In a judgment issued yesterday (Francis v Gross [2024] NZCA 528), the Court of Appeal unanimously overturned the controversial High Court decision in Francis v Gross [2023] NZHC 1107 and held that purchasers of partly constructed modular buildings (pods) did not have equitable liens (at all, and especially not in priority to secured creditors) over those pods.
The Court commented that granting equitable liens in insolvency to purchasers of incomplete goods would conflict with the priority regime contained in personal property securities and insolvency legislation, and that equitable liens should not be recognised in such circumstances in New Zealand.
Background
Podular Housing Systems Ltd was in the process of constructing 16 pods when it was placed into liquidation. Sixteen prospective purchasers had already partly paid for them.
Following liquidation, the 16 purchasers argued that they had equitable liens over the pods, and that such liens, arising by operation of law, should give them priority over secured creditors who had protected their interests by registering on the PPSR.
The High Court decision
In the High Court, the liquidators referred to a previous decision (Maginness v Tiny Town Projects Ltd (in liq) [2023] NZHC 494) involving similar facts in which the High Court had recognised equitable liens over pods in favour of purchasers. The liquidators argued that recognising equitable liens “indeterminately elevates unsecured creditors’ interests above the security interests protected by [the] Personal Property Securities Act (PPSA) priorities and accordingly renders those security interests less certain (and therefore of less utility in obtaining and maintaining security over a borrower’s assets)”.
The High Court, despite acknowledging that the circumstances in which equitable liens are recognised are "a themeless rag-bag", disagreed with the liquidators and held that liens over the pods were justified because each pod was identifiable, could be traced to a purchaser and could not reasonably be sold to someone else.
The High Court also held that the statutory justification for going against the usual position that registered security interests have priority over prospective purchasers lay in s 93 of the PPSA, under which common law lienholders have priority over secured creditors where they contribute materials or services in respect of goods. The Court stated that granting priority to equitable lienholders who contributed purchase monies was "the obverse of s 93's exception".
The Court of Appeal decision
The liquidators successfully appealed the High Court decision. The Court of Appeal held that the potential purchasers did not have equitable liens over the pods, so that they did not have priority over secured creditors.
The reasons for the Court's decision, in short, were as follows.
- There is no principled reason in New Zealand law to recognise equitable liens in these circumstances, which would alter statutory priorities as a consequence
- The recognition of an equitable lien in similar contexts would result in potentially significant, unnecessary, and uncertain implications
- There are no authorities in New Zealand, and no compelling authorities elsewhere, that support the recognition of a purchaser's equitable lien over partially completed personal property (the Court was not convinced by the majority's decision in the High Court of Australia in Hewett v Court, which had similar facts, preferring instead the minority opinion)
- Recognition of equitable liens in such circumstances creates inconsistencies and unnecessary difficulties in determining the priority of competing interests in an insolvency. Any amendments to the priority regime contained in the PPSA and the Companies Act are best left for Parliament to legislate, and the courts should not enable the law to be developed in a way that gives rise to such difficulties.
In terms of the priority of security interests, the Court held that preferential creditors rank ahead of certain perfected PPSA security interests, which would rank ahead of any equitable liens, and held that consequently it would be a logical impossibility for equitable liens to have priority over preferential creditors. Therefore, even if potential purchasers had equitable liens, these would not be in priority to preferential creditors and perfected security interests under the PPSA, which are legal (as opposed to only equitable) interests.
Our views
The Court of Appeal's decision provides much needed clarity (both as to equitable liens in New Zealand, as well as to the priority of potentially competing interests outside of the PPSA) following the High Court's earlier decisions. The decision supports a more coherent and certain PPSA system.
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