Rising construction costs have increased interest in modular homes, mass-built offsite and then trucked to their final destination. Should the builder go bust, buyers stand as unsecured creditors for instalment payments made on unfinished houses unless they previously registered a personal property security to protect payments made, the Court of Appeal ruled.
Podular Housing Systems Ltd went into liquidation insolvent in late 2022. There were 15 partly-completed houses at its Hamilton site, three at Christchurch. Customers who had made instalment payments during construction wanted to truck away ‘their’ houses; completed, or not.
An early High Court hearing helped. The judge ruled they held an equitable lien over ‘their’ unfinished house in respect of money paid. They could take possession. The build contract was treated as a sale of goods contract.
In light of this ruling, Podular’s liquidator did a deal with some customers; valuing work done to date of liquidation, with houses then released to each customer after any further required payment.
Insolvency practitioners’ professional body, the Restructuring, Insolvency and Turnaround Association, then supported an appeal to get a considered ruling on the status of modular home purchases. There was concern that the High Court ruling cut across recognised insolvency principles: payment to secured creditors and suppliers taking security over any company’s work-in-progress was being shunted down the line in favour of customers given the nebulous status of having an equitable lien.
This High Court ruling had wide implications; potentially affecting the status of contracts for the construction of specialised machinery, modular sections for high-rise buildings and the likes of custom-made joinery and jewellery.
The High Court decision was overturned. The Court of Appeal ruled Podular’s construction contract was not a contract for sale of goods, it was a contract for work and materials.
Unfinished houses were no more than work-in-progress, part of Podular’s inventory.
To create rights of an equitable lien favouring Podular’s customers would disrupt structured rules giving priority for secured creditors, the court ruled.
Customers part-paying for customised work can protect themselves by registering their status as a secured creditor under the Personal Property Securities Act, the court said.
Evidence was given that one Podular customer, having a partly-finished modular home when liquidation started, had registered their security interest in Podular’s inventory. They were able to take away their house.
Francis v. Gross – Court of Appeal (17.10.24)
25.018