular collateral only if the security interest has attached to the collateral'. Under s 19(2), a security interest has attached to the collateral only where certain conditions are satisfied, including that the grantor has rights to the collateral or the power to transfer rights in it to the secured party. Hue said that, as Dura had relinquished its legal and beneficial rights on the creation of the account, it had, when it created the Security Deed, no rights in the relevant collateral and no power to transfer rights in it to any secured creditor.
According to the submission, any interest held by Hue in relation to the funds fell within either ss 8(1)(b) or (c) of the PPSA and, thus, was excluded from its operation: either Hue's interest was created or arose under a law of the State (the Supreme Court Act 1986) and Dura had not agreed to give Hue any interest in the funds paid in; or, its interest was created or arose by operation of the general law upon Dura's complying with the condition which the Court of Appeal had imposed as a condition of the stay of execution.
Alternatively, Hue said, any interest held by it in the funds was not a 'security interest' within s 12(1) of the PPSA. First, in so far as it was necessary for a security interest to be created by a 'transaction', that transaction had to be 'consensual'. In the present case neither Dura nor Hue had agreed with the other to do anything: the payment in of the funds was the unilateral act of Dura. Hue referred to iTrade Finance Inc v Bank of Montreal.[14] Second, the 'contingent beneficial interest' that it held in the funds did not confer any property interest on Hue and, further, if it did, that interest was not one which 'secure[d] payment or performance of an obligation.'[15] Finally, Hue had a 'security interest' in the fund, the 'grantor' was not Dura. Given the circumstances of its creation, the trustees were the only persons who could have created an interest in the funds in favour of Hue, and they had not done so.
In conclusion, Hue was sceptical about the Security Deed itself, although the basis of its scepticism was not spelt out. However, the Security Deed was not in evidence before the Court, and there was no evidence to indicate the basis of Hue's scepticism as to either its existence or its terms.[16]

[14]

In answer to Hue's submission that Dura Asia-Pacific had not acquired any interest in the funds that it was capable of charging in favour the secured creditor, the receivers said that the relevant issue in the present application was Hue's interest in the funds, not that of the secured creditor.[17] In response to Hue's contention that the funds did not form part of the property of Dura at the time it entered the Security Deed, the receivers said that Dura 'retained a beneficial interest in them, which was "personal property" which Dura could charge'. Hue had relied upon the judgment of Mullighan J in Pilmer v HIH Casualty & General Insurance Ltd (No 2).[18] The receivers pointed out that that decision had been doubted in Duncan.[19] Hue had contended that whatever interest Dura might have had in the funds in the joint account after its creation did not constitute (after acquired) property.
The receivers replied that s 267 of the PPSA had the effect of restoring 'Dura's absolute beneficial interest', even if legal title remained with the trustees. Hue had also contended that, since, as at the date of the creation of the Security Deed, Dura had already relinquished all its legal and equitable interests in the funds in the joint account, it had no rights in the relevant collateral and no power to transfer rights in it to the secured creditor. The receivers replied by contending that, after the creation of the joint account, Dura had retained the right to compel the proper administration of those funds. Even if these were not the rights of a legal owner and those of the holder of a full beneficial interest, it was a 'right in the collateral' that it was capable of transferring. To Hue's contention that '(a)lthough in general terms Hue would regard itself as better protected by the payment in and establishment of the Trust Funds, Hue could not obtain any security for what it was owed until further order from the Court of Appeal and then only subject to the terms of that further order', the receivers referred to Hue's original submission in which Hue had not only described the payment in as 'security', but had also referred to authorities to the effect that such payments were 'security for the outcome of the contested claim'. To Hue's contention that a 'transaction' under s 12(1) had to be 'consensual' in the sense that there had to be 'interaction' between grantor and grantee, the receivers replied that that proposition involved placing a gloss on the words of the PPSA: s 12(1) did not define 'transaction'; the idea that it had to involve 'interaction' was unsupported by authority. Finally, to the contention that the trustees were the only persons who could have created an interest in the funds in favour of Hue, and they had not done so, the receivers said that the solicitors in whose names the joint account had been created were trustees, not grantors.

