Snapshot

1. The New Zealand High Court in Maginness v Tiny Town Projects Limited (in liq) has recently held that a purchaser of goods will (before the sale is completed) have an equitable lien over those goods to the extent of the value of the purchase money paid by the purchaser, if:
        (a) it has paid the purchase price in part or in full; and
        (b) the goods are identifiable as having been applied to the contract with the purchaser.
2. The Court also held that a purchaser’s equitable lien will have priority over a perfected security interest.
3. Typically, the contest between a purchaser and a secured party is resolved under the buyer versus secured party priority rules in Part 5 of the Personal Property Securities Act 1999 (PPSA).  Notably, section 53 gives priority to a buyer of goods sold in the ordinary course of business of the seller.  However, in this case, section 53 was held not to apply as the goods had not yet been “sold”.
4. This appears to be the first time that the New Zealand courts have recognised a purchaser’s equitable lien over goods.  It will, in effect, expand the situations in which purchasers may defeat the interests of secured creditors from the bright-line tests under Part 5 of the PPSA.
5. The existence of such a lien will likely create issues in practice for receivers and liquidators who are tasked with applying priority rules in insolvency situations.  When a sale has not yet been completed (such that section 53 does not apply), consideration will need to be given to whether the goods in question are identifiable as having been applied to a contract with the relevant purchaser such that an equitable lien may apply.
6. In our view, the priority of such equitable liens is questionable.  A more orthodox application of priority rules may have resulted in a finding for the secured creditors.

What happened?

Tiny Town Projects Limited (in liquidation) (Company) constructed and sold custom-built “tiny homes”.  These were built at the Company’s factory and then transported to a site specified by the purchaser.

The contracts with purchasers provided that:

1. purchasers paid for tiny homes in instalments;
2. “Completion” of the tiny home would occur only once a code compliance certificate (CCC) had been issued; and
3. the Company was required to deliver the tiny home to the purchaser once Completion had occurred, the purchaser had paid all amounts owing under the contract, and the purchaser had delivered a notice confirming that the purchaser was ready to accept delivery of the tiny home.

At the date of the Company’s liquidation, there were six purchasers of tiny homes:

1. three purchasers had paid the entire purchase price – their homes were 95% completed but no CCC had been issued; and 
2. three purchasers had partially paid the purchase price – their homes were 40% to 50% completed and no CCC had been issued.

These six tiny homes were the principal assets in the Company’s liquidation.

The liquidators applied for court directions to determine the priority of the competing interests in the tiny homes, including those of the purchasers and the other secured and unsecured creditors of the Company.

A buyer of goods sold in the ordinary course of business?

The purchasers argued that they took the tiny homes free of any PPSA security interests under section 53 of the PPSA.  This section provides that a buyer of goods sold in the ordinary course of business of the seller takes the goods free of a security interest that is given by the seller (unless the buyer knew that the sale breached a security agreement).

This allows ordinary course sales to occur without the purchaser concerning themselves with the security interests in the goods granted by the seller.

The key question at issue was, therefore, whether there had been a sale for the purposes of section 53.  The Court applied the Contract and Commercial Law Act 2017 (CCLA) rules that define when a “sale” occurs in order to interpret the meaning of “sold” under section 53.  The CCLA provides that a sale occurs when property passes (or the time for it to pass has elapsed). 

In all instances, even though payments under the contracts had been made, property had not yet passed to the purchasers because the CCCs had not yet been issued, and therefore section 53 did not apply.  In our view, this is a relatively orthodox, and correct, interpretation of section 53.

A purchaser’s equitable lien defeats security interests

Purchasers’ equitable liens exist in New Zealand

The purchasers also submitted that if they did not take the homes free of security interests under section 53, they acquired an equitable lien in the tiny homes.  The Court accepted this submission.

The Court found that the purchasers (both those who had paid in part and in full) were entitled to an equitable lien over their tiny homes (to the extent of the value of the purchase money paid by the relevant purchaser), because:

1. the purchasers had paid the purchase price in part or in full; and
2. the goods were identifiable as having been applied to the contract with the relevant purchaser.

This is a significant development, as it appears to be the first time that the New Zealand courts have recognised a purchaser’s equitable lien in goods.

Purchasers’ equitable liens have priority over security interests

Having found that the purchasers had an equitable lien in their tiny homes, it was then necessary for the Court to consider which interest in the homes had priority – was it the purchasers or the secured creditors?  The Court again found in favour of the purchasers.

