Maryland Bassett Company Limited v Taihe Innovation Management Limited (in rec)
[2023] NZHC 801
•17 April 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-1302
[2023] NZHC 801
UNDER s 290 of the Companies Act 1993 BETWEEN
MARYLAND BASSETT COMPANY LIMITED
Applicant
AND
TAIHE INNOVATION MANAGEMENT
LIMITED (in rec) Respondent
Hearing: 22 November 2022 Appearances:
RE Harrison KC and D Liu for the Applicant
RJ Hollyman KC and JD Ryan for the Respondent
Judgment:
17 April 2023
JUDGMENT OF ASSOCIATE JUDGE SUSSOCK
This judgment was delivered by me on 17 April 2023 at 4pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors/Counsel:
Heritage Law, Auckland
Claymore Partners, Auckland
RE Harrison KC, Auckland RJ Hollyman KC, Auckland
MARYLAND BASSETT COMPANY LTD v TAIHE INNOVATION MANAGEMENT LTD (in rec) [2023] NZHC 801 [17 April 2023]
Introduction
[1] Maryland Bassett Company Ltd (Maryland) applies to set aside a statutory demand served on it by Taihe Innovation Management Ltd (in receivership) (Taihe) dated 28 July 2022. The statutory demand seeks recovery of an alleged debt of
$659,961.36 (including interest) that Taihe says arises under a loan agreement between Taihe and Maryland.
[2] Maryland submits that the purported loan agreement was a sham transaction embarked upon by Taihe and Maryland through their respective sole directors, Lei (Andy) Zhang and Weidong (Donny) He.
[3] Essentially, Mr He’s evidence is that the sums advanced from Taihe to Maryland were to allow an injection of additional capital into a company associated with Mr Zhang, with the transaction “structured to look like a regular loan from [Taihe to Maryland] … so as to not alert the other shareholders” of that other company.
[4] In addition, Maryland relies on the indemnity clauses in a Deed of Trust and Indemnity entered into by Mr He, Maryland, Mr Zhang and Taihe on 7 March 2022 (the Deed). Maryland submits that based on those clauses, Maryland has a counterclaim, set-off or cross-demand equal to or exceeding the alleged debt.
[5] Taihe opposes the application to set aside on the basis that Maryland’s claim that it has no liability under the loan agreement is both misconceived and unsupported by material evidence and that instead:
(a)Maryland’s affidavits confirm the loan agreement; and
(b)the receivers and the secured creditor that appointed them are not parties to the alleged “sham transaction” and therefore should be able to rely on the face of the loan agreement and should not be adversely affected by the admitted dishonest motive of Mr He and Maryland.
[6]As a consequence, Taihe submits that Maryland:
(a)is estopped from relying on the sham transaction; or
(b)is liable as trustee of a trust.
[7] Even if the Court accepts that it is arguable the loan agreement is void and unenforceable as a sham transaction, Taihe submits it would have a clear right to demand immediate repayment of the funds advanced to Maryland.
[8] Furthermore, Taihe says the indemnity under the Deed is limited to circumstances where either the shares that are the subject of the Deed have been sold, or steps have been taken by Maryland to enforce claims against Mr Zhang (not Taihe). As neither event has happened, Taihe submits the indemnity does not assist Maryland.
[9] Finally, Taihe says Maryland is insolvent and so a liquidator ought to be appointed immediately.
Legal principles applying to setting aside a statutory demand
[10] Failure to comply with a statutory demand is one of the mechanisms by which insolvency is established under Part 16 of the Companies Act 1993. A creditor may serve a statutory demand on a company in respect of any debt owed that is not less than the current prescribed amount of $1,000.00.1 A company served with a statutory demand may apply to the Court to set it aside but must do so within 10 working days of service.2
[11] The Court’s discretion to set aside a statutory demand is provided by s 290(4) of the Companies Act:
(4)The court may grant an application to set aside a statutory demand if it is satisfied that—
(a)there is a substantial dispute whether or not the debt is owing or is due; or
(b)the company appears to have a counterclaim, set-off, or cross- demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or
(c)the demand ought to be set aside on other grounds.