[37]

Similarly, in In re Ford; Ex parte The Trustee,[35] it was held that money paid into court to secure leave to defend must be treated as money paid to abide the event and as security to the plaintiff for the sum for which he may obtain judgment at trial. Where the defendant became bankrupt, the amount in court was not available to his general creditors.
The effect of these authorities was considered by the Full Court in Commercial Banking Company of Sydney Limited v Colonial Financiers of Australia Pty Ltd.[36] In that case, the defendant company had been given leave, on an application for final judgment, to defend the proceeding upon condition that it made a payment into court. It satisfied that condition by making the payment in. However, some five months later, a petition for its winding up was presented and, a month later, a winding up order was made on that petition. The appellant (which was the plaintiff in the main proceeding) obtained leave to proceed, but an order was made providing that, if the claim was successful, execution should not issue on any judgment without leave of the court. Having succeeded in the action, the appellant issued a summons directed to the defendant company and its liquidator seeking an order that the moneys paid into court be paid to it.
The primary judge (Little J) refused to make the order and, in fact, ordered that the money paid into court in the action be paid out to the liquidator of the defendant company. In doing so, he had to consider the effect of s 293(1) of the Companies Act 1961[37] and s 122(1) of the Bankruptcy Act 1966 (Cth).[38] First, he held that, in making the payment into court, the defendant had created a charge in favour of the appellant. In so holding, he referred, amongst other cases, to In re Gordon; Ex parte Navalchand[39] and In re Ford; Ex parte The Trustee.[40] The charge, he held, was a charge on property within the meaning of s 122(1), made by the defendant company in favour of the creditor.
It was common ground that, when the payment in was made, the defendant was then unable to pay its debts as and when they fell due. The judge therefore concluded that the payment was, within the meaning of s 293(1) an 'act relating to property ... done by ... a company which, had it been ... done by ... an individual would in his bankruptcy be void or voidable'.[41] As a result, he held the defendant had created a charge which was void as against the liquidator to the extent that it secured the appellant in respect of an indebtedness to it of the defendant existing at the date of the payment into court.
On appeal, the appellant challenged the correctness of the authorities relied on below. It submitted that the payment into court did not satisfy the essential elements of a charge which, it was said, were 'the creation of new proprietary rights in the chargee and the retention of the general property in the thing charged, subject to the new rights, by the chargor. It was an incident of the first element that there were available to the chargee remedies in rem.'[42] It was further submitted: 'in the present case the [appellant] had no proprietary rights in respect of the money in court and that the defendant was in the same situation, so that it could not be said that the money was the property of the defendant over which the charge had been given to the [appellant].'[43]
In dismissing the appeal, Smith J (with whom Winneke CJ agreed) held that it was unnecessary to canvass the authorities relied upon by Little J. He said:

[52]

The money in court has not ceased to be the property of the bankrupt but the plaintiff in the action has acquired the right to treat it as security for his claim. The right of the plaintiff is thus analogous to having an equitable charge on the money. The precise nature of the plaintiff's interest in the fund may depend upon the cause of action which he is asserting and the claim that he is making in the action. Where he is claiming in debt, or claiming an identified sum, there may be some basis for treating him as if he was in the position of asserting a title to the sum in court. Where the plaintiff's claim, as in the present action, is a claim for unliquidated damages no such proprietory interest could arise, and the plaintiff's interest can at best be of the nature of an equitable charge giving him a right after judgment to have recourse to that fund to satisfy his judgment.

...

Therefore if this money had been paid into court to the credit of the present actions the position in my judgment would be that the money remained the general property of the defendants but was charged with whatever may be found to be the liability of the defendants to the plaintiffs. When the money is in court it is not necessary or profitable to consider the relationship of the court or its officials to that fund. The fund can only be dealt with in accordance with orders or authorisations of the court.

In the present case the money has not been paid into court but into a joint account in the names of the parties' then solicitors "to abide the event of the action." I consider that the use of this phrase is intended to create a situation which is equivalent to that where the money has been paid into court to the credit of an action. The difference is simply a ministerial difference for the convenience and benefit of the parties. It reduces the formality and it enables the fund to be managed in a way that will enable the maximum amount of interest to be earned. But it does not in my judgment give the two firms of solicitors any interest or rights over the fund. They are officers of the court and are bare trustees. They are not entitled to deal in any way with the money save pursuant to an order of the court. They are not entitled to any of the interest earned on the account. (Contrast the position of a stakeholder: see Potters v Loppert ...) The purpose of the trust is defined by the phrase "to abide the event of the actions." The beneficiary of the trust is primarily the defendants but the trustees are also affected by and are bound to have regard to the equitable charge of the plaintiffs. But it probably is not appropriate to discuss the position in terms of beneficiaries since the trustees are, under this form of order, simply holding the account on behalf of the court.

