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Equitable liens trump creditor entitlements


While liens have been around for as long as the law itself, a recent case in the High Court, Maginness & Booth v Tiny Town Projects Ltd (in liq) [2023] NZHC 494, has expanded the reach of equitable liens into assets in an insolvency situation. The case concerned partially built, but in some cases fully paid for, tiny homes.


The outcome in the case was that the lienholder purchasers were held to have a lien over the tiny homes to the extent of the price they had prepaid, in priority to all secured and unsecured creditors, including preferential creditors, and, in theory at least, PMSI holders.


Our Special Counsel, Kerry Puddle explains more.

 

The rise of the lien

The Court found that, on the facts, no sale had taken place under the Contract and Commercial Law Act 2017 (CCLA) and so title to the tiny homes remained with the Company. The “taking free” provisions of the Personal Property Securities Act 1999 (PPSA) did not assist purchasers either. But the purchasers were entitled to an equitable lien in respect of their specific tiny houses, and, because the liens fell outside of the scope of the PPSA, the lienholders were entitled to their money back in priority to the secured creditors.


It seems these principles could also extend to any insolvency involving the bespoke manufacture of goods, such as where kitchens, furniture and clothing are manufactured to customer specifications. Where those circumstances arise, secured and other unsecured creditors – including PMSI holders will rank behind purchaser lienholders.


What is a lien?

A lien is a right under the common law which allows the possessor of personal property to retain possession until money has been paid under an account. For example, a mechanic can refuse to release a car until their invoices have been paid, and a solicitor can retain files until their account has been satisfied. Under equity, a lien allows a claimant to have a right to payment satisfied out of certain property or the proceeds of that property. Possession is not required for an equitable lien to have effect.


Because true liens arise as a matter of law, not through agreement, they sit outside the general law of security interests and the PPSA. This can have important ramifications if the person over whom the lien is asserted becomes insolvent.


What happened?

Tiny Town Projects Limited (in liquidation) was a builder of tiny homes. The homes were custom built, according to the purchaser’s specifications, on site, and once they had been given CCC and all amounts paid, they were delivered to the customers.


The agreement between Tiny Town and the purchasers was a standard form agreement. It required the purchasers to pay the purchase price in instalments. Those funds were meant to be used by Tiny Town to pay for the construction of a specific customer’s home, but were in fact applied more generally in Tiny Town's business, and not to a particular home.


Tiny Town was placed into liquidation. At its site were six partly built homes. Three of the purchasers had paid the entire purchase price, and their homes were 95% complete. Three other homes were about 40 – 50% complete with pre-payments accordingly made. There were no other company assets of note. The liquidators sought directions that the partially complete homes were the property of the company in liquidation.


The application of the CCLA and the PPSA

Having reviewed in detail the provisions relating to the sale of goods in the CCLA, the Court found that title to the homes had not passed to the purchasers. The agreements specifically stated that the homes had to have a CCC granted prior to delivery. The homes were therefore not in a deliverable state until the CCC had been granted.


Furthermore, the Court held that section 53 of the PPSA, which allows buyers to take free of a security interest over the seller in certain circumstances, did not assist the purchasers because no “sale” had been concluded by the time of liquidation. The Court held that the provisions of the CCLA assisted the interpretation of section 53.


The Court however found that the purchasers had an equitable lien over the homes, to the extent to which they had paid for them. In doing so the Judge applied a case from Australian, Hewett v Court (1983) 149 CLR 639, which dealt with materials and work, and applied it to the context of a sale of goods.


The Judge acknowledged that it was a difficult case, but considered that it was appropriate to impose an equitable lien in respect of contracts for the sale of goods. The basis for imposing a lien was that:

1. The partly constructed tiny homes were readily identifiable between the separate contracts with the purchasers they related to.

2. During the period while the tiny homes remained the property of the company and before title passed to the specific purchasers, the homes could not, absent default, have been sold to anyone other than those specific purchasers.

3. The individual purchasers paid money towards the purchase of the specific and identifiable tiny homes.

4. There was a readily identifiable subject matter to which the liens could attach.

5. The tiny homes had been appropriated to the contract.


The liens fell outside the scope of the PPSA, being specifically excluded by section 23(b) of that Act, and therefore had priority over security interests existing pursuant to that Act. Each purchaser was held to have an equitable lien to the extent of the value of the purchase money paid by them.


Implications for creditors

On its face, there would seem to be little reason why the principles behind this case would not extend to any situation for the bespoke manufacture of goods. It is often the case that, for example, furniture, kitchens and suits are custom made. If progress payments are being made towards those items, then an equitable lien could arise for the value of the price paid.


This is a significant advance for consumer protection, but represents a corresponding decrease in the protection afforded to secured lenders in an insolvency situation, and by extension, to the level of recovery by other unsecured creditors. It is also a cautionary tale for insolvency practitioners dealing with appointments over manufacturers of bespoke products.


 

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