Tiny Town
Tiny Town Projects Ltd was building six tiny homes for prospective purchasers. However, when liquidators were appointed, the homes had not yet been completed. As a result, the prospective purchasers were not yet “buyers” under the Personal Property Securities Act (PPSA), and they were therefore not entitled to take the homes free from security interests under section 53 of the PPSA.
Despite that, the High Court held that the prospective purchasers did have a priority over secured creditors. The Court first found that prospective purchasers held an equitable lien over the houses that were being constructed for them. This was because each tiny home was clearly identifiable, could be traced to a purchaser, and could not reasonably be sold to anyone else.
The Court then held the equitable lienholders had priority over secured creditors. Although section 93 gives some priority over secured creditors, it only applies to a specific category of common law liens. Section 93 therefore does not apply to the equitable lienholders. Despite that, the High Court said that the equitable lienholders held priority “by analogy” to the priority given to the specific category of common law liens in section 93, even though there is nothing in the PPSA itself that gives equitable lienholders such a priority.
The Tiny Town decision therefore upends the usual position that, absent anything in the PPSA to the contrary, prospective purchasers generally rank behind registered security interests unless and until property passes.
Francis v Gross
The new High Court case has strikingly similar facts. Podular Housing Systems Ltd was constructing 16 modular buildings (pods) when it was placed into liquidation. Prospective purchasers had signed a contract and partly paid the purchase price for those 16 pods. A further 20 prospective purchasers had paid deposits for pods, but construction of their pods had not begun.
The 16 prospective purchasers for whom work had started relied on Tiny Town and asserted an equitable lien that gave them priority over secured creditors.
The liquidators argued that Tiny Town was incorrectly decided, saying that the decision “indeterminately elevates unsecured creditors’ interests above the security interests protected by PPSA priorities and accordingly renders those security interests less certain (and therefore of less utility in obtaining and maintaining security over a borrower’s assets).”
The High Court disagreed, ruling that Tiny Town was correctly decided. It acknowledged that the circumstances in which the Court recognises equitable liens represent “something of a themeless rag-bag”, but that the concepts were dynamic and that the recognition of liens in new circumstances is justified where there is “coherent principle [to] justify [their] development”. The Court concluded that an equitable lien attached to the work being undertaken for the 16 prospective purchasers: each pod was identifiable, could be traced to a purchaser, and could not reasonably be sold to anyone else.
By contrast, the Court ruled that the 20 prospective purchasers who had paid deposits were not lienholders, as there was no identifiable pod for a lien to attach to on their behalf.
The Court also confirmed the basis on which equitable lienholders obtained a priority over secured creditors. It was “drawn to” the reasoning in Tiny Town that the PPSA grants priority to common law lienholders who have contributed materials or services in respect of goods under section 93 of the PSSA, and ruled that granting priority to equitable lienholders who have contributed purchase monies was “the obverse of s 93’s exception”.
Comment
In an earlier update, we questioned whether the Court in Tiny Town was correct to give the prospective purchasers priority on the grounds relied on by the Court. Those same questions apply with equal force to the Court’s decision in Francis v Gross. In particular, it is not clear how giving priority to equitable lienholders is the “obverse” of the priority to common law lienholders in section 93. The latter is provided for in the PPSA. The former is not.
It remains to be seen whether either decision will be appealed, and if so, whether the Court of Appeal will uphold or reverse the decisions. In the meantime, however, liquidators should be aware that there are now two High Court decisions on this point, and that those decisions currently represent the law on this issue.
If you have any questions or require any other guidance, please contact our team or your usual Bell Gully adviser.
1Maginness v Tiny Town Projects Ltd (in liq) [2023] NZHC 494.2Francis v Gross [2023] NZHC 1107.