Security for costs and the PPSA – unlikely companions?

Laurus Group Pty Ltd (admin apptd) v Mitsui & Co. (Australia) Ltd (No 2) [2023] VSC 412

INTRODUCTION AND PROCEEDINGS

1.      Do funds paid into court as security for costs pursuant to a consent order give rise to a security interest pursuant to s 2(1) of the Personal Property Securities Act 2009 (Cth) (PPSA)? No, according to the Honourable Justice M Osborne in his recent decision in Laurus Group Pty Ltd (admin apptd) v Mitsui & Co. (Australia) Ltd (No 2) [2023] VSC 412 (the Reasons). However, it may be that other forms of security for costs do.

THE FACTS

2.      Laurus commenced proceedings against Mitsui. Mitsui made a security for costs application — which was resolved by agreement between the parties – by which Laurus would pay security in the amount of $100,000 into Court. The Court made orders by consent reflecting that agreement.

3.      Mitsui succeeded at trial and cost orders were made against Laurus. Laurus then entered voluntary administration. The administrator sought a declaration that the amount paid into Court as security for costs gave rise to a security interest for the purposes of the PPSA, which security interest had not been registered by Mitsui, and, hence, was an unperfected security interest as at the date of the appointment of the administrator. Therefore, the administrator argued, that interest vested in Laurus immediately before the appointment of the administrator by reason of s 267 of the PPSA, entitling the administrator to an order that the funds held in Court pursuant to the security for costs order be paid out.

LEGAL PRINCIPLES AND ANALYSIS

4.      It was common ground that, whilst the funds paid into court remained the general property of Laurus, Mitsui had an equitable charge over them (see Dwight v Commissioner of Taxation (1992) 37 FCR 178).

5.      The inquiry was whether that equitable charge constituted a ‘Security interest’ within the meaning of s 12 of the PPSA. Section 12 provides that:

A security interest means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).

6.      The word “transaction” in s 12 of the PPSA is not defined. Santamaria JA considered its meaning in Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd & Ors (2014) 49 VR 8, concluding that it was sufficiently broad to encompass the payment of funds into Court.

7.      In Dura, the applicant appealed against a judgment obtained against it by the respondent and applied for a stay against execution. The Court of Appeal granted a stay, on the condition that Dura pay $1 million into an account in the joint names of the solicitors, pending the determination of the appeal.

8.      Santamaria JA held at [126]-[127] of the judgment:

[B]ecause 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.

[…]

[Hue’s] 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.

9.      The administrator sought to distinguish Dura, arguing that the resolution of the security for costs application by consent constituted a consensual transaction. Osborne J disagreed, holding that there were two steps in the process: first, the agreement to resolve Mitsui’s inchoate right to security for costs through the submission of consent orders, and second, the making and subsequent compliance with those orders once made. He stated at [83]:

[T]he parties intended and understood that the product of their consensus was to be the making of orders by the Court, and that it was to be those orders not any private agreement between the parties which was to be the source of their rights and obligations relating to the question of security for costs. Any payment into Court was to be made pursuant to such orders that may be made with the consequences in the event of non-payment being those set out in any order or otherwise as ordered by the Court.

10.   The administrator’s submissions elided those two steps: [90]. Accordingly, Osborne J held that Mitsui’s equitable charge did not arise pursuant to a “transaction” and in any case was an interest provided for by operation of the general law falling within s 8(1) of the PPSA.

CONCLUSION

11.   This was surprisingly a novel issue, given that defendants who make security for costs applications typically do so because they apprehend that the plaintiff will be unable to pay the defendant’s costs if they successfully defend the claim – presumably due to anticipated insolvency.

12.   His Honour’s decision resolves a problem few practitioners realised that they had.

13.   However, the touchstone of His Honour’s decision was the fact that Laurus had complied with a court order which provided for the security interest. What then for alternative security for costs structures?

14.   Many practitioners recommend to their clients that, instead of paying funds into Court, they agree to pay funds into an interest-bearing account. Such an agreement is more commercially beneficial, particularly given today’s inflationary environment. If that agreement sufficiently identifies the relevant property, states that the property is being held as security (or “charged”), and the circumstances in which the secured party can access it (i.e. if the party providing security is subject to an adverse costs order), the agreement could achieve the same objective as a court order without a court order. Would such an agreement give rise to a security interest pursuant to s 12(1) of the PPSA, with its attendant consequences? Quite possibly. That question wasn’t before the Court in this decision, but may provide a fertile ground for applications in the future.