Following yesterday’s decision of the New Zealand Court of Appeal in Dalton and Gross v Francis^[1], the controversial purchaser’s equitable lien is to be no more in New Zealand. 

The case concerns the business of Podular Housing Systems Limited (Podular), which constructed and installed modular residential homes called “pods”. When Podular was placed into liquidation in 2022, a number of pods were in various stages of partial completion, and purchasers had paid deposits and instalments toward the purchase price, which had become payable in stages as the construction of the pods had progressed. 

The liquidators applied to the High Court for directions as to the nature and priority of the purchasers’ claims to the partly completed pods. The High Court held that each purchaser for whom a pod had been partly constructed had an equitable lien over that pod to the extent of the purchase moneys (including deposit) paid by them, and implied that such a lien had priority over competing security interests and statutory preferential creditors. The High Court’s decision attracted some criticism^[2] and raised a number of questions about how purchasers’ equitable liens may fit coherently with New Zealand’s existing personal property security regime, including alongside the Personal Property Securities Act 1999 (PPSA), and the preferential creditor regime in Schedule 7 of the Companies Act 1993 (Schedule 7). 

These issues were considered by Simpson Grierson’s Steve Flynn in his article, “Equitable Liens and Priority”,^[3] where Steve suggested that recognition of an equitable lien would give rise to serious complications in applying other aspects of New Zealand personal property securities law. We were delighted to see the Court of Appeal reference Steve’s article, and the reasoning within it, favourably throughout its decision.

Equitable liens not recognised

In overturning the High Court’s decision, the Court of Appeal found that the recognition of an equitable lien in these circumstances:

• would create an inconsistency between the positions of purchasers whose pods had been partially-constructed (and an equitable lien had arisen), and purchasers who paid deposits but whose projects had not commenced (leaving no partially-constructed pod for any lien to attach to, and whose claims would only rank pari-passu alongside other unsecured creditors);
• could have far-reaching potential consequences, and may unintentionally allow for the recognition of an equitable lien in the context of agreements to construct and install any kind of customised goods; 
• would be the first of its kind in New Zealand, with no supporting appellate authority in New Zealand, and limited (and contested) international authority behind it; 
• would be a significant extension of the existing legislative framework for consumer layby sales, which provides for the priority of buyers who have made part-payment of the purchase price of goods in the event of the insolvency of the seller (up to a $30,000 cap on the purchase price of those goods) - such an extension was considered to be a matter for Parliament; and
• would give rise to inconsistencies and practical difficulties in applying the statutory regimes that govern priority of claims in insolvency. 

The Court of Appeal’s decision reflects the same cautionary approach taken by the same Court in Toll Logistics, which warned that “an expansive approach to the recognition of liens would be inconsistent with the intentions of Parliament in enacting the PPSA”^[4] due to the additional complexity these liens would introduce into existing priority regimes.  

Equitable liens versus PPSA security interests and preferential creditors

The Court was also asked to consider the relative priority of any purchasers’ equitable lien, in the event that one arose, as against PPSA security interests and the claims of preferential creditors. Although such a lien was not recognised in this case, the Court’s reasoning provides valuable insight into the determination of the relative priority of equitable claims in an insolvency context. 

The judgment confirmed that where competing interests in personal property arise, and one is a security interest to which the PPSA applies, and one is not, and the PPSA does not make a specific provision for the relative priority of those security interests, then general principles of personal property law must be applied. Referencing the Supreme Court of Canada in Bank of Montreal v Innovation Credit Union^[5], the Court of Appeal held that: 

• PPSA security interests could be characterised as ‘legal’ interests for the purposes of property law; and
• PPSA security interests acquired by the secured creditor over property in good faith, and without notice of the circumstances giving rise to the equitable interest, will have priority over the equitable interest even if the equitable interest arose before the PPSA interest attached to the property. 

When considering whether a purchasers’ equitable lien would have priority as against the claims of preferential creditors, the Court noted that a circularity would arise. Although preferential claims rank ahead of PPSA claims, and PPSA claims rank ahead of equitable claims, the Court concluded that Schedule 7 indicated that a purchaser’s equitable lien may rank ahead of preferential claims, creating “a logical impossibility.”^[7] While the inconsistency is resolved in these circumstances by the Court’s finding that purchasers’ equitable liens should not be recognised at all (meaning any discussion of such a lien’s priority remains hypothetical), the priority of equitable claims in an insolvency as against the claims of preferential creditors remains unclear. 

Coherence restored

The Court of Appeal’s refusal to recognise the purchasers’ equitable lien in the context of contracts for work and materials is to be welcomed, as restoring coherence to New Zealand’s personal property security, and insolvency, regimes. 

Please get in touch with our experts if you have any questions about this article.

Special thanks to Katie Daly for her assistance in writing this article. 

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