Bo Si Limited (in liquidation) v Crusaders Building Development Limited
[2022] NZHC 788
•13 April 2022
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2021-409-467
[2022] NZHC 788
UNDER the Companies Act 1993 BETWEEN
BO SI LIMITED (IN LIQUIDATION)
Plaintiff
AND
CRUSADERS BUILDING DEVELOPMENT LIMITED
First Defendant
CANTERBURY RYWM HOLDINGS LIMITED
Second Defendant
Hearing: 8 April 2022 Appearances:
S Carradus for Plaintiff
B M Russell and J A Frampton for Second Defendant E L Sprott for Supporting Creditor, P C Eastgate
Judgment:
13 April 2022
JUDGMENT OF ASSOCIATE JUDGE LESTER
BO SI LIMITED (IN LIQUIDATION) v CRUSADERS BUILDING DEVELOPMENT LIMITED [2022] NZHC 788 [13 April 2022]
[1] The plaintiff, Bo Si Limited (in liquidation) (Bo Si), applies to liquidate Crusaders Building Development Limited (Crusaders), on the grounds that it did not comply with a statutory demand served by Bo Si on 14 September 2021.
[2] The second defendant, Canterbury Rywm Holdings Limited (Canterbury), is an 18 per cent shareholder in Crusaders and has filed a statement of defence to the liquidation.
Background
[3] Crusaders was incorporated on 13 July 2016. It was intended to be a land holding company. It has not traded, in the sense that it has been a passive landholder, but has incurred expenses for rates and minor property maintenance since it acquired the land it was incorporated to buy, that purchase being completed on 1 February 2017. The land purchase is a large block of development land in Central Christchurch. The purchase price of the land was $5,300,000.
[4] There is an issue as to who the correct shareholders of Crusaders are. The Companies Office records show Mr Luan as holding 4,346,000 shares and Canterbury as holding 954,000 shares. Accordingly, the total number of shares in Crusaders is 5,300,000.
[5] Canterbury’s shares were originally purchased by Mr James Martin. He contributed $954,000; hence he received that number of one dollar shares. Mr Martin’s shareholding is not in issue, but whether he introduced his funds way by way of equity or by way of an advance will be in issue, albeit not one to be determined in this context.
[6] Mr Hongtao Li (Mr Li) claims that he is a shareholder in Crusaders on the basis that he was introduced to the opportunity of investment in Crusaders by Mr Luan. In late 2016, Mr Li says he arranged for $2,025,228.85 to be paid to purchase shares in Crusaders. The intention was that Mr Li would pay 10,000,000 Renminbi (RMB), being the official Chinese currency, which would convert to around $2,000,000 – in order to buy 40 per cent of the shares in Crusaders. Because of exchange rate
variations, the amount Mr Li says he actually paid is a little over $2,000,000. Mr Li says he made the payments between 14 July 2016 and 29 November 2016.
[7]In Mr Li’s affidavit, he produces a table of payments as follows:
Date Amount Remitter Account payment made to 26 Jul 2016 $216,092.38 As explained in
Mr Martin’s affidavit at paragraphs 8 to 10
Crusaders Building Development Limited 22 Nov 2016 $60,000.00 Li Lei Lei Qi (Iris) Yang 23 Nov 2016 $69,000.00 Xie Jiong Yi Yuhui Wang 24 Nov 2016 $69,000.00 Cao Liang Liang Nan Ji 24 Nov 2016 $69,000.00 Xiaohui Duan Crusaders Building Development Limited 25 Nov 2016 $25,500.00 Dong Rui Bo Si Limited 26 Nov 2016 $69,000.00 Wei Haixia Easy Accounting (Qi Yang) 29 Nov 2016 $69,000.00 Xie Jian Ye NZ Bosi Limited 29 Nov 2016 $1,378,699.47 Bosi Limited Total $2,025,228.85
[8] While Mr Li says he paid the money for a shareholding in Crusaders, shares were not issued to him. The company records show Mr Luan provided to the company
$4,358,654.14 which Mr Li says included his funds.