The Court first considered whether the priority rules in the PPSA applied.  The Court rightly held that equitable liens (which arise by operation of law and are therefore non-consensual in nature) are excluded from the scope of the PPSA by section 23(b).  Section 23(b) provides that the PPSA does not apply to a lien, charge or other interest in personal property created by any Act or by operation of law.

There is, however, one exception to the exclusion rule in section 23(b).  Section 93 of the PPSA provides that a lien arising out of materials or services provided in respect of goods will have priority to a PPSA security interest in particular circumstances.    Following earlier Court of Appeal authority in Toll v McKay, such liens are restricted to what are called ‘customary common law liens’.  They are accorded priority on account of accepted commercial custom. 

The purchasers did not, of course, supply materials or services in respect of the tiny homes and therefore did not have a lien of the type addressed in section 93.  The PPSA therefore did not answer the priority dispute. However, the Court seemingly inferred priority for the purchasers’ equitable liens based on a comparison to section 93.  It held that:

“[w]hile the equitable liens fall outside the process of the PPSA by reason of s 23(b), and to that extent could be said to have priority over security interests under the PPSA, any such priority is consistent with or analogous to the priority provided to other types of non-consensual lien by s 93”.

A major (and dubious) development for resolving priority competitions

This conclusion is a major development in New Zealand’s law for resolving priority competitions between PPSA security interests and equitable liens.

It will expand the situations in which purchasers may defeat the interests of secured creditors from the bright-line tests under Part 5 of the PPSA (including section 53).

Unfortunately, this will create considerable uncertainty as to the specific circumstances in which a purchaser’s interest may take priority, particularly in insolvency scenarios.  Where a pending sale has not yet completed, consideration will need to be given to whether the circumstances may give rise to an equitable lien.

A different outcome from land

The key ingredient to the recognition of the purchasers’ equitable lien was that the tiny homes were custom-built for the purchasers and, as such, were identifiable as having been applied to the contract with the relevant purchaser.  In effect, the goods were unique to the purchaser.

A similar policy underpins the justification for purchasers of land having an equitable interest in that land pending completion of the sale – land, just like the tiny homes, is generally regarded as unique.  However, it is widely accepted that such equitable interests in land will generally not have priority as against the holder of a registered mortgage over land.^[1]

Following the decision in Tiny Town, an inconsistency arises between the position of a purchaser of goods and a purchaser of land.  A purchaser of goods with an equitable lien in the goods will defeat the interests of a PPSA security interest, whereas a purchaser of land with an equitable interest in that land will not ordinarily defeat a registered mortgagee.

There may be some policy justification for the divergent position that arises from the different legal nature of a mortgage versus a security interest but this was not considered in the judgment.

A flawed comparison?

As noted above, the fact that the equitable liens fall outside the PPSA, and a comparison drawn with section 93 of the PPSA, appear to be the key reasons as to why the purchasers’ equitable liens were determined to have priority.  

This reasoning is questionable.  The fact that equitable liens are not subject to the PPSA (other than as provided for in section 93) does not, of itself, have any bearing on the question of priority.  The PPSA may not, itself, answer the priority question – but the search should not stop there.

Further, if Parliament intended all liens to have priority under section 93, it could have provided for that.  The fact that section 93 is specific to  a lien arising out of materials or services provided in respect of goods can just as easily be interpreted as supporting an argument that other liens were either not intended to benefit from the same priority or are intended to be resolved outside of the PPSA.

A possible framework for resolving these disputes

The question of resolving priority competitions as between PPSA security interests and non-consensual interests (that are outside the scope of the PPSA) has challenged courts for some time.  

Fisk v Attorney-General concerned a contest between a statutory charge under the Customs and Excise Act 1996 (C&E Act) and a PPSA security interest.^[2]  The Court found that the statutory charge was excluded by section 23(b) of the PPSA but that the C&E Act conferred priority to the holder of the statutory charge.

While the result in Fisk is similarly questionable,^[3] the Court helpfully acknowledged a possible framework for resolving priority competitions between PPSA security interests and non-consensual interests.  This framework involved the following steps:^[4]

1. First, determine if the PPSA provides a rule for resolving the priority competition. The primary issue here is to determine whether the non-consensual interest falls within section 93 (and therefore has priority to a competing security interest).
2. If the answer to (1) is “no”, determine whether non-PPSA legislation or a common law priority rule confers priority upon the non-consensual security interest.
3. If the answer to (2) is “no”, priority should be determined according to the order of attachment of the competing security interests.

The contest around the tiny homes was a prime opportunity for this framework to be fully considered – including whether some rule outside of the PPSA existed to resolve the priority conflict, rather than drawing a conclusion that priority for one party arose simply from the interest not being regulated by the PPSA.