Rights between secured creditors and general creditors clarified after “Tiny Homes” liquidators seek court directions – a new species of purchaser’s lien
Tiny Town Projects Limited (trading as “NZ Tiny Homes”) was placed into liquidation late last year, with six bespoke but partially built “tiny homes” being the key assets in the liquidation. Following various claims raised by creditors, the liquidators sought directions regarding the positions of the six purchasers of the tiny homes. Lowndes Jordan acted for the liquidators and presented arguments for the general body of unsecured creditors.
The purchasers asserted they were entitled to the Tiny Homes, through either a sale under s53 of the Personal Property Securities Act 1999 (PPSA), a trust, or a lien, against the interests of the general body of creditors. The liquidators’ analysis was that ownership of these six homes had not yet passed under the PPSA, and they sought directions from the High Court under s 284(1)(a) of the Companies Act 1993 to clarify the relevant legal principles and to facilitate correct outcomes for all impacted creditors. Argument was made both on behalf of the general body of creditors and for the tiny home purchasers. You can find the Court’s decision dated 14 March 2023 here.
Section 53 of the PPSA
Section 53 of the PPSA provides that a buyer of goods sold in the ordinary course of business of the seller takes the goods free of any security interest provided by the seller. The Court found that the tiny homes were not “sold”, and:
- The relevant analysis to determining whether goods are “sold” for the purposes of the PPSA is to apply sale of goods principles, now contained in the Contract and Commercial Law Act 2017.
- This includes the default rules as to when property passes where the intention of the parties cannot otherwise be ascertained. In this case, the tiny homes were future goods by description under an agreement to sell.
- A broader approach to determining whether there was a sale, favoured in some Canadian decisions, was not taken.
This approach reflects the specific NZ legislative framework and provides certainty to creditors and insolvency practitioners as to the relevant rules where the underlying contract does not have a contractual term as to when property passes.
Justice Venning also found that no institutional constructive trust in the tiny homes arose in favour of their purchasers.
Equitable purchaser’s lien over goods
Separately the Court found that individual tiny home purchasers had an equitable purchaser’s lien over their respective tiny home to the extent of the value of their payments. Those equitable liens sit outside the PPSA and so in effect enjoy a super priority over secured and unsecured (including preferential) company creditors. Although a purchaser’s lien has prior authority in relation to purchases of land (where it operates as an encumbrance and ordinarily ranks after prior registered interests) this is the first time an equitable purchaser’s lien has been recognised in a sale of goods context in New Zealand.
The practical effect of this aspect of the decision is that subject to deduction of the liquidators’ reasonable costs in safeguarding the tiny homes (via the liquidators’ own well-established equitable lien, known as the salvage principle) the purchasers who had fully paid prior to liquidation were entitled to delivery of their tiny homes.
The position is more complex for the partly paid purchasers, who can either pay in full to be entitled to delivery, or have the benefit of the lien up to the value of their payments. Practically, the latter is an entitlement to a judicial (or agreed) sale process to realise the equitable “security”. The outcome for the partly-paid lien-holders is that they will have practical considerations to work through to ascertain whether the equitable lien has any tangible benefit, depending on the value of the asset and likely recoverable proceeds of sale.
Insolvency practitioners and creditors should bear in mind the novel principles determined under this decision due to the potential impacts on their rights in any partly-purchased, bespoke and identifiable goods.