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The High Court has issued a second judgment confirming that purchasers of goods from a company that then goes into liquidation may have an equitable lien in those goods.
Setting the scene: Tiny Town
Earlier this year, in Maginness v Tiny Town Projects Ltd [2023] NZHC 494 (Tiny Town), the High Court found that purchasers of tiny homes each had an equitable lien attaching to the relevant tiny home, to the extent of the money paid by them.
The Court acknowledged that the issue was “a difficult one”. But it found on balance that the lien existed as a result of applying “developing principles of equity and a liberal approach to the application” of the relevant provisions of the Contract and Commercial Law Act (CCLA) 2017. The critical fact was that each tiny home was readily identifiable as attributable to a particular contract.
That finding has been echoed in an unrelated High Court judgment handed down recently, arising from the liquidation of Podular Housing Systems Ltd.1
Podular constructed and installed bespoke modular buildings, or “pods”. The pods were first constructed on the company’s leased facilities, and then transported and installed at each customer’s desired site.
The key issue for the Court was whether title over several partially built pods, for which customers had made part-payments, had passed to the purchasers or was retained by the company. And, if the company retained title, did the customers have an equitable lien over each pod?
Property in pods had not passed
As in Tiny Town, the Court found that property in the incomplete pods had not passed to the customers. The contracts plainly asserted the company’s reservation of title, even when material had been brought onto the customer’s property, until the customers had paid the full purchase price. As none of the pods had been transported to the customers’ sites nor paid for in full, title had not passed to the relevant customer.
Equally, the purchasers could not get the benefit of s 53 of the Personal Property Securities Act (PPSA), under which a purchaser in the ordinary course of business takes free of security interests. As affirmed in Tiny Town and in previous New Zealand case law, CCLA principles were relevant in applying s 53. In this case, the agreements for sale of the pods only became “sales” for the purposes of s 53 when the customers had paid for the pods in full.
Equitable lien
The Court then considered whether, as in Tiny Town, the purchasers had an equitable lien over their pods.
The Court noted key distinctions between the two situations. In Tiny Town, the assets in issue were wholly constructed on the company’s property and delivered to the customer once fully constructed and paid for in full (and several customers had paid the entire purchase price). Here, the contracts provided for substantial works to transport and install the pods on site, and none of the customers had paid anything close to the full purchase price.
However, the Court found that there was no distinction in the “important features” of the two cases, namely the ability to identify precisely the buildings at issue and appropriation to the respective customer’s contract. As in Tiny Town, payment by the customer was not itself sufficient to attract a lien over the asset. A lien was only established for payments attributable to identified goods appropriated to the specific contract. Whether that was the case in any circumstance was in the Court’s estimation a question of fact or degree.
Chapman Tripp comment
Podular solidifies the new normal for insolvency practitioners, creditors, and purchasers. Where goods are identifiable and attributable to the contract, a purchaser is likely to have an equitable lien over those goods and have rights to those goods to the extent the customer has paid for them. That lien ranks above secured creditors.
While the judgment contains some comment on the relationship between the customer’s lien and the liquidator’s costs, that question will likely need to be considered in further judicial decisions.
In identifying whether assets are identifiable and attributable to the contract, Podular adopted a test first raised in Tiny Town - that the asset would be excluded from any “commercially sensible” sale to a different customer. Applying this approach to identifying assets under contract in a liquidation requires a level of subjective assessment not currently present in identifying assets in insolvency scenarios. If that standard is adopted more widely in identifying specific assets in a liquidation or receivership, it may have broader implications for both insolvency practitioners and secured creditors.
We will provide a further update if the judgment is appealed.
1. Francis v Gross [2023] NZHC 1107.
