Court overturns Tiny Town decision, clarifying buyer rights

Friday 18 October, 2024

The Court of Appeal has re-settled an important question of the law in relation to securities under the Personal Property Securities Act 1999. In 2023 the decisions of Maginness v Tiny Town Projects Ltd and Francis v Gross (HC) upended the law regarding security interests. Those cases held that where money had been paid towards an identifiable good (a tiny home under construction in both cases) the purchasers had an equitable lien which ranked ahead of secured and preferential creditors under the PPSA. The decisions led to uncertainty in the insolvency community.

The liquidator in Francis v Gross appealed. Yesterday the Court of Appeal released its decision and the uncertainty has been removed.

The position under Tiny Town

Tiny Town Projects Ltd built tiny homes which were to be delivered to the purchasers once completed and ready. Some purchasers had paid the full purchase price while others had not. It was common ground that title remained with the company. However, the company became insolvent.

The High Court held that the purchasers had an equitable lien over their respective tiny homes. Justice Vening considered that “equity’s response shouldbe to support an equitable lien over the partly completed homes in favour of the purchasers to the extent of the value of the purchase moneys paid by the individual purchasers," at 110. 

The Court also held these equitable liens ranked ahead of secured and preferential creditors. His Honour reasoned that the PPSA does not apply to liens, that s 93 says that liens arising from materials or services provided in respect of goods subject to a security interest have priority, and the same must apply to equitable liens by analogy.

The same issue arose two months later with Francis v Gross (HC). Another tiny home company, “Podular”, had gone into liquidation. The High Court applied Tiny Town.  

The issue

The effect of these judgments was significant. They disrupted the usual position that prospective purchasers rank behind registered security interests unless and until property passes.

The judgments created substantial uncertainty and potential unfairness between purchasers. Under Tiny Town if two purchasers, A and B, had paid their deposit but work had only begun on A’s tiny home only A would be secured and B would not through no fault of B’s. This undermined the standard pari-passu recovery rule.

Tiny Town also meant that a certain class of creditors would receive a security interest without contracting for it. They would take priority over other parties who had contracted for their security interests.

The implications were not restricted to tiny homes. There was nothing to stop these cases being applied to any property or modification specified for a customer.  

Tiny Town and Francis v Gross (HC) required liquidators country-wide to grapple with the practical application of the equitable lien principle on an asset by asset basis with each new liquidation.

The Court of Appeal

The Court of Appeal found the High Court judgment in Francis v Gross was wrong.

First, based on the precedent relied upon. The contracts in the case were not for the sale of goods. The judgment in Tiny Town relied on the High Court of Australia’s decision Hewett v Court. That decision was authority for equitable liens applying to partially constructed modular homes (by a 3:2 majority with a persuasive dissent, as the New Zealand Court of Appeal noted). However, the Australian High Court was unanimous in that the contracts in that case were for services, just as if the buildings were constructed on site. The Court of Appeal found there was no relevant New Zealand appellate authority supporting Tiny Town, and that international authority was not persuasive.

Second, the Court of Appeal found that equitable liens were only claimed once suppliers became insolvent. At that point other creditors were involved and their interests must be considered before a lien is recognised. It was not fair for an equitable lien to sweep in at the point of insolvency, where not contracted for, to the detriment of those who had contracted for a security interest.

Third, the Court of Appeal recognised the concern that equitable liens applied unfairly. They protected some purchasers whose tiny homes were underway but not others. This prejudiced creditors through no fault of their own. Additionally, it was open to any of the purchasers to register a PMSI. Indeed, some of the purchasers did. Why then should all purchasers be treated preferentially when they had chosen not to exercise that option?

Fourth, the Court of Appeal questioned the practicalities of an equitable lien: how could one arise upon payment of the deposit when no good existed at that time and works had not begun?

Finally, New Zealand has a statutory scheme in place to govern the insolvencies of companies. The PPSA was purposefully designed to simplify personal property law. The application of Tiny Town had muddied the water. The Court of Appeal remarked that law should not develop in a way that frustrates what Parliament had intended. Parliament could provide for liens of this kind but chose not to.

Implication

The decision in Tiny Town surprised the insolvency community. It created uncertainty for businesses and insolvency practitioners. Tiny Town and Francis v Gross led to a double regime of equitable and statutory interests that Parliament had not intended.

The insolvency community is likely to welcome the Court of Appeal’s judgment. It resettles the law on purchasers’ interests. There are no more equitable liens over readily identifiable goods – priority will be governed by the PPSA, as Parliament intended.

The Court of Appeal decision can be found here.