Court of Appeal rules on equitable liens in Francis v Gross

What rights do purchasers of partly-completed tiny homes have if the builder becomes insolvent? In a surprising decision last year, the High Court ruled that purchasers have an equitable lien over the homes to protect any deposit or other amounts paid, and that the lien gave the purchasers a priority interest in the homes, ahead of secured creditors, other unsecured creditors and liquidators.

If allowed to stand, that decision would have upset the clear statutory priorities in an insolvency as set out in the PPSA and the Companies Act, and would have left significant uncertainty as to the scope of this significant new equitable exception.

The Court of Appeal today overturned the High Court. It ruled that the purchasers did not have an equitable lien, saying that there is no principled reason to treat them differently from other unsecured creditors whose houses had not yet been started, that the lien is not narrow but could apply in a broad range of circumstances, that there is no New Zealand authority to support such a lien, that it would give rise to difficulties in applying the relevant statutory priority regimes, and that there is already a specific statutory schemes regime for layby sales.

The Court of Appeal was even stronger on the priority question, saying that even if the purchasers had an equitable lien, the Court was “firmly of the view” that those liens would not take priority. Security interests under the PPSA are legal interests, and legal interests have priority over equitable interests. This is a key point, and it is good to see a clear judgment on this issue.

It will come as no surprise that I see this as a welcome decision, clarifying what had been a significant level of uncertainty following the High Court’s decision.