The High Court has recently, on two occasions, held that an equitable lien exists in favour of the purchasers of incomplete tiny homes and modular builds which were being constructed by companies that are now in liquidation.
What is an equitable lien?
This is an equitable right conferred by law in the real or personal property of one person in favour of another person until certain specific claims have been satisfied. The right to an equitable lien will survive the intervening insolvency of an individual or company.
Case Law Analysis
Maginness v Tony Town Projects Limited (in liq) [2023] NZHC 494 [14 March 2023]
Tiny Town Projects Limited (in Liquidation) (Tiny Town) was in the business of constructing and selling custom-built tiny homes. At date of liquidation, Tiny Town had partially completed construction of six tiny homes. The tiny homes were “fully” constructed at the company’s leased warehouse and then delivered to the purchaser’s address.
The purchasers were made up of those that had paid the full purchase price (their tiny homes were 95% complete) and those that had made partial instalment payments (their tiny homes were 40-50% complete).
The court had to determine the following issues:
- Whether property in the tiny homes had passed to fully paid purchasers or remained with the company – failed
- Effect of section 53 of the PPSA on the parties’ rights – failed
- Whether the purchasers of the tiny homes are entitled to an equitable lien, and whether the lien would be subject to the provisions of the PPSA – succeeded and excluded from provisions of PPSA
- Whether there is a constructive trust over the property in favour of the purchasers – failed
- Whether the payment made by one of the purchasers to Tiny Town subsequent to its liquidation was to be repaid – succeeded
The court first looked at the contract for sale and purchase of the tiny homes. It was decided that ownership in the tiny homes did not pass to the purchaser upon payment of the full purchase price. Rather, that ownership would only pass once the tiny homes were in a deliverable state, and until Tiny Town was able to provide a CCC, the purchasers were not bound to take delivery.
The important feature in this case was the ability to precisely identify the tiny homes and that they have been appropriated to the contract. There exists readily identifiable subject matter to which the liens can attach. The build must be at the stage, where in any sensible commercial sense, the tiny home could not have been sold to any other purchaser, than the one asserting. The court went on to say that the purchasers’ interest as equitable lien holders is excluded from the provisions of the PPSA by s 23(b) that the lien exists.
The court considered that equity’s response should be to support an equitable lien over the partly completed homes in favour of the purchasers to the extent of the value of the purchase moneys paid by the individual purchasers. An equitable lien holder is regarded by equity as a secured creditor. The court went on to say that the purchasers’ interest as equitable lien holders is excluded from the provisions of the PPSA by s 23(b).
In this case, the tiny homes the money was provided for had been largely, or at least partially completed, and in all cases could be identified as having been appropriated to the respective contracts.
Francis v Gross [2023] NZHC 1107 [10 May 2023]
Podular Housing Systems Ltd (in Liquidation) (Podular) was in the business of constructing bespoke architecturally designed modular buildings, styled pods, for residential occupation. Construction was first to take place at the company’s leased premises and then completed at the customer’s identified property.
The court had to determine the following issues:
- Whether customers have title in their respective incomplete pod – failed
- Whether customers have an interest in their respective incomplete pod – they have an equitable lien which is excluded from the provisions of the PPSA
The court held that title remained with the company even after transportation to the customer’s site until the customer made payment in full.
Justice Jagose J held that there are distinctions to be made in this case from the Tiny Town case above. The tiny homes above were wholly to be constructed at the company’s facility. While the pods in this situation are in various degrees of incomplete construction at the company’s facilities, the contracts include the company’s substantial works to transport and install them at the customer’s site, and none of the customers had paid anything like the full purchase price.
Nonetheless, his Honour held that there is no room for distinction in the “important features” of the cases respectively before me and Venning J: the ability precisely to identify the buildings at issue and appropriation to the respective customers’ contracts.
The customers’ payments in whole or in part is not sufficient to attach a lien. The lien is only to the extent of payments attributable to identified goods appropriated to the contracts in question (this is a question of fact and degree).
What does this mean for insolvency?
If the liquidators of a company in liquidation have been successful in realising company assets, and distributions are to be made to creditors, these distributions will be made in order of priority as set out in Schedule 7 of the Companies Act 1993.
The secured creditors of a company are creditors that have a security interest over all or some of the company’s assets. The secured creditor can enforce their security against the assets of the company and avoid competing for a distribution on liquidation with the unsecured creditors of the company.
The secured creditor’s interest does not normally extend to the company’s inventory and accounts receivable if the company has preferential creditors. The realisation of the inventory and accounts receivable would first be used to pay the fees and expenses incurred in the liquidation (including liquidator’s remuneration), wages and salary owing to staff, PAYE owing to the Inland Revenue Departments, staff holiday pay, etc.
In situations where the company has entered into a purchase money security agreement granting a security interest in the company’s inventory in favour of a lender, the lender will then have priority to the inventory or the funds from the realisation thereof, over the preferential, secured, and unsecured creditors.
The most recent High Court decisions now give the equitable lien holder the status of a secured creditor over their specific “appropriated” asset, and the provisions of the PPSA will not apply to their secured interest. This means that assets (normally realised in the liquidation) which were once available to the full pool of creditors, and to be distributed according to order of priority, will now only be available to the lien holder, should the Court find that an equitable lien exists. In addition, this secured interest of the lien holder will also trump the PMSI that a lender may have over company inventory.
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