Don’t lien on me: Court of Appeal puts equity in its place

Early last year, the High Court released two decisions in which the Court found that purchasers of part-complete tiny homes had an equitable lien (a right over a specific asset conferred by law rather than agreement) over those homes up to the value that the purchasers had paid for them. Those liens were said to have priority over secured creditors and preferential unsecured creditors. See our articles which explain the background and decisions in these two cases here and here.

One of those decisions, concerning the liquidation of Podular Housing Systems Limited, was appealed to the Court of Appeal. The Court of Appeal has now released its decision, which overturned the decision of the High Court. The Court of Appeal held that the circumstances did not give rise to equitable liens, and even if the purchasers did have equitable liens, they would not take priority over all competing claims to the part-complete homes.

Liquidators' appeal of the High Court decision

The liquidators' position was that:

• A purchaser did not have an equitable lien over a part-complete home.
• Even if a purchaser did have an equitable lien, that lien does not entitle them to be repaid in priority to secured and preferential unsecured creditors.

The liquidators also claimed that the costs they incurred in relation to identifying, preserving, and selling the part-complete homes should be met out of the proceeds of sale ahead of any claim under an equitable lien.

Court of Appeal decision: no equitable liens

The Court of Appeal agreed with the liquidators that the purchasers did not have equitable liens over the part-complete homes. The key reasons for this finding were:

• No reason to afford priority: There was no principled reason to alter priorities as between purchasers who had made payments and whose homes had been party-completed, and unsecured creditors-including purchasers who had also made payments, but construction of their homes had not started.
• The potential ramifications are too wide: Recognising a lien in this context could have far-reaching consequences. It would mean that liens could come into existence in the context of agreements to construct and install many different kinds of items designed to meet a purchaser's particular specifications.
• No authority for recognising lien: There was no New Zealand appellate authority, and no persuasive overseas authority, supporting recognition of such an equitable lien.
• This is a matter best left to Parliament: Parliament had carefully prescribed priority for a buyer of goods on the insolvency of the seller in the context of consumer layby sales, with a cap of $30,000 on the purchase price of those goods. The purchasers were effectively seeking the protection afforded by this regime, despite the purchase price of their homes being greater than the $30,000 threshold. The Court considered that an extension of this type of protection was a matter for Parliament.
• Practical difficulties: Recognition of a lien in this context would give rise to difficulties in applying the relevant statutory regimes in the context of an insolvency.

Equitable liens not afforded priority

The Court considered that even if the purchasers had equitable liens in respect of the part-complete homes, those equitable liens did not have priority over all competing claims, including those of secured and preferential unsecured creditors. The key reasons for this finding were:

• Falling outside the statutory scheme does not necessitate priority: It did not follow that simply because equitable liens fell outside the regime of the Personal Property Securities Act 1999 (PPSA) that they had priority over secured and preferential interests.
• Secured creditors would have priority: Secured interests recognised by the PPSA are legal interests. There is no good reason for an equitable lien to have priority over a secured interest acquired in good faith for value, without notice of the circumstances giving rise to the equitable lien.
• Preferential unsecured creditors would have priority: Schedule 7 of the Companies Act 1993 afforded preferential unsecured creditors priority over secured creditors in respect of the proceeds from the homes. Given the Court's view that secured creditors would have priority over equitable lien holders, it would be an 'impossible contradiction' for equitable liens to rank ahead of preferential interests.
• Liquidators' costs would have priority: A purchaser's equitable lien gives rise to an entitlement to have the property sold and net proceeds applied to meet their claim for the purchase price. Liquidators would therefore be entitled to deduct their costs incurred in identifying, preserving, and selling the homes before meeting the purchaser's claim.

Our comment: decision provides comfort

The Court of Appeal's decision is clear-no equitable lien arises in the circumstances; even if it did, it would not usurp the usual priority rules. More generally, the decision reinforces the significance of the statutory insolvency priority rules and makes it clear that the courts should not develop the law in a manner that is not compatible with those rules.

This decision should provide comfort for secured and preferential unsecured creditors of manufacturers that supply goods designed to meet purchasers' particular specifications. Those creditors can take comfort that their usual priority will not be overtaken by creditors asserting an equitable lien.

The decision should also provide some certainty for insolvency practitioners appointed to such companies. It should allow them to distribute assets in accordance with the orthodox priority rules with strong grounds for fending off any asserted equitable liens.

This insight was written with the assistance of Ossama Mohamed, a Solicitor in our Dispute Resolution team.

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