Do you need to register your interest under an escrow arrangement on the Personal Property Securities Register (PPSR)?
The decision of the Supreme Court of Western Australia in Dalian Huarui Heavy Industry International Company Ltd v Clyde & Co Australia last month1 indicates that the answer may be yes, depending on the terms of the arrangement.
Specifically, the decision indicates that some escrow arrangements may give rise to a “security interest” as defined in the Personal Property Securities Act 2009 (Cth) (PPSA). And, if the party benefiting from the security interest does not register its interest on the PPSA, then its interest may not be protected (or, in PPSA language, “perfected”) under the PPSA.
The consequences of failing to register a security interest on the PPSR can be dire. For example, the PPSA provides that unperfected security interests “vest” in the grantor upon the grantor’s winding up or administration in certain circumstances.2 A party whose security interest vests in this way would no longer be able to enforce its security.
The Dalian case
The background to the Dalian case involved a dispute between Dalian and Duro. Dalian claimed that Duro owed it money for goods supplied in connection with an iron ore project in Western Australia, and the parties were engaged in international arbitration in Singapore to resolve the dispute.
On 30 September 2019, the arbitral tribunal in Singapore determined that Dalian was entitled to security in the amount of A$27m to secure the amount in dispute. Singapore’s international arbitration legislation expressly empowered the tribunal to order a party to provide security of this nature.
On 23 October 2019, to implement the tribunal’s order, Dalian, Duro and Clyde & Co (C&C) entered into an agreement governed by Western Australian law (Trust Agreement). The Trust Agreement provided that Duro would pay the A$27m into C&C’s trust account and that C&C “may only release or pay the Trust Amount … in accordance with … a direction of the Tribunal in the Arbitration”. Duro paid the funds into C&C’s trust account on 28 October 2019.
On 24 January 2020, the tribunal directed C&C to pay the trust funds to Dalian. However, C&C did not immediately pay the amount, and in the meantime Duro was placed into voluntary administration. Dalian then sought an order from the Supreme Court of Western Australia ordering C&C to pay the A$27m to Dalian.
Did Dalian have a security interest which it should have registered on the PPSR?
The Court found that the Trust Agreement created a security interest in favour of Dalian over the A$27m in trust funds which Duro had paid into C&C’s trust account.
In particular, given the circumstances in this case, the Court found that:
- Duro retained a “residual” equitable interest in the trust funds, which was “property” for the purposes of the PPSA; and
- since Duro retained an interest in the trust funds, it was capable of granting to Dalian an equitable interest (in the nature of a charge or lien) in the trust funds, which in this case met the definition of a “security interest” in the PPSA.
The Court went on to find that, between the date the trust funds were deposited into C&C’s trust account (23 October 2019) and the date the tribunal ordered C&C to pay the funds to Dalian, Dalian’s security interest was not “perfected” under the PPSA because it had not been registered by Dalian against Duro on the PPSR. Accordingly, during this period, Dalian’s security interest was at risk of vesting in Duro upon Duro’s administration.
Luckily for Dalian, the Court also found that the security interest was perfected by “possession” as soon as the tribunal ordered C&C to pay the trust funds to Dalian. Ultimately, this meant that Dalian’s failure to register on the PPSR was not fatal. Others, however, might not be so lucky.
Lessons learned: consider your escrow arrangements
The Dalian case shows that parties need to carefully consider whether an escrow arrangement gives rise to a “security interest” as defined in the PPSA. If it does, then the party holding the security interest may need to register it on the PPSR in order to fully protect its interest and ensure its enforceability further down the track (e.g. if the other party is wound up or goes into administration).
At the end of the day, whether or not you need to register your interest under an escrow arrangement on the PPSR will depend on the nature and terms of the arrangement. This is likely to involve analysing what type of interests are created by the arrangement (and by which parties), and may not always be straightforward.
However, given the potentially serious consequences of not registering an interest on the PPSR when necessary, we would recommend reviewing the PPSA implications of your escrow arrangements before implementing them.
1. Dalian Huarui Heavy Industry International Company Ltd v Clyde & Co Australia (A Firm) [2020] WASC 132.
2. Personal Property Securities Act 2009 (Cth), Part 8.2.
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