[9] There is an affidavit from the accountant, Ms Yang, for Crusaders in which she says her records show that Mr Li contributed $2,025038.47 to Crusaders and as far as the accountant was concerned these funds were transferred to acquire shares in Crusaders. Mr Li’s share was taken in Mr Luan’s name to avoid “some restrictive rules for overseas property investors, such as Mr Li”. Ms Yang is the recipient of the payment made on 26 November above. For reasons related to controls on funds out of China, the remitter of the funds was not Mr Li. As to the last and largest payment, this payment was made from Hong Kong by a friend of Mr Li, in exchange Mr Li says he paid a debt the friend owed in China.
[10] In due course, Mr Li discovered that the shares had not been registered in his name and he has issued proceedings in this Court which are for hearing on 23 May 2022, where he seeks to have the Crusaders Share Register rectified to show him as holding 40 per cent of the shares (or on Mr Luan’s figures, just over
38 per cent). Mr Li and Mr Martin would then, together, hold the majority of the shares in Crusaders.
[11] Mr Li, in his shareholder proceeding, applied for an injunction to prevent Mr Luan dealing with Crusaders’ land. That injunction remains in place.
[12] A complicating matter is that Mr Luan died suddenly in March 2020, which was after the issue of Mr Li’s proceeding. In Mr Li’s shareholder proceeding, the sworn affidavit of Mr Luan was produced by the liquidator in the liquidator’s affidavit in this proceeding. While Mr Carradus, counsel for Bo Si, raised some issues with the admissibility of Mr Luan’s affidavit, the fact is, it was the liquidator who put Mr Luan’s affidavit before the Court.
[13] Mr Luan was the sole director and shareholder of Bo Si. Mr Luan’s executor placed Bo Si into liquidation. The liquidators of Bo Si, having undertaken their enquiries, concluded that Crusaders was a debtor of Bo Si and issued the statutory demand upon which this liquidation proceeding is based. The statutory demand records that Crusaders:
… hereby demands payment of the sum of $1,087,699.79 being the debt owing by Crusaders Building Development Limited to Bo Si Limited (in liquidation) for repayment of advances.
[14] The demand contained no detail as to the advances. The statement of claim in which the liquidation order is sought, pleads that Crusaders is indebted to Bo Si for the same amount as is claimed in the statutory demand.
[15] With the death of Mr Luan, his de facto partner took over as director of Crusaders. She did not advise Mr Li of the statutory demand and no steps were taken to set the demand aside. The present director of Crusaders in fact supports the liquidation. Canterbury is sceptical of the motives of Mr Luan’s de facto partner in that she is owed money by Bo Si either in her own right or on behalf of others and submits liquidation of Crusaders would assist her in recovering the amounts so claims from Bo Si.
[16] The liquidator of Bo Si claims that Crusaders owes Bo Si a much larger sum, in excess of $4,000,000, but as noted, that is not the amount claimed in the statutory demand nor relied on in the statement of claim. Mr Martin and Mr Li have no idea how such an indebtedness could arise when, from their point of view, as between them and Mr Luan they fully funded Crusaders’ acquisition of the land and it has not incurred any liabilities beyond rates and minor property maintenance issues since the property was acquired.
[17] Canterbury applied for an adjournment of the liquidation hearing given Mr Li’s application to have the Share Register rectified. I declined that application.
[18] Before turning to the principles, I deal briefly with Bo Si’s challenge to Canterbury’s standing to oppose liquidation.
[19] Mr Carradus submitted Canterbury had no standing to dispute the debt upon which the liquidation is based. Mr Carradus referred to s 165(6) of the Companies Act 1993 (the Act) which states:
Except as provided in [s 165], a shareholder is not entitled to bring or intervene in any proceedings in the name of, or on behalf of, a company or a related company.
[20] I do not accept Mr Carradus’ submission on standing. McGechan on Procedure, referring to the fact that a shareholder may file a statement of defence, says:1
Shareholders have an independent right to file a defence to protect their position. They do not have to satisfy the derivative action requirements of s 165 of the Companies Act 1993: Weller v New Town Taxation Ltd (1995) 8 PRNZ 712.