This being the relationship of the solicitors to the account, it can be seen that it makes no difference whatsoever who are the individual trustees. Being one of the trustees of this account gives the trustee no rights over or in respect of the fund.[61]

[55]

There are many circumstances in which trust money can be paid into court by a trustee either pursuant to an order made on the application of a beneficiary or pursuant to an application made by the trustee himself or herself. In such a case, the funds paid into court remain subject to any pre-existing trust notwithstanding the payment in. If some person or persons were presently entitled to the corpus or income before payment in, the fact of payment in to await the orders of the court will not, of itself, displace that present entitlement. If entitlement is disputed, the function of the court will be to identify existing interests in the money paid into court rather than to create new ones. If the interest of a beneficiary in the moneys is vested and the beneficiary has a right to demand and receive payment of income, the fact that the interest and the right are disputed and await vindication by the order of the court will not make the interest contingent or negate the existence of the right. That being so, if a beneficiary is found by the court to have had a pre-existing interest in the income, the fact that the interest was not admitted or its extent was not ascertained at the time of payment in or until the making of the relevant order does not mean that the beneficiary was not presently entitled to it both at that time and during the period pending the court's determination

...

After payment in, the claimants acquired an interest in the moneys in the sense that they were entitled to insist that they be properly administered and applied for the purposes for which they were paid in. However, no claimant was beneficially entitled to either the whole or any part of the moneys paid into court or the interest earned thereon. The moneys were received and held by the Accountant to be applied in accordance with the orders ultimately made by the Supreme Court. The respective interests of the individual claimants were, at best, contingent. None had an entitlement to the capital or the income of the fund which was vested either in interest or in possession. A fortiori, none had a present legal right to demand or receive payment of either capital or income.[68]

[58]

The form which such security will take is a matter for the court: see eg Pt 53, r 3 of the Supreme Court Rules 1970 (NSW). It might, as here, take the form of cash which could be ordered to be paid into court to abide the outcome of the proceedings, or be invested in the joint names of the solicitors for the parties. It might take the form of a guarantee, or it might take the form of a security over other property, real or personal. In whatever form it is ordered, the property, the subject of the security, will continue to be the general property of the party who has given the security, and once an order for costs be made in favour of, say, the defendant against the plaintiff, the defendant will become, in all respects, a secured creditor: cf WA Sherratt Ltd v John Bromley Ltd ... Pending the resolution of the dispute between the parties and the making of a cost order, the defendant would have no proprietary interest in the property forming the security, but at best would have a right, in the nature of an equitable charge, giving him, after a cost order has been made and the costs taxed or agreed, recourse to the fund to satisfy the terms of the judgment: cf Halvanon Insurance Co Ltd v Central Reinsurance Corporation.

...

Where the security takes the form of an order that moneys be deposited in the names of the solicitors of the parties, the moneys will be held, at least until the time a cost order is made (and perhaps until a bill of costs has been prepared and taxed, in default of agreement between the parties as to the quantum of costs), in trust for the plaintiff who has deposited them with the trustees. However, the trustees will be affected by, and bound to have regard to, the equitable rights of the defendant, which rights are co-extensive with his rights to have the fund held pending the determination of the proceedings and the making of a cost order, and if that order be in his favour, pending his having recourse to the fund to the extent of the costs taxed or agreed. In other words, the defendant has rights in the nature of a lien over the fund to secure reimbursement to himself, if an order of costs be made in his favour, out of the security fund.[74]

[61]

