Benjamin Brian Francis and Simon Dalton as Liquidators of Podular Housing Systems Limited (In Liquidation) v Ilan Gross - [2024] NZCA 528
Date of Judgment
17 October 2024
Decision
Summary
Equitable Liens - Whether a purchaser's equitable lien attaches to a partly-built modular home - Personal Property Securities Act 1999 - Relative priority between an equitable lien and PPSA security interests - Companies Act 1993 - Relative priority between an equitable lien and preferential creditor interests under the Companies Act - Appeal allowed
Podular Housing Systems Ltd (Podular) carried on business constructing and installing modular residential buildings known as "pods". The pods were constructed at Podular's facilities in Hamilton and Christchurch. Podular was placed in liquidation, and the appellants were appointed as liquidators, on 12 December 2022. At the time of liquidation, Podular had 18 partly-completed pods at its facilities. The purchasers of each of these pods had paid a deposit and instalments of the purchase price. Another 20 purchasers had paid deposits, but construction of their pods had not begun.
The purchasers whose pods had not been partly constructed claimed in the liquidation as unsecured creditors. Secured creditors with security interests perfected by registration under the Personal Property Securities Act I 999 (PPSA) and preferential creditors under s 312 and sch 7 of the Companies Act I 993 also claimed in the liquidation.
The liquidators applied to the High Court for urgent directions in relation to various matters, including 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. Justice Jagose found that legal title to the pods remained with Podular, however each purchaser of a partlycompleted pod had an equitable lien over their respective pod to the extent of the purchase moneys paid by them: Francis v Gross [2023] NZHC I 107, [2023] 2 NZLR 762. In a subsequent minute Jagose J 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 appeal to this Court. They say that an equitable lien does not attach to a partly-completed pod; but even if there is an equitable lien, that does not entitle the purchasers to be repaid in priority to preferential creditors or creditors with security interests under the PPSA. The liquidators also say that their costs and disbursements should be met out of the proceeds of sale of the pods ahead of any claim by the purchasers under an equitable lien.
Held: the appeal is allowed and the directions given in the High Court are set aside.
The purchasers do not have an equitable lien over their respective partly-completed pods. There is nothing about the arrangements between Podular and the claimant purchasers that distinguishes their position from that of other purchasers who paid deposits but whose pods have not been started. All of these purchasers entered into materially similar contracts, they have all made payments, and they have not yet received Podular's promised performance in exchange of those payments. There is no principled rationale which justifies equity providing purchasers of partly-completed pods with a priority over other purchasers and other unsecured creditors, particularly when (unlike some other purchasers) they did not contract for a purchase money security interest. There is no appellate authority in New Zealand that supports recognition of a purchaser's equitable lien over personal property in this context, and no persuasive authority from overseas jurisdictions.
The implications of recognising a lien in this context are potentially wide. If an equitable lien is recognised in this case, such a lien could come into existence in the context of consumer modular components of buildings, specialised vehicles, plant and machinery, joinery, and other types of asset that are built or customised to meet the requirements of particular purchasers. It is not clear why the law should recognise a form of security interest in those contexts, absent any agreement providing for such an interest. If this argument were accepted, there would also be a strong argument that such a lien should be recognised in the context of contracts for the sale of goods where the price had been paid in part, the goods to be delivered had been identified, but property had not yet passed: a much-debated issue which underscores the possible implications of recognising an equitable lien in this case.
Parliament has legislated in the Lay by Sales Act 1971 and now in subpt 1 of pt 4A of the Fair Trading Act 1986 to provide priority for buyers of goods on the insolvency of the seller in the specific context of lay by sale agreements for the supply of goods that have purchase price of up to $30,000. Courts should be cautious before extending a similar regime to contracts for the supply of goods (whether under a contract for work and materials or otherwise) without any financial limit where Parliament has chosen not to do so. Furthermore Parliament, in providing for a layby sales priority regime, has made detailed provision for the interplay between the priority conferred on consumers by this regime and the claims of security interest holders under the PPSA and other unsecured creditors. A court recognising an equitable lien in the present case cannot adjust other statutory priority regimes to ensure coherency and consistency.
Recognition of an equitable lien in this context would also lead to difficulties in applying relevant statutory priority regimes in the insolvency context. Security interests that attach to the pods under the PPSA are legal interests which, if acquired in good faith for value without notice of the circumstances giving rise to the equitable lien, would have priority over a purchaser's equitable lien. However the relative priority between an equitable lien and claim by preferential creditors under sch 7 of the Companies Act would present difficulties. The claims of preferential creditors over the pods would appear to rank ahead of claims to the pods by secured creditors under the PPSA, but would also appear to rank behind an equitable lien. That is logically impossible where an equitable lien ranks behind security interests under the PPSA. These difficulties support the conclusion that equitable liens should not be recognised in New Zealand in the context of the present case.
