The purchaser's equitable lien in insolvency: recent developments

9 minute read  16.11.2023 Nick Anson, Andrew Vella

Two recent cases from New Zealand demonstrate how an equitable lien can arise in insolvency to elevate the interest of unsecured purchasers of goods to secured status.


Key takeouts


  • Equitable liens in favour of purchasers were recognised over 40 years ago by the High Court of Australia in the leading case of Hewett v Court (1983) 149 CLR 639 (Hewett).
  • Questions have arisen in Australia about whether equitable liens in favour of a purchaser are available in respect of goods the subject of a contract of sale because they are argued to be inconsistent with sale of goods legislation.
  • For the first time the New Zealand courts have recognised a purchaser's lien in an insolvency context and held that equitable liens in favour of purchasers are not excluded by the sale of goods legislation.

Insolvency by its nature involves a shortfall in property available to pay creditors. After any secured creditor is paid and the insolvency practitioner fees are drawn, there is generally seldom anything left for other creditors. Given this reality, creditors with access to legal advice will, if possible, strive to elevate themselves to secured creditor status. Sometimes this involves novel arguments about existing (and often conservative) legal principles. One such doctrine is the so called "equitable lien" arising in favour of a purchaser who has paid all or some of the purchase price to a seller who has become insolvent. While the concept of an equitable lien is not new, two recent New Zealand High Court decisions – Maginness & Booth v Tiny Town Projects Ltd (in liq) [2023] NZHC 494 (Tiny Towns) and Gross v Lumen Business Solutions Limited [2023] NZHC 1107 (Gross) – demonstrate how liens can arise to elevate the interest of unsecured purchasers of goods to secured status. A third New Zealand High Court decision, Dalton v Reeves [2023] NZHC 2779 (Dalton), demonstrates when the equitable purchaser's lien will not arise. This article examines these decisions and outlines the implications for liquidators, secured creditors and potential purchasers.

What is a purchaser's equitable lien?

A purchaser's equitable lien is a security interest in property that arises by operation of law. It is available to a purchaser who has paid part or all of the purchase price but has not yet received the title to the property purchased.

It has been held to arise "in equity" because the interest does not arise from the agreement between the parties and is instead justified by reference to what the asset owner is bound, as matter of conscience, to perform in order to do justice between the parties. Equitable liens in favour of purchasers were recognised over 40 years ago by the High Court of Australia in the leading case of Hewett v Court (1983) 149 CLR 639 (Hewett). In that case, which involved purchasers who had part paid for works to construct a modular house, Gibbs CJ made the point that "[t]he rules of equity are not so rigid and inflexible that it is necessary to discover precise authority in favour of the existence of a lien before one can be held to have been created" (Hewett at p649).

Generally, for the purchaser's lien to exist between parties in a contractual relationship:

  1. the purchaser must have paid the whole or part of the purchase price or expenses relating to the purchase giving rise to actual or potential indebtedness on the part of the vendor;
  2. title in the purchased property must not have passed to the purchaser;
  3. the property must be identifiable and have been appropriated to the sale transaction;
  4. the existence of the lien must not be inconsistent with the terms of the contract;
  5. the sale transaction must be incomplete without fault of the purchaser; and
  6. in the circumstances, it is unconscionable or unfair for the vendor to deal with the property without regard to the purchaser.

Let's look at an example.

Party A (the purchaser) contracts with Party B to manufacture a custom trailer. Under the terms of sale, Party A pays 50% upfront with the remaining due upon delivery. Title does not transfer to Party A until delivery. Party B completes 80% of the trailer but enters insolvency before finishing it. The custom trailer remains in B's yard and is obviously the trailer Party A ordered. Conventional wisdom says that A is an unsecured creditor. Party A might be able to negotiate with the Liquidator of Party B to finish the trailer or pay an amount to purchase it. However, if Party A has a purchaser's lien, it would be the first ranking secured creditor of the trailer for the value of its part payment.

Sale of goods legislation

Contracts for the sale of goods are regulated in each State and Territory by sale of goods legislation. In academic circles it has been a matter of hot debate whether the sale of goods legislation applies as a code to prevent an equitable lien arising because it is said to be inconsistent with the statutory provisions of the legislation. The judgment of Atkin LJ in Re Wait [1927] 1 Ch 606 (Re Wait) supports this view and the High Court in Hewett left the question open because on the facts that case involved a contract for works rather than a contract for the sale of goods.

The argument that equitable liens are excluded by the sale of goods legislation is subject to a counter-argument. There is a saving provision in the sales of goods legislation itself which aims to enable the concurrent application of the "common law". Each Australian jurisdiction has a saving provision in similar terms but the scope of the saving provision is itself a matter of legal controversy because a reference to the "common law" could arguably be inclusive of the law of equity (in the sense of "general law") or exclusive.

