New Zealand Tiny Homes (Tiny Homes) fell victim to liquidation on 15 November 2022. After its incorporation in 2020 this was a short, but most certainly not sweet, business affair for its director James Cameron of New Plymouth.
The liquidation of Tiny Homes was said to be linked to the liquidation of Tiny Town Projects Limited (Tiny Town) which was also liquidated on 15 November 2022, another of Mr Cameron’s companies incorporated in 2017.
Tiny Town and Tiny Homes were related companies. Tiny Homes held the intellectual property for the creation of building small properties in New Zealand, whereas Tiny Town was the company that actually attended to the building of these properties
The business of Tiny Homes and Tiny Town
Tiny Homes and Tiny Town were in the business of building small properties for consumers in New Zealand. The size of these properties allowed for a far more accessible fixed purchase price for home buyers.
At the time of liquidation of Tiny Homes and Tiny Town, there were a number of these homes that were virtually completed. The only hurdle being procedural matters of gaining compliance before title in the property could pass from Tiny Town to the purchaser.
It is important to note that each of these homes was customised and built on the purchaser’s instructions. A sale and purchase agreement was signed for each home and payment of the purchase price was paid to Tiny Town in instalments.
The first liquidator’s report of Tiny Town that the issues stemming from COVID-19, a spike in building costs and supply chain issues impacted the company’s ability to ‘fulfil fixed price contracts.’ This inability to fufil fixed price contracts led to both Tiny Town and Tiny Homes demise.
In November 2022, Tiny Town was placed into liquidation. At the point of liquidation there were 6 homes that were partially completed. Of the 6 purchasers of these homes, 3 had paid the full purchase price of their respective homes and were awaiting small changes to be made to be issued a code of compliance before the homes could be delivered. The remaining 3 purchasers had homes that were 40%-50% complete.
The first liquidators report for Tiny Town showed the company had very few assets, bar the 6 homes in question.
The liquidators filed proceedings in the High Court seeking directions on how to best deal with the 6 homes.
The case of Manginness v Tiny Town Projects Limited (In Liquidation)  NZHC 494 (the Proceeding) was heard before Venning J on 20 February 2023 with the judgment being delivered on 14 March 2023.
One of the issues to be decided in the Proceeding was whether the 3 fully paid purchasers were entitled to take ownership of the homes, or whether they belonged to Tiny Town. There were also issues raised in relation to the Personal Property Securities Act 1993 (PPSA) as to whether an equitable lien was granted over all 6 homes.
When does property pass?
The first issue was whether property in the homes had passed to the 3 fully paid purchasers. Counsel for the purchasers argued that as the purchase price had been paid in full, the homes should pass to the purchasers. Counsel argued the compliance certificate should not be the decisive factor as in the liquidator’s evidence it was accepted delivery of the homes would occur when full payment was made, not when the compliance certificate was issued.
Venning J rejected this argument, stating that, property will only pass when the homes are ‘in a deliverable state.’ Venning J defined the deliverable state as when the compliance certificate was issued.
It was concluded on the first issue that property in the homes had not passed to the purchasers.
An equitable lien
Counsel for the purchasers argued that even though there was uncertainty on the property passing, that under section 53 of the PPSA the purchasers had an interest in the homes, whether by way of an equitable lien or a constructive trust.
An equitable lien is a form of equity which the Court can grant to give an indemnity or priority over other creditors. On the other hand, a constructive trust is a trust created whereby one person holds property for the benefit of another, it prevents someone holding property from unjustly benefitting from the holding of that property.
Venning J considered that section 53 of the PPSA did not apply here. However, His Honour’s view was different on the topic of an equitable lien. It was argued by counsel for the purchasers that an equitable lien should be granted to all purchasers over the homes based on the extent of money paid to Tiny Town by them.
A key argument is that these homes were identifiable to each purchaser, and had been built to their specifications. Counsel for the purchasers argued that “the purchasers’ equitable lien confirmed their in rem rights in the tiny homes that trumped any competing claim in the liquidation.”
Venning J submitted this was a difficult issue to ascertain based on the facts of this case. His Honour laid weight on the fact these homes were specified to each purchaser and could not reasonably have been sold by the liquidators to other parties. Venning J concluded there was an equitable lien over the 6 homes.
The next issue was whether the lien was subject to the PPSA, to which Venning J referred to it as being excluded under section 23(b) of the PPSA. His Honour’s full conclusion was “I conclude that the individual purchasers are entitled to equitable liens for the extent of the value of the purchase moneys paid by them and that their equitable liens sit outside and are not affected by the provisions of the PPSA.”
The result of the judgment was that the purchasers of the 6 homes were entitled to an equitable lien against the homes to the extent of the purchase moneys paid by them.
This judgment has been described as ‘ground-breaking’ and that certainly is the case. This judgment will change the way assets in liquidation are dealt with. The judgment gives rights to the purchasers in a situation where in the normal course of the liquidation it would be common for them to lose their assets.
This decision plays on the fairness of the justice system and emphasises the importance of natural justice in a situation where typically there really are no winners. Although it is arguable this ruling is to the disadvantage of other unsecured creditors in the liquidation, it is weighed on the balance of taking away homes from 6 individuals who in some cases may have been left homeless without this judgment.
The judgment will cast a positive light on the prospects of recovery in liquidations for some creditors, showing them the law of equity can assist in certain circumstances. However, it also results in some doubt for secured creditors whose position is ultimately worsened if equity prevails.
In this case it seems as If on the balance the correct decision was made, however this may not always be the case. If you require assistance on your position as a creditor in a liquidation or want some further information on your rights please do not hesitate to contact us for a free no obligation discussion.
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