A recent decision of the High Court in Maginness & Booth v Tiny Towns Projects Limited has inserted another layer of complexity into the insolvency of companies in the construction industry, while potentially providing a helpful remedy to those who have paid for goods not yet received when a company goes into liquidation.

The decision is relevant to those in the construction industry for two reasons:

1. There has been a lot of publicity about a slowdown in the economy, particularly in residential construction. Already there are examples of developers, head contractors, and subcontractors being put into liquidation. If forecasts are correct, this will not only continue for the foreseeable future but ramp up in frequency.
2. Since the pandemic there has been a drastic increase in early payment for materials manufactured or stored off site. While these are often covered by an agreement for payment of offsite materials, that will not always be the case; or the agreement and subsequent registration of the security may be deficient. This case may provide another avenue to obtain goods that have been paid for but are in the possession of a company in liquidation.

So what happened?

Tiny Town Projects Limited (Tiny Town) manufactured tiny homes. Liquidators were appointed over the company at which point there were six partially completed homes. Three were fully paid for and 95% completed. The other three were partially paid for and approximately 50% complete.

The company had limited assets - other than the six partially complete tiny homes - and had preferential and secured debtors. It was stated in the judgment that the chances of a return to secured creditors seemed slim.

The purchasers of the tiny homes said that they had a right to the homes in preference to other creditors on four different grounds and so the liquidators applied to the Court for directions on the issue. Three of the purchasers' arguments were dismissed but one succeeded.

Court findings

The purchasers argued, and the Court agreed, that they had an equitable lien in the tiny homes - in other words, a right to have recourse against a specific piece of property to secure the payment of a liability owed by the owner of the property. Where an equitable lien is established, the creditor is essentially elevated to the position of a secured creditor.

It appeared critical to the reasoning of Venning J in this decision (and was described as an important factor) that the tiny homes were readily identifiable as unique to each purchaser. His Honour said that the tiny houses could not have realistically been sold to anyone other than the identified purchasers.

The Court also found the rules about priority of security interests under the Personal Properties Security Act (PPSA) did not apply to equitable liens because section 23 stated that the PPSA did not apply to this type of lien.

The result was that the purchasers, who would have otherwise been unsecured creditors, would not have received anything from the liquidation, were entitled to an interest in the tiny homes to the extent of what they had paid to date.

Implications for the construction industry

Often companies in the construction industry are paying in advance for the manufacture of goods to be incorporated in the contract works. As noted above, this has increasingly been the case after the pandemic given the volatility of prices and a desire to procure early to avoid the risk of escalation.

If a company that has been paid in advance to complete goods and has partially completed them when it goes into liquidation, those goods would, prior to this decision and in the absence of any other security, be sold and distributed for the benefit of the creditors of the company generally.

After this decision it may be the case that someone who has paid to have goods manufactured - whether in part or full - can claim an equitable lien in the goods. As it was an 'important feature' that the goods were unique and could only be sold to the specific purchasers it is likely that this would be a necessary feature of any claim. For example:

1. An equitable lien may be established where a head contractor has paid a subcontractor to produce goods that are so unique and specific to a project that they could not realistically be sold to any other party.
2. An equitable lien is unlikely to exist where a party is paid in advance to produce a standard product that was not unique and can be sold to others in the usual course of business. 

Whether an equitable lien exists is always decided on the facts on the particular case. Usually it is important in an insolvency situation to act quickly - if you have paid for goods that are in the possession of a company in liquidation then you can contact us to discuss your options.