In Re Lovering; Galladin Pty Limited v Jackson,[80] Galladin Pty Ltd sued various members of the Lovering family in respect of the ownership of the undertaking carried on at a farm on Kangaroo Island as well as for breaches of fiduciary duties owed to the company. Before trial, a Mareva injunction (known now as a 'freezing order') was granted on the application of Galladin Pty Ltd over certain assets under the control of the Loverings. The Loverings sold some bales of wool and placed the proceeds of that sale into their solicitor's trust account. The Mareva order was varied to require that the proceeds of the sale of any crop, produce or livestock was similarly placed in the solicitor's trust account.
After several changes of solicitors, an order was made that the funds in the trust account be paid into court 'subject to further order, with liberty to apply on short notice for payment out or to further vary or discharge the order'.[81] The litigation came to trial, and, after a hearing, was reserved for judgment. Before delivery of judgment, an order was made for the sale of livestock and for 'the proceeds of that sale to be paid into court for the further credit of the action and to abide the further order of the Court'.[82] At trial, both the company and the defendants were partially successful. It was held that the livestock belonged to the defendants, but that they were liable for breaches of fiduciary duty owed to the company. The judge ordered that the funds in court be paid out, by way of equitable execution, to Galladin Pty Ltd. However, before that order was effected, each of the defendants became bankrupt. Hill J was asked to determine, as a preliminary question, whether the moneys paid into court but ordered to be paid to Galladin Pty Ltd had vested in the trustee in bankruptcy by force of s 58 of the Bankruptcy Act 1966 (Cth).[83] In doing so, Hill J contrasted the interests of the parties in the funds in court before the order on the judgment was made with their interests after the order was made.
Having considered each of the decisions discussed above, Hill J said:

[91]

It cannot be said that any clear principle emerges from a review of the authorities. In the words of White J, each case will depend upon a consideration of 'the relevant statutory or rule regime governing the payment in, the rule regime concerning the holding of the moneys in court, the purpose for which the moneys have been paid in, any relevant decision of the court concerning the legal or beneficial ownership of the moneys or the entitlement to them, and any relevant event in the litigation in relation to which the moneys have been paid, rather than by reference to any rule of general application'.[129]
In the present case, close consideration must be given to the circumstances in which the payment was made into the joint account and the terms of the court order pursuant to which the payment in was made. The Court had delivered a judgment against Dura in favour of Hue in the sum of $6,173,155.80. Unless a stay was ordered, that sum was payable forthwith. On Dura's application a stay was ordered, but on terms. One of the terms was that Dura make a payment in. The character of the payment in was described in the order of the Court: it was to be paid in 'pending the hearing and determination of the appeal or further order and to abide the outcome of the appeal'. The clear intention of the rule contained in the order was that the fund was to 'abide the outcome of the appeal' and that, pending the hearing and determination of the appeal, the Court was to have complete control over the dispensation of the fund. Once Dura made the payment in, it was to be divested of any proprietary interest in the fund.
No doubt, in the event it had been successful in its appeal, Dura would have had standing to apply to the Court for the repayment of all or part of the funds. Dura would have also retained rights of due administration against the trustees of the fund.[130] Further, if the payment in had exceeded what was finally determined to be the entitlement of Hue, it may be that, subject to the order of the Court, Dura would have had an equity to redeem the balance of the funds in the hands of the trustees.[131] If the case had settled as a result of Dura's having paid the judgment sum to Hue, Dura would have had standing to apply to the Court for an order that the money in the joint account be repaid to it. Such a claim may have been irresistible. Maybe as much as can be said is that, upon the payment in, Dura parted outright with any legal interest in the money in the joint account and, at best, retained rights of due administration and an equity to redeem any amount held to be unnecessary to satisfy Hue's entitlements arising under the judgment.
Accordingly, the only basis upon which Dura can now make a claim to the fund is that Hue was 'the secured party', that the interest it held in the funds in the joint account was a 'security interest' within s 12 of the PPSA, of which Dura was 'the grantor', and that that security interest remained unperfected upon the resolution for the winding up of Dura and that it vested in Dura.

[132]

[26] In Ontario, when a party claims a security interest in personal property to satisfy payment or performance of an obligation, the court must ask whether the PPSA applies: subject to limited exceptions, the application of that Act is pervasive. In Bank of Montreal v. Innovation Credit Union, 2010 SCC 47 (CanLII), 2010 SCC 47, [2010] 3 S.C.R. 3, this Court noted that the provisions of Saskatchewan's Personal Property Security Act, 1993, S.S. 1993, c. P-6.2, extend 'to almost anything which serves the function of a security interest' (para. 18). The same is true in Ontario. Section 2 of the PPSA reads in part as follows:

2. Subject to subsection 4(1), this Act applies to,

(a) every transaction without regard to its form and without regard to the person who has title to the collateral that in substance creates a security interest including, without limiting the foregoing,

(i) a chattel mortgage, conditional sale, equipment trust, debenture, floating charge, pledge, trust indenture or trust receipt . . .