[21] Mr Carradus submitted his standing argument was more nuanced. Section 290 of the Act provides only the company may apply to set aside a statutory demand. The submission was that only the company could take a point that went to the validity of the statutory demand, hence here, to the extent the shareholders sought to challenge the demand, they were unable to do so unless they met the requirements of s 165 of
1 Andrew Beck and others McGechan on Procedure: High Court Rules 2016 (online ed, Brookers) at [HR31.16.01].
the Act. However, in my view, requiring a shareholder to take that step is simply not practical in the 10 working days allowed to apply to set aside a demand. As I have said, it is only at the time of opposing the liquidation that a shareholder can be heard as of right.
[22] Rule 31.16(2) of the High Court Rules 2016 (the Rules), permits a shareholder to defend a liquidation. It cannot have been intended that this right would be toothless.
[23] Accordingly, this is the first opportunity that Canterbury has had to challenge Bo Si’s status as creditor. Insolvency Law in New Zealand notes:2
Normally a defendant that has failed to apply to set aside a statutory demand in time will not be permitted the substantive defence at the liquidation proceedings. The defendant needs to show some exceptional factor to justify its failure to seek to set aside the statutory demand.3
[24] This approach represents what might be called the traditional approach applied where a company failed to take up its right to challenge a demand. However, where the application to liquidate is the shareholder’s first opportunity to challenge the debt, in my view, it is permissible to consider whether the statutory demand would have been set aside, that is, whether there is a genuine dispute as to whether the plaintiff is a creditor. As Insolvency Law in New Zealand notes:4
… a liquidation order will not be made where there is a genuine and substantial dispute as to the existence of a debt, such that it would be an abuse of the process of the court to order a liquidation.
[25] Mr Russell also relies on the following passage from Cable Price (NZ) Ltd v Taimona Haulage Ltd, which might be called the modest approach:5
In its written submissions, Cable Price raised an argument based on the decision of Associate Judge Abbott in Balmoral Marketing v Karapiro Spa6 to the effect that a company that fails to apply to set aside a statutory demand may be barred from disputing the debt in a subsequent liquidation application. That decision has been overtaken by later decisions – Heron’s Flight Ltd v NZ
2 Paul Heath and Mike Whale Insolvency Law in New Zealand (4th ed (Vol 1), LexisNexis, Wellington, 2021) at 244.
3 This summary reflects the law as stated in Balmoral Marketing Ltd v Karapio Spa Ltd, HC Auckland CIV-2005-404-6396, 3 October 2006.
4 Heath and Whale, above n 2 at 244.
5 Cable Price (NZ) Ltd v Taimona Haulage Ltd [2016] NZHC 828 at [17].
6 Balmoral Marketing Ltd v Karapiro Spa Ltd, above n 3, at [46].
Properties International Ltd7 and the Court of Appeal’s decision in Yan v Mainzeal Property Construction Ltd.8 The failure of a company to respond to a statutory demand may raise a question as to a defendant’s genuineness in contesting its liability for the debt at the liquidation application stage, but even with that concern, I am still satisfied that Taimona has raised proper grounds for disputing liability.
[26] Here, Canterbury submits there is a genuine and substantial dispute as to whether Bo Si is a creditor of Crusaders on two grounds. Considering whether Bo Si is a creditor will inevitably involve examining the merits of the statutory demand. The presumption of insolvency created here by the statutory demand not being challenged is rebutted by it being shown there is a genuine and substantial dispute as to the existence of the debt claimed in the demand and because here there is no evidence of other debt owed by Crusaders. Mr Luan’s Estate has filed an appearance in support but did not present submissions. Ms Sprott, counsel for Mr Luan’s Estate, maintained a watching brief but did not have instructions which would enable her to explain the basis of the debt claimed by the Estate in Crusaders. The debt was similar in level to Mr Luan’s current account within Crusaders but may not be the same amount. Without the debt claimed by the Estate being subject to evidence, which the Canterbury can consider and reply to, and given the state of the records kept by Mr Luan, I do not consider the Estate claim further.
