Two High Court cases released earlier this year have a potentially big impact on the Personal Property Securities Act (PPSA).
The first case (Maginness v Tiny Town Projects Ltd [2023] NZHC 494) involved the liquidation of Tiny Town Projects Limited (Tiny Town).
Tiny Town constructed and sold custom built ‘tiny homes’. These were constructed at the company’s factory and transported to the purchaser’s site on completion. When Tiny Town went into liquidation in November 2022, it was in the process of building six tiny homes for prospective purchasers. Three purchasers had paid the entire purchase price for their home (their homes were 95% complete but no CCC had been issued). The other three purchasers had made part payment of the purchase price (their homes were 40-50% completed and no CCC had been issued).
The six tiny homes were the principal assets in the company’s liquidation. The liquidators applied to the Court for directions to determine the priority of competing interests in the tiny homes – as between the purchasers and the other secured and unsecured creditors of the company.
Under s53 of the PPSA, purchasers in the ordinary course of business take free of any security interests attaching to the goods. In this case however, it was found that, under the terms of the relevant contracts (and applying the sale of goods provisions in the Contract and Commercial Law Act 2017), the sales had not been completed and title had not passed to the purchasers. That being the case, section 53 did not apply.
The High Court found however that the purchasers of the tiny homes each had an equitable lien attaching to the relevant tiny home, to the extent of the money paid by them. Those liens fell outside the PPSA and were found to have priority over perfected security interests in the same goods. It is understood to be the first time a New Zealand court has recognised a purchaser’s equitable lien in goods.
Key to the Court’s decision in this case was that each tiny home was readily identifiable as attributable to a particular contract. Essentially, the tiny homes were bespoke and, in the Court’s view, could not readily be sold elsewhere.
The Court’s decision was met with surprise, and some criticism, when it was released in March. Many speculated whether it would be overturned by a higher court. Instead, just two months later, the High Court affirmed the approach in a strikingly similar case, Francis v Gross [2023] 2 NZLR 762. That case involved the liquidation of Podular Housing Systems Ltd (Podular Housing), a company which constructed modular buildings (pods). Podular Housing went into liquidation with 16 pods at various stages of construction.
In that case, the liquidator argued that Tiny Town was wrongly decided, by “indeterminately elevating unsecured creditors’ interests above the security interests protected by PPSA priorities and accordingly rendering those security interests less certain (and therefore of less utility in obtaining and maintaining security over a borrower’s assets).” The High Court disagreed and followed the decision in Tiny Homes. The purchasers of the 16 pods under construction were found to have an equitable lien which ranked in priority ahead of perfected security interests in the same goods.
What these cases mean
That liens fall outside the scope of the PPSA is not new – this is specifically provided by s23 of the PPSA. Section 93 of the PPSA also gives special priority to a common law lien arising from the provision of materials or services in respect of goods.
Until now however, this was understood in the context of common law or possessory liens – such as a worker’s or repairer’s lien, which gives a right to retain possession of property pending payment for work done to it. These liens require continuous possession of the goods and are lost when possession is lost.
The Court of Appeal (in Toll Logistics v MacKay) has previously restricted s93 to ‘customary common law liens’ and said that “an expansive approach to the recognition of liens would be inconsistent with the intentions of Parliament in enacting the PPSA.”
The equitable purchasers’ lien recognised by the High Court in these cases has the potential to turn previously understood PPSA priority arrangements on their head. Until now, in an insolvency situation, purchasers under uncompleted contracts (and in the absence of any other security arrangement), have generally been treated as unsecured creditors of a company, ranking behind the holders of perfected security interests – like trade creditors with a purchase money security interest (PMSI) or a bank with a general security interest over the assets of the company. Well-informed purchasers may now be able to claim a special priority status that ranks ahead of these secured creditors, particularly where custom or bespoke goods are involved.
In an economic climate where insolvencies are on the rise, the decision will be of particular importance to receivers and liquidators, tasked with determining the priority of competing interests. Trade suppliers or creditors of companies, particularly those which construct or manufacture custom products, may also find that their security position is not what they thought it was. This may have a significant impact in a construction insolvency for example, where bespoke large-ticket items like kitchens or cabinetry are involved.
If you have any questions or would like further information, please get in touch with our insolvency & restructuring law team.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
