Court of Appeal clarifies insolvency priorities in podular housing systems case: No equitable lien for tiny home purchasers

Introduction

In Podular Housing Systems Ltd v Gross (NZCA 528), the New Zealand Court of Appeal has delivered a definitive ruling on the treatment of partially completed tiny homes in an insolvency context. The decision clarifies that purchasers of these unfinished “pods” do not acquire an equitable lien, thereby reinforcing established statutory priorities under the Personal Property Securities Act 1999 (PPSA) and aligning with long-held insolvency principles.

Case background and factual overview

Podular Housing Systems Ltd specialized in the construction and installation of prefabricated tiny homes. Operating out of facilities in Hamilton and Christchurch, Podular built its “pods” off-site and then transported them to purchasers’ locations for final assembly. However, following its liquidation on 12 December 2022, Podular left 18 partly completed pods tied to contracts where purchasers had paid deposits and instalments but had not yet taken possession.

The central dispute arose from the nature of these contracts and whether the purchasers were entitled to an equitable lien (a security interest arising by implication of equity) to secure their payments against the unfinished works. The liquidators, Benjamin Brian Francis and Simon Dalton, argued that recognising such a lien would upset the statutory priority regime established under the PPSA and the Companies Act 1993.

Key legal issues and determinations

1. Nature of the contracts

The Court of Appeal held that the agreements between Podular and its purchasers were contracts for work and materials rather than contracts for the sale of goods. In emphasizing the principle of “substance over form,” the Court noted that the contracts primarily involved the provision of construction, installation, and site-related services. This distinction is pivotal because it directs the legal analysis toward service-based contractual obligations, where the statutory mechanisms for securing creditor rights differ markedly from those applicable to outright sales.

1. Equitable lien and priority of claims

The Court unequivocally rejected the notion that purchasers held an equitable lien over the partly completed pods. It found that:

1. Unjustified priority: Granting an equitable lien would have inappropriately elevated the claims of purchasers above other unsecured creditors, including those whose pods had not even been commenced.
2. Lack of principled basis: There was no compelling equitable rationale or statutory basis to permit such a lien.
3. Statutory conflicts: Recognizing an equitable lien would conflict with the established priority regimes under the PPSA and disrupt the orderly framework provided by the Companies Act 1993.

Court’s reasoning

The Court emphasized several core themes in its judgment:

• Substance over form: By focusing on the underlying services provided rather than the contractual label, the Court affirmed that the legal framework applicable was that for work and materials, not the sale of goods.
• Fairness and equity: In considering fairness among creditors, the decision underscored that granting an equitable lien to purchasers would create an imbalance, disadvantaging other unsecured creditors.
• Rigorous statutory interpretation: The Court’s detailed analysis of the PPSA and the Companies Act 1993 demonstrated that the orderly resolution of creditor claims must prevail over ad hoc equitable remedies.

Implications for the tiny home and construction industries

The Court of Appeal’s ruling delivers critical guidance for both insolvency practitioners and market participants in the tiny home construction sector. By affirming that no equitable lien exists for purchasers under a contract for work and materials, the decision:

• Restores clarity to the priority of claims in insolvency, ensuring that registered security interests under the PPSA remain paramount.
• Reinforces the need for purchasers to protect their interests through explicit contractual mechanisms, such as negotiating for a purchase money security interest (PMSI), rather than relying on an implied equitable remedy.
• Provides broader industry certainty, mitigating concerns that an expansive interpretation of equitable liens might destabilize established insolvency frameworks across related sectors.

Conclusion

The decision in Podular Housing Systems Ltd v Gross (NZCA 528) marks a significant precedent in New Zealand insolvency law. By rejecting the application of an equitable lien to purchasers of partly completed pods, the Court has affirmed key statutory priorities and aligned with international caselaw principles. This ruling not only clarifies the legal status of contracts for work and materials in the context of insolvency but also reinforces the necessity of maintaining a fair and predictable creditor hierarchy, a development that will undoubtedly influence future insolvency proceedings.

Disclaimer: This article is provided for informational purposes only and does not constitute legal advice. For advice on specific matters, please consult a qualified legal professional.

Read the full article by Waterstone Christchurch manager, Peter Drennan