[27] The first ground is that the records relied on by the liquidator to claim the debt in the statutory demand are unreliable and that the bulk of the claimed debt is in fact represented by funds paid by Mr Li for the purchase of shares in Crusaders. The second ground is the amount claimed in the statutory demand, if an advance, is not repayable until the land is sold, this being a reference to rates payments made by Bo Si on behalf of Crusaders. Mr Russell, counsel for Canterbury, submitted that in relation to the balance of the claimed advance, if Crusaders did owe Bo Si money, it was repayable on demand and no demand was made prior to the issuing of the statutory demand. In the absence of a prior demand calling up the alleged debt, Bo Si was not a creditor and its demand was “ineffective”.9
7 Heron’s Flight Ltd v NZ Properties International Ltd [2012] 1 NZLR 424 (HC).
8 Yan v Mainzeal Property Construction Ltd (in receivership and in liquidation) [2014] NZCA 190 at [61].
9 It is only failure to comply with an effective statutory demand that creates the rebuttable presumption that a company is unable to pay its debts. See Heath and Whale, above n 2, at 244.
The accuracy of the records of Bo Si and Crusaders
[28] Mr Meluish is one of the liquidators of Bo Si. In his affidavit sworn on 22 February 2022, he says:
12.As I discuss later in my affidavit, it has been difficult to investigate Bo Si’s affairs due to poor record keeping, poor accounting practices extensive inter-entity lending, and a failure by Mr Luan to maintain separation between his companies and his own finances.
[29]Mr Meluish goes on to say, in his affidavit at [25]:
Most of Mr Luan’s companies were financed, directly or indirectly, through Bo Si. Those companies were, in turn, used to channel funds back to Bo Si to use in other endeavours. Money freely flowed between Mr Luan’s companies, with little in the way of record keeping, and seemingly no regard for director obligations. It will be a difficult process to unwind the transactions, to ensure that the correct funds are made available to the correct people.
[30]Further, in para [39] of Mr Meluish’s affidavit he says:
… I acknowledge that Mr Luan was loose in his dealings, as well as the company’s records and financial dealings …
[31] Despite these candid and properly made acknowledgements by Mr Meluish, he nonetheless says there is no reasonable argument as to the amount claimed.
Payable on demand
[32] Bo Si does not suggest there were any formal terms of the alleged advances, perhaps not surprising given the above observations by Mr Meluish. Canterbury says the advances, if they existed, were repayable upon demand subject to repayment of advances made by Bo Si to meet Crusaders rates and minor property maintenance payments which Canterbury says only had to be repaid upon the sale of the land.
[33] A statutory demand may only issue in respect of a debt that is due. Mr Russell submits there is no evidence that a demand was made prior to the issuing of the statutory demand. He submits “on demand” advances do not become payable until demand is actually made. Therefore, there cannot have been any sum due and owing
when the statutory demand was issued. Mr Russell referred to All Safe Scaffold Ltd v Coghlan:10
… A statutory demand can be issued only for a debt that already exists and is payable. Money left in a company in a current account basis is not due and payable until a demand has actually been made.
[34] Mr Carradus submits no demand was required, relying on DFC New Zealand Ltd v McKenzie,11 where the Court held in respect of an “on demand” obligation, time for limitation purposes runs from the date of the advance. In such a case, no demand is necessary and the cause of action arises at the outset on the implied promise to repay. However, the issue is whether “…the parties have expressly or by clear and necessary implication made it apparent that they intended the obligation [to repay] not to arise unless and until a demand is made.”12 It is not possible here, because of the death of Mr Luan and the state of the records he left, as described above, to say what the terms of the alleged advance may have been.
[35] If a demand was required, Mr Carradus submits there is no evidence a demand was not made. However, at the heart of this application is whether there is a genuine and substantial dispute as to the existence of a debt. Mr Carradus argues the applicant’s position is an “argument from silence”, that is, it points to an absence of correspondence or a notice calling up payment. Mr Carradus said it would be different if the present director, who has first-hand knowledge of Crusaders affairs, had said she was not aware of any demand being made. However, given the current director is not opposed to liquidation, she was hardly likely to take steps to undermine the current application. Canterbury put in issue whether demand was made. It would have been a simple matter, had there been a prior demand, for evidence to be given of the prior demand.
