Back to the Beginning: No Equitable Purchaser’s Liens in Specific Manufactured Goods

The Court of Appeal has today delivered its long-awaited judgment in Benjamin Brian Francis and Simon Dalton as Liquidators of Podular Housing Systems Limited (In Liquidation) v Ilan Gross [2024] NZCA 528. This case addresses the issue of equitable liens for purchasers of partly completed modular pods in the context of the subsequent insolvency of the manufacturing company.  We have been waiting patiently for this decision because of our involvement in Maginness v Tiny Town Projects Ltd (in liq) [2023] NZHC 494, in which the High Court first recognised equitable liens for purchasers of partially completed homes, allowing them to recover payments made towards their respective properties.

In short, the judgment takes us back to the traditional position; purchasers of partly completed manufactured goods do not possess equitable liens.  Legislative reform will be required to take a contrary position.  There are a number of nuances and interesting points which make the judgment worth reading in full.  A brief overview is below to whet your appetite.

Overview

Podular Housing Systems Ltd (Podular), which constructed modular residential buildings, went into liquidation with multiple partly completed pods at its facilities in Hamilton and Christchurch. Some but not all purchasers had paid deposits and instalments for these pods. The liquidators sought clarity on the purchasers' claims, particularly regarding whether they had equitable liens over the incomplete pods.

Key Issues

1. Nature of Contracts: The initial assumption in the High Court was that the agreements between Podular and the purchasers were contracts for the sale of goods (para [54]). However, after traversing the law, the Court of Appeal clarified that these were contracts for work and materials, given the substantial construction required on-site which arose on the specific facts (para [59]).
2. Equitable Liens: The High Court had determined that each purchaser possessed an equitable lien over their respective pod, corresponding to the amounts paid (para [47]). The liquidators contested this finding, arguing that such liens could not arise under a contract for the sale of goods (para [67]).  The liquidators succeeded.
3. Priority of Claims: The liquidators also argued that even if equitable liens were recognised, they would not take precedence over the claims of secured creditors under the Personal Property Securities Act (PPSA) or preferential creditors, such as employees and tax authorities (para [9]).  A detailed analysis of these issues was undertaken, which may be useful in other cases, but is ultimately unnecessary on these facts as no equitable lien has been established.

Court's Findings

1. Equitable Lien Recognition: The Court of Appeal ultimately decided against the recognition of equitable liens for the purchasers. The judges noted that acknowledging such liens could create complex implications regarding the prioritisation of creditors in insolvency scenarios, particularly since it would provide certain purchasers with advantages over others who made similar payments but lacked completed construction (para [11]).
2. Statutory Framework: The Court emphasised the importance of the statutory scheme provided by the PPSA and Companies Act, which already outlined the priority of various creditor claims (para [114]). The Court of Appeal undertook a detailed analysis and confirmed that the law should not be developed in a way that complicates these established frameworks (para [150]).
3. Implications for Future Cases: The judges warned against the potential overreach of recognising equitable liens in various contexts beyond this case, such as contracts involving the manufacture of other customised goods (para [102]). The Court highlighted that it is not appropriate for the law to create security interests that could disrupt established commercial practices without a solid principled justification (para [111]).
4. Implications for Liquidators: Where a purchaser's equitable lien does exist (not on these facts), the holder of the lien cannot take possession or claim ownership of the property; they can only request its sale, with net proceeds applied to repay the purchase price. Consequently, liquidators are entitled to first deduct their costs for identifying, preserving, and selling the pods from the proceeds before addressing the purchasers' claims (para [152 - 155]).

Conclusion

The Court of Appeal's judgment resets the landscape of insolvency law in New Zealand back to previously understood principles, particularly regarding the rights of purchasers in liquidation scenarios. By denying the recognition of equitable liens, the Court is maintaining consistency and clarity in the application of insolvency principles, emphasising the need for legislative solutions rather than judicially imposed remedies.

The Court of Appeal’s more detailed summary is available here.