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Prior to the Court of Appeal’s decision in Francis v Gross [2024] NZCA 528 on 17 October 2024 (Podular (COA)), there was a period of uncertainty for building contractors as to their status in respect of payments they had made towards prefabricated/custom-made building components, products or structures when the manufacturing company had gone into liquidation.
This uncertainty arose in the context of two decisions of the High Court; the first Maginness v Tiny Town Projects Ltd (in liq) [2023] NZHC 494 (Tiny Town Projects) and the second Francis v Gross [2023] NZHC 1107 (Podular (HC)).
Both of these decisions were in the context of modular home building companies, Podular Housing Systems Ltd and Tiny Town Projects Ltd, that had gone into liquidation, leaving behind unfinished modular homes in their factories and creditors out of pocket.
In both cases, the High Court was asked to determine the status of purchasers who had made payments towards these incomplete modular homes but were not considered owners, because title had not passed at the time the companies responsible for manufacturing them were put into liquidation. In each case, the High Court found that the purchasers had an equitable lien over the incomplete modular homes still sitting in the factories.
The Court of Appeal’s decision in Podular (COA) resolved much of the uncertainty created by the two High Court decisions and is of equal importance to those operating in this section of the construction market, and insolvency practitioners.
What Is an Equitable Lien?
An equitable lien is a charge over property. It secures the discharge of an actual or potential debt and can only be enforced by way of sale. This means it does not transfer title to the property but those benefitting from the equitable lien can apply for the property to which the equitable lien has attached to be sold to discharge the debt.
The Court of Appeal in Podular (COA) confirmed that it “is difficult, if not impossible, to identify any coherent principle that underlines all forms of equitable lien” and cited a description of the circumstances in which they arise as a “themeless rag-bag.”
Earlier High Court Decisions
Tiny Town Projects
Tiny Town Projects concerned, in part, whether an equitable lien had attached to partially completed modular homes where purchasers had made payments towards the homes but ownership had not yet passed to them at the point Tiny Town Projects Ltd had gone into liquidation.
In finding there to be an equitable lien, Justice Venning commented:
- Equity is not so inflexible that there needs to be precise authority to support an equitable lien.
- The partially complete modular homes are readily identifiable to the individual purchasers to which they relate.
- These modular homes could not, in any sensible commercial sense, have been sold to anybody else but to the purchaser who had made payment towards them.
Justice Venning considered an equitable lien had attached to the partially complete modular homes. This was significant because Justice Venning then went on to find that equitable liens fell outside of the Personal Properties Securities Act 1999 (PPSA) and had priority over other security interests. That meant that the modular homes to which purchasers had made payment towards were not part of the pool of assets of the insolvent company to be distributed amongst the secured and unsecured creditors.
Podular (HC)
The facts of this case were very similar to those in Tiny Town Projects, with one of the only real differences being that a portion of the works in this case were to be carried out at the purchasers’ properties.
Again, the Court found that an equitable lien had attached to the incomplete modular homes to which the purchasers had made payment towards.
Perhaps the most crucial aspect of Justice Jagose’s judgment was a finding (at [36]) that:
Where payments in the ordinary course of business directly obtain the company’s developed manufactured goods custom-made for the customer, without the customer’s knowledge of an existing competing interest (of which no knowledge here is evidenced), equity can and should fasten on the goods in manufacture themselves to the extent of the customer’s payments.
This appeared to stand for the point that if a purchaser had made payment towards custom-made goods or products without any knowledge of an existing competing interest in those goods, that an equitable lien would have attached to those custom-made goods to the extent to which the purchaser had made payment towards them.
This statement is of quite broad application and could easily apply to prefabricated/custom-made components, products or structures that are to be manufactured offsite in which title has not yet passed. It could apply beyond the building sector as well.
Court of Appeal’s Decision
Podular (COA)
The liquidators in Podular (HC) appealed to the Court of Appeal.
In reversing the High Court’s decision, the Court of Appeal found that the purchasers did not have an equitable lien over their partially completed modular homes towards which they had made payment.
Key considerations for the Court of Appeal were that:
- To recognise an equitable lien in these circumstances would be to alter the priorities between purchasers who had made payments towards modular homes which just happened to be partially constructed and purchasers who had made payments towards modular homes that had not been constructed at all. It was said there was no principled reason for doing this.
- The potential implications of recognising an equitable lien in this context are wide. There was concern that equitable liens could come into existence for contracts where items are constructed according to particular specifications. Specific reference was made to modular sections of buildings, plant and machinery, or joinery.
- There is a lack of authority supporting an equitable lien in this context.
- It would be more appropriate for Parliament to make priority for the purchasers in this context.
- The courts should not develop the law in a way which gives rise to difficulties in applying the relevant statutory priorities in the context of insolvencies.
The Court of Appeal also found that if an equitable lien arose in these circumstances, those liens would not have a priority over all competing claims to the modular homes.
Our Comment
While the Court of Appeal appeared to limit its reasoning to the facts of Podular (COA), it is likely its decision has settled many of the concerns arising from the High Court’s decisions in Tiny Town Projects and Podular (HC).
The decision in Podular (COA) is a sensible and practical decision which adds some certainty back into the law of security interests. It avoids the situation where there is a custom-made products and goods exception which sits outside of the PPSA regime. It also prevents a situation where other creditors that do not have identifiable/custom goods are perhaps being unfairly prejudiced when it comes to being paid from the pool of assets of an insolvent company.
Despite the decision in Podular (COA), there are still steps that contractors can take to avoid being burnt by suppliers of prefabricated/custom-made components, products or structures going into liquidation. Options include registering purchase money security interests, ensuring that supply contracts are not “front-loaded” and do not have unfavourable clauses as to when ownership passes so as to create unnecessary risk, and of course to do due diligence on suppliers to identify any potential warning signs of insolvency.
If you have any questions about this decision, please get in touch with our Construction Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