[36] I am entitled to infer, from the absence of an answer to a point so easily answerable, that no prior demand was made. Further, if a demand was made, the question would arise as to whether a reasonable time was allowed to Crusaders to
10 All Safe Scaffold Ltd v Coghlan [2016] NZHC 3106 at [13].
11 DFC New Zealand Ltd v McKenzie [1993] 2 NZLR 576.
12 DFC New Zealand Ltd v McKenzie, above n 11, at 582.
make payment.13 Here, it should be kept in mind that Bo Si was placed in liquidation by Mr Luan’s executor. Crusaders’ only likely source of payment was therefore the other shareholders, or at least Mr Li who claims to be a shareholder, and Mr Martin. A reasonable time for payment would have to reflect that reality.
[37] The point is probably moot given there is a substantial dispute as to whether a prior demand was made.
[38] Had Crusaders taken the point that the statutory demand was invalid on the ground there was no prior demand, then it would seem inevitable the statutory demand would have been set aside given the factual uncertainties. As I have said, this is the first opportunity for the shareholders to defend Crusaders’ position.
[39] I am satisfied Canterbury has established a genuine and substantial dispute as to whether the debt is due and payable by Crusaders.
[40] If my conclusion on this point is incorrect, I now assess the second challenge which goes to the existence of the debt which is, in short, that the records relied on by the liquidator are not accurate and do not establish Bo Si is a creditor.
[41] The liquidator has produced a running account of transactions between Bo Si and Crusaders. With reference to that running account the liquidator says he is satisfied that $1,087,699.79 is due and owing and that the transactions were subsequent to Mr Li and Mr Martin’s payments.
[42] The account includes debits and credits between 30 November 2016 and 10 August 2020. A little over $80,000 of the amounts paid out by Bo Si on behalf of Crusaders are rates. The evidence of Mr Martin is that the agreement made with Mr Luan was that Mr Luan would pay the rates and be reimbursed upon the sale or development of Crusaders’ land. It appears Mr Luan had the rates paid by Bo Si. Whoever paid the rates is not of immediate significance if the agreement was the rates would only be repayable upon the sale of Crusaders’ land. The land has not been sold and thus it is said those amounts are not payable. I note that, around the time Mr Li
13 See ANZ Banking Group (NZ) Ltd v Gibson [1986] 1 NZLR at 556 (CA).
took issue with Mr Luan for Mr Luan not transferring Mr Li’s shares into Mr Li’s name, a new arrangement in relation to rates was reached under which the three shareholders agreed to meet the rates in proportion to their shareholding. Mr Luan at that time did not call for the previous rates covered by Bo Si to be reimbursed, which is at least consistent with Mr Martin’s evidence as to the original arrangement relating to the rates. Given Crusaders has no income, it would be unlikely Mr Martin and Mr Li would agree to money advanced for the rates being payable on demand.
[43] The opening debit in the liquidator’s running account has the following narration:
30/11/2016: Unknown – per capital G5/46, G5/16 21T0221670 CRUSADERS for 888 Colombo St, another company paid rest. Total payment of $1.5 million has been paid.
[44]The debit is recorded as $1,071,030.00.
[45] In the five days prior to this payment from Bo Si, Mr Li on his evidence, paid to Bo Si in the sum of $1,473,199.47 being the entries from the table set out at para
[7] on 25 and 29 November 2016. Mr Li says, and Mr Carradus does not dispute, that in respect of Mr Li’s money, Bo Si was only a conduit for the funds destined for Crusaders and that Bo Si paid Mr Li’s funds onto Crusaders.
[46] On Mr Li’s evidence, the timing of his money being introduced, then transferred by Bo Si to Crusaders is consistent with Mr Li’s position that he was asked to introduce his funds for the share purchase through Bo Si. Mr Carradus accepted Bo Si was not in a position to demonstrate that the opening debit of $1,071,030 was not Mr Li’s funds being forwarded to Crusaders. It was not suggested Mr Li’s funds were transferred to Crusaders at some other time. I am therefore satisfied there is a substantial dispute as to whether the transfer was an advance as asserted by Bo Si or whether it was Bo Si on-paying Mr Li’s funds. The evidence I have in fact suggests it was the latter. Once the opening debit and the rates are removed, there is no indebtedness in terms of the liquidator’s running account owed by Crusaders.