A purchaser's lien in insolvency: The New Zealand decisions

The recent New Zealand cases not only recognised a purchaser's lien in an insolvency context for the first time in that jurisdiction but they refuse to follow Re Wait, holding that the "common law" saving provision in the New Zealand equivalent sale of goods legislation enables the concurrent application of equitable liens.

Tiny Towns

Tiny Town Projects Limited (in Liquidation) (TTP) was a builder of customisable portable tiny homes. TTP entered liquidation at a time when it had partially constructed six tiny homes ordered by six different purchasers. The contracts were in the form of a standard form instalment contract. The six homes were between 40% and 95% complete and were the principal assets of the liquidation. Two of the six purchasers had paid 100% of the purchase price and the others had paid some but not all of the purchase price. When TTP entered liquidation the purchasers each claimed secured creditor status based on a purchaser's lien over the respective tiny homes.

Venning J held that an equitable lien arose in favour of each purchaser based on reasoning consistent with the majority decision in Hewett. The attributes supporting the finding of a lien were:

  • the partially complete tiny homes were readily identifiable as having been applied to separate contracts with the individual purchasers;
  • the transactions were in the ordinary course of business and there was no default by the purchasers;
  • in a commercial sense, TTP could not have sold the tiny homes to anyone other than the identified purchasers;
  • the money paid by the individual purchasers was specific and identifiable to their tiny home; and
  • the tiny home in each case was a piece of identifiable subject matter to which the lien could attach.

Venning J acknowledged the force in the observations made by Atkin LJ in Re Wait that the goods legislation was intended to operate as a code, but decided that the common law saving provision in the New Zealand legislation allows for the concurrent operation of an equitable lien in the context of a contract for the sale of goods.

Gross

A second case considered the same issue in the context of a liquidator's application for directions. Podular Housing Systems Limited contracted with customers to build modular buildings (called pods) for residential use. When liquidation commenced there were 13 pods under construction with customers having made staged part-payments relating to their respective pods. The purchasers each claimed an equitable lien over their respective pods. The liquidators sought directions from the Court. While he was urged not to, Jagose J followed the decision in Tiny Towns and held that there was an equitable lien in favour of each of the purchasers of the respective pods.

Dalton

In Dalton a liquidator of a construction company sought directions from the Court about whether a customer had an equitable purchaser's lien in certain building materials relating to a construction of a house. After discussing the decisions in Tiny Towns and Gross, Anderson J determined that no purchaser's lien arose for three reasons. First, the contract between the parties was a building contract and not for goods (even though modules of the house were to be built off site and transported to the land). Second, the terms of the contract only required payment on delivery which had not occurred. Lastly, the materials were generic products (plywood and shiplap cladding) and, as such, they were not specific to the purchaser's contract and could be substituted with other readily available materials. Accordingly, her Honour found that there was nothing demanding equity's intervention to restrain the liquidator dealing with the materials without regard to the interests of the purchaser.

A purchaser's lien in insolvency: The Australian position

In Australia, the New Zealand decisions in Tiny Towns and Gross provide a good starting point for purchasers to claim that they are secured creditors relying on Hewett.

The decision in Hewett is not free from criticism. The dissenting judgment of Wilson and Dawson JJ made a number of arguments against recognising a purchaser's lien in insolvency. One such argument was that it places the purchaser in a secured position giving it an advantage over other creditors when the contract did not contemplate this status, and it introduces complexity into determining the rights of the parties and this reduces certainty that is the basis of sound commercial practice. Of course, this dissenting view did not prevail and the starting position is that purchasers, in the right case, can claim security by way of an equitable lien.

Where the lien arises, the purchaser becomes a secured creditor. As the lien arises by operation of law it does not need to be perfected by registration on the Personal Property Securities Register. This puts the purchaser in a far superior position compared to if they were asserting rights as an unsecured creditor, but questions of priority against the holder of prior security may still need to be resolved. In New Zealand, they have been resolved in favour of the purchaser.

Takeaways for liquidators, secured creditors and purchasers

The Tiny Towns decisions have implications for liquidators, secured creditors and potential purchasers:

  • Liquidators should exercise caution in dealing with property that is subject to purchase contracts because it may not be property that is available to the company.
  • Secured creditors may not, despite having the first ranking security interest, enjoy priority from the proceeds of goods that are the subject of sale contracts with purchasers. By dealing with the property without regard to the purchaser's interests, secured creditors may be exposed to legal risk.
  • Potential purchasers who have made part payments towards goods but received nothing have a potential pathway to make a recovery in priority to the interests of all other creditors.

Contact our team to discuss how these developments may impact you and your business or visit our webpage for more information about recent news in restructuring and insolvency law.

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