[27] A 'security interest' is defined broadly as 'an interest in personal property that secures payment or performance of an obligation', and the definition of 'personal property' that applied at the relevant time included 'intangibles' and 'securities' (PPSA, s.1(1)). The PPSA employs 'a functional approach to determining what security interests are covered by its provisions' (Bank of Montreal, at para. 18). When it applies, it renders irrelevant the distinctions between the wide variety of instruments which existed at common law and in equity for taking a security interest in another person's property.

[28] With this in mind, I will now consider the nature of the interests of the parties to this appeal in the disputed funds.

A. Interest of i Trade in the Disputed Funds

[29] In i Trade's opinion, it has a prima facie right, as set out in B.M.P., Simms and other cases, to recover monies paid under a mistake of fact. This argument cannot succeed. The principles respecting the recovery of mistaken payments apply as between payor and payee. BMO is not a payee, so those principles are inapplicable here. Rather, the source of i Trade's claim to the disputed funds lies in Belobaba J.'s judgment, and more specifically in the order in which he authorized i Trade to follow and trace the assets acquired with funds it had advanced to Webworx. What i Trade now seeks to do is to recover the proceeds of sale of the shares credited to the investment account on the basis that they were impressed with a constructive trust or were subject to an equitable lien.

[30] Regardless of whether i Trade elects to take the constructive trust or the equitable lien route to assert its interest, the PPSA does not apply to those rights. This is because i Trade acquired them as a result of Belobaba J.'s judgment granting a constructive trust or an equitable lien. The rights thus resulted from a court order, not from a 'transaction . . . that in substance creates a security interest' (PPSA, s. 2). In addition, the creation of the rights was not consensual: R. H. McLaren, Secured Transactions in Personal Property in Canada (2nd ed. (loose-leaf)), at s1.02; F. Bennett, Bennett on the PPSA (Ontario) (3rd ed. 2006), at p. 15; R. C. C. Cuming, C. Walsh and R. J. Wood, Personal Property Security Law (2005), at pp. 85 and 96-97; J. S. Ziegel and D. L. Denomme, The Ontario Personal Property Security Act: Commentary and Analysis (2nd ed. 2000), at pp. 71-72.

[133]

iTrade Finance[158] was recently applied in Victoria in Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd.[159] In that case, the defendants had registered financing statements on the Personal Property Securities Register ('the PPS Register') claiming an interest in the property of the plaintiffs arising out of their participation in the development of a golf course at Carrum. With a view to having the financing statements removed, the plaintiffs made amendment demands pursuant to Part 5.6 of the PPSA. In the event, the Registrar sent a notice to the effect that a decision had been made pursuant to s 180(1) of the PPSA to register a financing change statement.
The effect of that decision was to terminate the defendants' claimed interests on the PPS Register. However, the defendants threatened to lodge new financing statements if the existing registrations were removed. The Court held that, whatever might be the nature of the defendants' interests in the development (if any), those interests did not arise out of a consensual transaction. In so far as the interests did not arise out of a consensual transaction, they could not be a 'security interest' as defined by s 12 of the PPSA. Accordingly, the Court ordered the defendants be restrained from lodging fresh financing statements in respect of those interests.
In my opinion, because the interest of Hue in the moneys paid into Court did not arise out of a consensual transaction between it and Dura, its interest in the funds was not a 'security interest' within s 12 of the PPSA. It follows that Dura was not the 'grantor' of a security interest, nor was Hue a 'secured party' under the PPSA.
Further, in so far as Hue acquired an equitable charge over the moneys paid into Court, the PPSA did not apply as that charge answered 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', within the meaning of s 8(1)(c) of the PPSA. Its interest arose as a result of Dura complying with the condition imposed by the Court of Appeal. 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.
For those reasons, any interest of Hue in the moneys was not capable of being 'perfected' under s 21 of the PPSA. Section 267 of the PPSA operates with respect to security interests granted by a body corporate that are unperfected at the time of its insolvency. As a result, s 267(2) of the PPSA has no operation. By reason of s 267(2), upon the commencement of the winding up of Dura there was no secured interest with respect to the moneys paid into the joint account that had been granted by Dura to Hue that vested in the liquidator of Dura.
For the reasons summarized in [86] above, when the moneys were paid into the joint account, Hue acquired an equitable charge with respect to them which was unaffected by s 267(2).

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