[47] The liquidator’s frank assessment of the reliability of the company’s records, coupled with Mr Li’s evidence as to when he introduced his money for the purchase
of his shares and the fact that the narration for the opening debit refers to “Crusaders for 888 Colombo St” means there is a substantial dispute as to the accuracy of the liquidator’s reconstruction.
[48] Mr Carradus in his submissions says the advances have been confirmed by a number of matters including: “Crusader[s’] financial accounts (albeit the debt is in the name of Mr Luan rather than Bo Si)”. Given what is accepted as to Mr Luan’s record keeping, in a summary context I cannot simply ignore the way Crusaders’ accounts were prepared because it fits Bo Si’s theory of the case.
[49] Mr Carradus notes there are emails from Mr Luan’s address which refer to Bo Si being a shareholder in Crusaders, but those emails do not appear to be written by Mr Luan. While there is reference in the emails to an agreement to be signed by Mr Luan, which also refers to the shares as belonging to Bo Si, it is not clear if that agreement was signed or only intended to be signed.
[50] Nothing in Crusaders’ records supports Bo Si’s claim. At the heart of Mr Carradus’ submission was that Bo Si advanced to Crusaders the funds Mr Luan used to buy the shares registered in his name or at least to fund Mr Luan’s share of the purchase price of the land. Along with the funds introduced by Mr Li and Mr Martin, Crusaders needed a little over $2,320,000 to complete the purchase of the land. Mr Carradus submitted this money came from Bo Si and is described as an advance to Crusaders in Bo Si’s accounts.
[51] However, in Crusaders’ account, the funds (along with Mr Li’s funds) are recorded as having been introduced by Mr Luan (whether by way of advance or to purchase shares remains in issue). The shares were taken in Mr Luan’s name. The purchase of the land was completed by Crusaders in February 2017. In the liquidator’s running account reconstruction, only the transfer of $1,071,030 occurred before February 2017.
[52] I have already concluded there is a substantial dispute whether the amount claimed in the statutory demand and as pleaded in the statement of claim (being the amount explained in the liquidator’s running account) was advanced by Bo Si to
Crusaders. To the extent the advance relied on in the statutory demand is made up of the $1,071,030, already discussed, that claim does not survive the matters discussed at
[45] above. As I concluded, the evidence supports the proposition that the $1,071,030 was passed through Bo Si to permit Mr Li to buy his shares and was not an advance for Mr Luan to buy his shares.
[53] Mr Luan was responsible for the accounts of both Crusaders and Bo Si, as he was the sole director of each company. Given what the liquidator has explained of Mr Luan’s record keeping, there is no reason to treat Bo Si’s accounts (which were not produced) as trumping Crusaders’ accounts. There are issues with Crusaders’ accounts as discussed by its accountant (Ms Yang) in her affidavit, but it does not follow from those issues that Bo Si’s accounts should be treated as gospel when it comes to the record of the advance to Crusaders.
[54] As Mr Li says, given he was intending to buy shares in Crusaders, there was no reason for him to loan money to Bo Si. Even if for Mr Luan’s own reasons, he wanted Bo Si to receive the money on behalf of Crusaders as a conduit, the reality of the transaction from Mr Li’s point of view is that he was paying his money to Crusaders.
[55] I am satisfied there is a real doubt, that is, a genuine and substantial dispute as to the existence of the debt asserted by the liquidator, that is, whether Bo Si is a creditor.
[56]Accordingly, the application for liquidation is dismissed.
Costs
[57] Counsel did not make submissions on costs. My impression is costs should follow the event on a 2B basis. That shall be the order if no submissions on costs (of not more than five pages) are filed within five working days of the date of this Judgment.
Associate Judge Lester
Solicitors:
Lane Neave, Christchurch
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