1 Companies Act 1993, s 289.
2 Section 290(2).
[12] The Court of Appeal confirmed the principles a court should apply when exercising the s 290(4) discretion in Confident Trustee Ltd v Garden and Trees Ltd:3
[16]The general principles under s 290(4) are well settled:
(a)The onus is on the applicant seeking to set aside the statutory demand to show that there is arguably a genuine and substantial dispute as to the existence of the debt. The Court’s task is not to resolve the dispute but to determine whether there is a substantial dispute that the debt is due.
(b)The mere assertion that a dispute exists is not sufficient. Material short of proof is required to support the claim that the debt is disputed.
(c)If such material is available, the dispute should normally be resolved first in ordinary civil proceedings before any statutory demand is issued.
(d)If a counterclaim, cross-demand or set-off is suggested an applicant must establish that this is reasonably arguable in all the circumstances.
(e)It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise unless such evidence is contrary to the available documents or earlier statements made by the parties.
(footnote omitted)
Section 290(4)(a): A substantial dispute
[13] To succeed in an application under s 290(4)(a) the applicant must demonstrate a “fairly arguable”4 basis for the alleged dispute. The onus of establishing the dispute is on the applicant.5 In AAI Ltd v 92 Lichfield Street Ltd (in rec and liq) the Court of Appeal summarised the applicant’s task as follows:6
What the applicant must show is that the dispute it raises has substance; the applicant must explain to the court what the dispute is; and the dispute so shown must be a real and not a fanciful or insubstantial dispute.
3 Confident Trustee Ltd v Garden and Trees Ltd [2017] NZCA 578, recently confirmed by the Court of Appeal in Demasol Ltd v South Pacific Industrial Ltd [2022] NZCA 480 at [26].
4 Forge Holding Ltd v Kearney Finance (NZ) Ltd HC Christchurch M149/95, 20 June 1995; United Homes (1998) Ltd v Workman [2001] 3 NZLR 447 at [32].
5 JP & BM Holdings Ltd v Commissioner of Inland Revenue HC Auckland CIV-2010-404-5208, 26 November 2010, at [7].
6 AAI Ltd v 92 Lichfield Street Ltd (in rec and in liq) [2015] NZCA 559, [2016] NZAR 1338 at [22], referring to Re A Company [1991] BCLC 737 (Ch) at 740.
[14] Taihe submits that the Court is not required to accept without question a bare assertion of facts, or “whatever unvarnished statements may happen to be made on affidavit”,7 and the debtor company must point to evidence, short of proof, of its claim.
[15] The principles developed in fields such as applications to remove caveats, and opposition to summary judgment apply by analogy.8 In this respect, Counsel for Taihe emphasises the following passage from the Court of Appeal’s decision in Krukziener v Hanover Finance Ltd:9
The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable… In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it.
Section 290(4)(b): A cross-demand
[16] The wording in s 290(4)(b) is whether the applicant “appears to have” a counterclaim, set-off or cross-demand. In Industrial Group Ltd v Bakker, the Court of Appeal held:10
[25] The approach required by the “appearance” test in s 290 is a review with a low threshold. The tight time constraints distinguish the s 290 discretion from that to be exercised on, say, a summary judgment application, where the presence of complex legal issues is not necessarily a bar to a remedy. As with leave to appeal an arbitrator’s award, the hearing should, in the normal course, be short and to the point, and the judgment likewise.
[17] Maryland emphasises that a “cross-demand” is wider than either a counterclaim or a set-off, referring to the following definition of cross-demand in the English decision, In Re A Bankruptcy Notice:11
“Cross-demand” seems to me to be a word introduced in order to give a wider ambit to the meaning of these claims, something that would not be described, certainly, as a set-off, something that could not have been brought in the action, something that still lies outside a counterclaim, but is of a nature which
7 United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 (CA) at [34].
8 At [34].
9 Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162 at [26].
