Appeal by liquidators from High Court judgment recognising equitable lien for purchasers of partly-built modular homes – relative priority between an equitable lien and security interests under the Personal Property Securities Act 1999 (PPSA) – relative priority between an equitable lien and preferential creditor interests under the Companies Act 1993
Francis v Gross [2024] NZCA 528
Podular Housing Systems Ltd (Podular) carried out business constructing and installing modular homes (described as pods). Podular constructed the pods at its facilities in Hamilton and Christchurch, then trucked them to the customer property and installed them.
On 12 December 2022, Benjamin Francis and Simon Dalton were appointed as liquidators of Podular, which was plainly insolvent. There were 18 partly completed pods at Podular’s facilities. The purchasers had paid a deposit and instalments of the purchase price. A further 20 purchasers had paid deposits, but construction of their pods had not begun. They claim as unsecured creditors.
Other claimants in the liquidation include secured creditors with general security agreements over all Podular’s assets, which were perfected by registration under the PPSA and preferential creditors under the Companies Act (the Commissioner of Inland Revenue and Podular’s employees).
The liquidators applied to the High Court for urgent directions, including as to the nature and priority of the purchasers’ claims to the partly completed pods and the liquidators’ entitlement to recover the cost of identifying, preserving and selling the pods out of the proceeds of sale of those pods.
The High Court found that legal title remained with Podular, but each purchaser of a partly completed pod had an equitable lien over that pod to the extent of the purchase moneys (including deposit) paid by them.
The judge also directed that the liquidators’ costs and disbursements could not be deducted from the sale proceeds of the pods before remitting any balance to the purchasers.
The liquidators appealed.
Applicable principles: Personal Property Securities Act 1999, ss 16, 17, 23, 45, 53, 93; Companies Act 1993 s 284, 312, Schedule 7 – did the purchasers have equitable liens over partly-completed pods? (no) – do holders of equitable liens have priority over holders of security interests under the PPSA? (no) – do holders of equitable liens have priority over preferential creditors under the Companies Act? (no) – should New Zealand law recognise equitable liens over the pods? (no) – could liquidators recover costs out of the proceeds of sale of the pods, if the purchasers had equitable liens? (yes).
Held: The appeal is allowed and the directions given in the High Court are set aside. The following directions are made under s 284 of the Companies Act:
a. A purchaser of a partly completed pod is not entitled to an equitable lien over that pod to secure repayment of the amounts the purchaser has paid towards the purchase price;
b. A purchaser of a partly completed pod is not entitled to take possession of that pod;
c. A purchaser of a partly completed pod is an unsecured creditor of Podular (unless they hold a valid and enforceable security interest in the pod or in other collateral);
d. To avoid doubt, the liquidators are entitled to deduct from the proceeds of realisation of the pods their reasonable costs of identifying the claimants to the pods and preserving and realising the pods; and
e. To avoid doubt, the liquidators are entitled to meet their actual and reasonable costs of pursuing this application for directions before the High Court and before this court out of the assets of the company, including the proceeds of realisation of the pods.
Note: The key reasons for the court’s decision that the purchasers did not have equitable liens over the partly completed pods, were:
a. Recognising an equitable lien would alter priorities between those purchasers and the purchasers who had paid deposits but whose pods had not been commenced. There is no principled reason to do so.
b. There are potentially wide implications of recognising an equitable lien, which could come into existence in the context of agreements to construct and install different kinds of items.
c. There is no appellate authority in New Zealand supporting the recognition of an equitable lien in this context and no persuasive overseas authority.
d. Parliament has legislated to provide priority for buyers of goods on the insolvency of the seller in the specific context of consumer layby sales, with a $30,000 purchase price cap (Fair Trading Act 1986, Part 4A, subpart 1). Any proposal to extend this carefully circumscribed protection is a matter for Parliament, not the courts.
e. The courts should not develop the law in a manner which gives rise to difficulties in applying the relevant statutory priority regimes in the context of an insolvency.
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