News Court of Appeal Provides Clarity on Equitable Leins

On Thursday 17 October the Court of Appeal released their decision on Benjamin Brian Francis and Simon Dalton, as liquidators of Podular Housing Systems Limited (in liquidation) v Ilan Gross And Ors.[1] This ruling is significant for secured creditors, liquidators and the broader insolvency industry.

The Court of Appeal decision follows two High Court decisions issued last year, known as Tiny Town[2] and Podular Housing.[3]   Those decisions concerned who had a priority claim to partially built custom-made modular housing in an insolvency.  The High Court in both decisions found that a purchaser who had partially paid for their custom-made pod had an equitable lien which attached to “their” pod.  The High Court considered that because equitable liens fell outside the Personal Properties Securities Act 1999 (the PPSA), the equitable liens took priority over security interests under the PPSA in those pods.  The High Court in Podular also suggested that the equitable liens took priority over preferential creditor claims and held that the Liquidators could not deduct their costs in preserving the pods, in priority to the equitable lien holder’s claim.

These decisions came as a surprise to many within the industry, sparking substantial discussion and debate among professionals. Given RITANZ's role as the leading association in the insolvency industry, RITANZ was asked by the Court of Appeal to provide submissions on the issues, including the practical ramifications of recognising an equitable lien in these circumstances.

In order to ascertain the views from our members a survey was circulated in October 2023 to gather valuable feedback. The survey results illustrated that:

• There were a diverse range of opinions on whether a purchaser’s equitable lien should attach to custom-made goods manufactured for that purchaser, where that purchaser has part paid for goods, to the extent that the equitable lien would give that purchaser a priority claim to those goods over unsecured creditors only.
• However, there was a clear consensus from members that if the Court were to recognise such an equitable lien, that equitable lien should not take priority over secured creditors, preferential creditors or the Liquidators’ costs associated with identifying and preserving the particular asset.

The responses indicated significant concerns amongst members that the High Court decisions had created substantial uncertainty as to the priority of claims in circumstances where an equitable lien could arise.

As a result, RITANZ’s submissions to the Court of Appeal focused on emphasising the need to maintain the transparency and certainty inherent in the present law, addressing the priority between equitable liens (if recognised) and secured creditors, preferential creditors and Liquidators’ costs and ensuring that the Court understood the practical impact recognising equitable liens would have in an insolvency.  Rachel Pinny, RITANZ Board member and Wellington Barrister was instructed to make the submission for RITANZ.

Click here to read the full decision. Below is a summary of findings.

1. The Court held that the purchasers did not have an equitable lien over their partly completed pods.

2. The Court considered that the main consequence of recognising an equitable lien in these circumstances would be to alter the priorities in an insolvency as between purchasers of partly completed pods who made payments towards the costs of those pods and unsecured creditors including purchasers of pods who had paid deposits but whose pods had not been commenced at the time of the liquidation.  It considered there was no principled reason to do so. 

3. The Court acknowledged that there were potentially wide ramifications if they were to recognise an equitable lien in this context.

4. The Court contrasted the arguments in favour of an equitable lien being recognised with the (limited) express statutory priority for buyers of goods under layby sale agreements under the Fair Trading Act.  The Court considered that this regime was effectively what the purchasers argued applied for an equitable lien.  In that instance Parliament had not enacted a general priority but made a carefully circumscribed regime which only applied to consumers where the purchase price was no more than $30,000.  That statutory regime also specifically provided for the interplay between the priority conferred on consumers under that regime and the claims of PPSA security interest holders and other creditors (including preferential creditors).  This indicated that the Courts should be cautious about implementing a similar regime without such limits where Parliament chose not to do so and where the Courts could not adjust other statutory priority regimes to ensure coherence and consistency.

5. The Court then went on to consider the priority any equitable lien would have, noting that that issue may impact whether it was appropriate to recognise such liens.

6. The Court held:

• Simply because a security interest falls outside the PPSA, that does not mean that it takes priority over PPSA interests.  Instead, the general principles of personal property law must be applied.
• As a security interest recognised by the PPSA is a statutory interest, it must be a legal interest.  Therefore, even if the purchasers had an equitable lien over their pods, that would not take priority over PPSA security interests that attached to the property of the company including the pods, if those security interests were acquired by a secured creditor in good faith without notice of the circumstances giving rise to the equitable liens.
• The Court then addressed the circular issue that would arise in respect of claims of preferential creditors if an equitable lien was recognised.  The Court stated that if an equitable lien was recognised, then a preferential creditor would have a priority claim to pods as inventory over a perfected PPSA security interest under Schedule 7 of the Companies Act, but a perfected PPSA security interest would take priority over an equitable lien to those pods and an equitable lien would have priority over preferential creditor.  The Court noted that would be a “logical impossibility.”
• The Court considered that the only remedy an equitable lien could give a purchaser was the power to have the property sold and a right to the net sale proceeds.  As they only had a right to the net sale proceeds, the Liquidators’ costs of identifying, preserving and realising the pods would be met first from the proceeds of sale.

7. The Court ultimately concluded that there was no convincing reason of principle to recognise an equitable lien in these types of cases and that doing so would give rise to inconsistencies and practical difficulties in applying the statutory regimes that govern priority in an insolvency.   If New Zealand law was to give purchasers a priority claim in such circumstances, the Court of Appeal considered that priority should be granted by Parliament, as Parliament could then address the extent of the priority and how it fits with the wider PPSA regime and insolvency statutory framework.

Thank you to Rachel Pinny and to all those who provided feedback. If you would like to know more about the hearing or have any questions or comments, please don’t hesitate to get in contact.

[1] [2024] NZCA 528

[2] Maginness v Tiny Town Projects Limited (in liq) [2023] NZHC 494, [2023] 2 NZLR 828

[3] Francis v Gross [2023] NZHC 1107, [2023] 2 NZLR 762

News