Security for costs does not create a PPSA security interest: Laurus Group v Mitsui

The Victorian Supreme Court has confirmed that payment of funds into Court as security for costs will not give rise to a security interest required to be registered on the PPSR, even if the payment was made pursuant to consent orders. This means that section 267 of the PPSA will not assist external administrators to recover funds paid into Court as security for costs under a Court order.

1. Security for costs— a quick refresher

Both the Victorian Courts and the Federal Courts provide a mechanism for security for costs to be ordered in proceedings where a claimant (either a plaintiff or a plaintiff by counter claim) has brought a claim, but there are reasonable grounds on which to suspect that the claimant would not be able to meet any costs order that was made against them. 

In those circumstances, the Court has the discretion to order that the claimants pay a certain amount of funds into Court as security for any cost orders that may be made against the claimant.  The purpose of this process is to ensure that if a party is defending a claim, it will not be deprived of its normal entitlement to payment of legal costs if it is successful.

2. What happened in this case?

In Laurus Group Pty Ltd (admin apptd) v Mitsui & Co. (Australia) Limited (No. 2) [2023] VSC 412, the Victorian Supreme Court was asked to consider whether funds paid into Court as security for costs were still available to Mitsui, in circumstances where Laurus Group had administrators appointed. 

Laurus Group was required to provide security for costs by payment of funds into Court for the benefit of the defendant Mitsui.  Laurus Group’s claim was dismissed and Mitsui was granted judgment for its counterclaim, with orders that Laurus Group pay Mitsui’s costs of the proceeding. 

The judgment was handed down in June 2022, and on 30 November 2022 Laurus Group was placed into voluntary administration.

The administrator of Laurus Group claimed that:

  1. a portion of the funds paid into Court gave rise to a security interest on Mitsui’s behalf for the purposes of the PPSA;

  2. Mitsui had not registered that security interest on the PPSR;

  3. the security interest was therefore an unperfected security interest that vested in Laurus Group (i.e. administrator) under section 267 of the PPSA.

The administrators sought to distinguish the decision in Dura Australia (Constructions) Pty Ltd v Hue Boutique Living Pty Ltd [2014] VSCA 326 (Dura) by arguing that the funds were paid into Court pursuant to an agreement in the consent orders and that agreement gave rise to the security interest.

If the administrator was correct, the administrator would be entitled to recover the funds held in Court as security for costs.

3. The Court’s decision

The Victorian Supreme Court was required to consider whether the payment of funds into Court pursuant to a consent order for security for costs gives rise to a security interest within the meaning of section 12(1) of the PPSA.  The Court held that it does not. 

In coming to this conclusion, the Court took the following factors into consideration:

  1. The agreement for provision of security for costs claimed by the administrator was reached between the solicitors for the parties and intended to be finalised by an order of the Court.  The obligations under the agreement between the parties did not include an obligation to pay funds into Court or provide for Laurus Group to grant Mitsui with an interest over the funds paid into Court, but merely contemplated that consent orders would be made requiring Laurus Group to pay those funds into Court.

  2. Once the consent orders were made, that gave rise to an obligation on the part of Laurus Group to pay the funds into Court and gave rise to Mitsui’s rights to enforce those orders.  Once Laurus Group complied with the orders to pay funds into Court, Mitsui acquired an equitable lien over the funds to which it could have recourse if the Court ultimately made an order for payment of those funds.

  3. Section 12 of the PPSA requires that for a security interest to result from a transaction that is an agreement, the test is whether the terms of the agreement provided for the creation of the relevant interest.

Laurus Group paid the funds into Court pursuant to the Court order and not pursuant to the earlier agreement.  Accordingly, and consistent with the decision in Dura, the security interest was created upon the payment of funds into Court pursuant to the Court order and not under a consensual transaction between Laurus Group and Mitsui.

4. Take aways

This decision confirms that where funds are paid into Court pursuant to a Court order (even where those orders are made by consent), they will not give rise to a security interest required to be registered on the PPSA.

If a security interest is necessary or desirable, it will need to arise as a result of an agreement rather than a Court order. This could be facilitated by the payment of funds into a solicitors’ trust account or an interest bearing account with appropriate documentation of the agreement, rather than paying the funds into Court and then for it to be perfected through registration on the Personal Properties Securities Register.

To discuss this further or for more information please contact:

Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au

Kelvin Tay
Senior Associate
T: +61 3 9611 0148 | M: +61 413 557 157
E: ktay@sladen.com.au

Alicia Hill