The holder of an equitable lien is not entitled to take possession of the property, and they do not have an ownership interest in it. Rather, a purchaser's equitable lien over property entitles the purchaser to have the property sold, and to have the net proceeds of sale applied to meet their claim for repayment of the purchase price. It follows that if a purchaser's equitable lien were recognised in this case, the liquidators would be entitled to deduct the costs they have incurred in identifying, preserving and selling the pods. The net proceeds after meeting those costs would then be available to meet the purchasers' claims, subject to claims with priority over the equitable liens.
Podular Housing Systems Ltd (Podular) carried on business constructing and installing modular residential buildings known as "pods". The pods were constructed at Podular's facilities in Hamilton and Christchurch. Podular was placed in liquidation, and the appellants were appointed as liquidators, on 12 December 2022. At the time of liquidation, Podular had 18 partly-completed pods at its facilities. The purchasers of each of these pods had paid a deposit and instalments of the purchase price. Another 20 purchasers had paid deposits, but construction of their pods had not begun.
The purchasers whose pods had not been partly constructed claimed in the liquidation as unsecured creditors. Secured creditors with security interests perfected by registration under the Personal Property Securities Act I 999 (PPSA) and preferential creditors under s 312 and sch 7 of the Companies Act I 993 also claimed in the liquidation.
The liquidators applied to the High Court for urgent directions in relation to various matters, including 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. Justice Jagose found that legal title to the pods remained with Podular, however each purchaser of a partlycompleted pod had an equitable lien over their respective pod to the extent of the purchase moneys paid by them: Francis v Gross [2023] NZHC I 107, [2023] 2 NZLR 762. In a subsequent minute Jagose J 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 appeal to this Court. They say that an equitable lien does not attach to a partly-completed pod; but even if there is an equitable lien, that does not entitle the purchasers to be repaid in priority to preferential creditors or creditors with security interests under the PPSA. The liquidators also say that their costs and disbursements should be met out of the proceeds of sale of the pods ahead of any claim by the purchasers under an equitable lien.
Held: the appeal is allowed and the directions given in the High Court are set aside.
The purchasers do not have an equitable lien over their respective partly-completed pods. There is nothing about the arrangements between Podular and the claimant purchasers that distinguishes their position from that of other purchasers who paid deposits but whose pods have not been started. All of these purchasers entered into materially similar contracts, they have all made payments, and they have not yet received Podular's promised performance in exchange of those payments. There is no principled rationale which justifies equity providing purchasers of partly-completed pods with a priority over other purchasers and other unsecured creditors, particularly when (unlike some other purchasers) they did not contract for a purchase money security interest. There is no appellate authority in New Zealand that supports recognition of a purchaser's equitable lien over personal property in this context, and no persuasive authority from overseas jurisdictions.
The implications of recognising a lien in this context are potentially wide. If an equitable lien is recognised in this case, such a lien could come into existence in the context of consumer modular components of buildings, specialised vehicles, plant and machinery, joinery, and other types of asset that are built or customised to meet the requirements of particular purchasers. It is not clear why the law should recognise a form of security interest in those contexts, absent any agreement providing for such an interest. If this argument were accepted, there would also be a strong argument that such a lien should be recognised in the context of contracts for the sale of goods where the price had been paid in part, the goods to be delivered had been identified, but property had not yet passed: a much-debated issue which underscores the possible implications of recognising an equitable lien in this case.
Parliament has legislated in the Lay by Sales Act 1971 and now in subpt 1 of pt 4A of the Fair Trading Act 1986 to provide priority for buyers of goods on the insolvency of the seller in the specific context of lay by sale agreements for the supply of goods that have purchase price of up to $30,000. Courts should be cautious before extending a similar regime to contracts for the supply of goods (whether under a contract for work and materials or otherwise) without any financial limit where Parliament has chosen not to do so. Furthermore Parliament, in providing for a layby sales priority regime, has made detailed provision for the interplay between the priority conferred on consumers by this regime and the claims of security interest holders under the PPSA and other unsecured creditors. A court recognising an equitable lien in the present case cannot adjust other statutory priority regimes to ensure coherency and consistency.
Recognition of an equitable lien in this context would also lead to difficulties in applying relevant statutory priority regimes in the insolvency context. Security interests that attach to the pods under the PPSA are legal interests which, if acquired in good faith for value without notice of the circumstances giving rise to the equitable lien, would have priority over a purchaser's equitable lien. However the relative priority between an equitable lien and claim by preferential creditors under sch 7 of the Companies Act would present difficulties. The claims of preferential creditors over the pods would appear to rank ahead of claims to the pods by secured creditors under the PPSA, but would also appear to rank behind an equitable lien. That is logically impossible where an equitable lien ranks behind security interests under the PPSA. These difficulties support the conclusion that equitable liens should not be recognised in New Zealand in the context of the present case.
The holder of an equitable lien is not entitled to take possession of the property, and they do not have an ownership interest in it. Rather, a purchaser's equitable lien over property entitles the purchaser to have the property sold, and to have the net proceeds of sale applied to meet their claim for repayment of the purchase price. It follows that if a purchaser's equitable lien were recognised in this case, the liquidators would be entitled to deduct the costs they have incurred in identifying, preserving and selling the pods. The net proceeds after meeting those costs would then be available to meet the purchasers' claims, subject to claims with priority over the equitable liens.