A recent High Court decision dealing with the long tail of the tiny home boom throws up questions for secured and preferential creditors of companies going into liquidation, just as insolvency begins to spike. Suppliers and creditors of bespoke good manufacturers from tailors to engineering workshops, may need to re-evaluate their securities.
Tiny Town Projects Limited was put into liquidation in November 2022. At the time, it had six custom-built tiny homes sitting in its workshop. These were between 40 and 95 per cent complete.
A dispute emerged over who owned the partially completed cabins: the company or the customers who had already paid instalments towards the total purchase price.
In a conventional analysis of the situation, Justice Venning began by looking at whether the customers had taken legal title to the cabins before the liquidation based on the individual contract in question. The Judge concluded that under the Contracts and Commercial Law Act 2017 and Personal Property Securities Act 1999 legal title remained with the company.
Less conventionally, the Judge went on to say that the customers could instead claim an “equitable lien” over the homes to the extent they had already paid for them.
An equitable lien is a well-established legal concept that deals with a range of situations where someone is owed or has paid money for goods in someone else’s possession.
Here, the Judge finding that a lien existed meant the customers had a priority security claim for the return of their purchase money.
Because of how the Personal Property Securities Act 1999 deals with liens, this meant the customers could recover their funds ahead of other secured and unsecured creditors. That included preferential creditors such as suppliers of raw materials used to build the cabins, including PSMI* holders with perfected interests recorded on the Personal Property Securities Register.
Practically, with the limited assets available in that liquidation, as in many cases, this came at the expense of other creditors further back in the queue.
The potential importance of this decision comes from how the Judge’s reasoning can be applied elsewhere. The Judge focused on two features of the contract between the company and the customers. These were that:
- it was very clear which tiny home was meant for each customer; and
- so long as the customers kept paying the purchase price instalments, the company was not allowed to sell the tiny home to anybody else.
This will be a very common arrangement between bespoke goods manufacturers and their customers. Businesses as diverse as engineering workshops, tailors, boat-builders, and vintage car restorers and furniture makers would likely fall into a similar category. Even custom solutions fabricated by tradespeople like plumbers could be caught.
It is unclear if the decision in this case will be followed by other Judges. But for the moment, the decision suggests trade suppliers and other creditors of anybody who is in a custom goods business should re-evaluate their security arrangements. This can include not only manufacturers, but importers and wholesalers of one-off and bespoke items (like antiquarians, bookdealers, and so on).
The decision calls into question how useful retention of title arrangements may be if those goods become incorporated into partly completed bespoke goods that are unfinished at the time of the liquidation. That is a fairly commonplace arrangement. It also means perfected PMSIs* could be less effective than usually thought.
How much this matters in practice will depend of course on what other assets the company may have available to satisfy its secured creditors. In the case of Tiny Town Projects Limited and similar businesses, which rely on building custom products as orders are received as a cashflow business, those may be limited.
If the issues discussed in this article have given you reason for reflection, Holland Beckett Law’s dispute resolution and restructuring, turnaround and insolvency experts are here to help. We regularly act for liquidators, receivers, creditors, directors, and companies on the full range of insolvency, finance, company, and contract law matters.
*A purchase money security interest (PMSI) is a security interest for goods or property sold or leased on the basis the vendor retains title in the property until payment is made. As this can survive the goods being incorporated into other products, this is commonly used for suppliers of raw materials.
Sarah Mason
Tauranga
Rachel Scott
Tauranga
Sam Tabak
Tauranga
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