10 Industrial Group Ltd v Bakker [2011] NZCA 142, (2011) 20 PRNZ 413 (emphasis added).
11 In Re A Bankruptcy Notice [1934] Ch 431 at 438, applied in, for example, Re Bennett ex parte Preston HC Palmerston North CIV-2007-454-856, 28 October 2008.
can be specified and which is of such a nature that it equals or exceeds the amount of the judgment debt …
[18] In respect of cross-demands, as for set-off and counterclaims, the applicant must be able to do more than merely assert that there is an available cross-demand. It must be able to point to evidence before the court showing that it has a real basis for the claimed cross-demand and that accordingly the applicant’s claim to be a creditor is, to the extent of the cross-demand, in doubt. The applicant must show that there are clear and persuasive grounds.12
Issues
[19]The issues can therefore be formulated as follows:
(a)Has Maryland established that there is arguably a genuine and substantial dispute as to the existence of the debt on the basis that the loan agreement is part of a “sham transaction”?
(b)In addition, or in the alternative, is it reasonably arguable that Maryland has a cross-demand that exceeds or is equal to the amount of the debt based on the indemnity provisions in the Deed?
(c)If neither of the above are arguable, is Maryland insolvent?
(d)If insolvent, should a liquidator be appointed immediately?
Factual Background
[20] Mr He, the sole director of Maryland, has sworn an affidavit in support of the application to set aside. There was no evidence from Mr Zhang, the sole director of Taihe. The evidence on behalf of Taihe comes one of its receivers, Mr Christopher McCullagh, who had no direct involvement in any of the discussions of which Mr He gives evidence. Maryland submits that I should infer from this that Mr Zhang’s evidence would not assist Taihe. There may however be many reasons for Mr Zhang not having given evidence so I do not draw such an inference for the purposes of this application.
12 Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA) at 274-275.
[21] Mr McCullagh’s affidavit raises issues with Mr He’s evidence in terms of apparent timing of some events and the entities involved. Mr He in his affidavit in reply objects to the admissibility of Mr McCullagh’s comments and what he says are effectively submissions on the content of Mr He’s affidavit and on the interpretation of the Deed. It is not necessary to determine questions of admissibility as only in the clearest of cases will the court determine factual disputes in the context of applications to set aside a statutory demand. Furthermore, to the extent that Mr McCullagh’s evidence is submission, those submissions are repeated by Taihe’s counsel. I therefore set out Mr He’s evidence on the factual background below and then discuss Mr McCullagh’s criticisms in the discussion of the issues.
[22] Mr He’s explanation of why the loan agreement is a sham requires an understanding of the context in which the agreement was reached. I therefore set out in some detail the events leading up to entry into the loan agreement as Mr He describes them.
[23] Mr He says that he was introduced to Mr Zhang in 2015 as the owner of a company he refers to as “IE Money”. Mr He says that following that meeting they became friends. Mr He subsequently introduced Mr Zhang to senior management at Alibaba Group resulting in Mr Zhang obtaining an exclusive licence for Mr Zhang’s company, IE Money, to operate Alibaba’s online payment platform, Alipay, in New Zealand.
[24] Mr He says Mr Zhang invited him to invest in IE Money as a way of thanking him for making the acquisition of the Alipay licence possible. Mr He’s evidence is that he was initially reluctant but that Mr Zhang was insistent and that he was willing to guarantee Mr He’s investment by giving him a put option on all shares subscribed for plus a guaranteed return of eight per cent per annum.
[25] Mr He deposes that Mr Zhang also told him that he was going to give Mr He 2,500,000 shares in IE Money to show his appreciation regardless of whether Mr He invested in IE Money. Mr He annexes a Companies Office printout to his affidavit confirming issue of 2,500,000 shares in IE Financial Services Limited (IFSL) on 21
December 2016. It appears from this printout that Mr He’s references to IE Money are to IFSL.
[26] Following this, Mr He deposes that on 14 March 2017, in reliance on Mr Zhang’s representations, Mr He’s company, Evergreen Investment Group Ltd (Evergreen), entered into the following agreements with Mr Zhang and IFSL:
(a)a subscription agreement for 4,500,000 shares in IFSL;
(b)a put option whereby Mr Zhang agreed to purchase 4,500,000 shares; and
(c)a share sale agreement whereby Evergreen agreed to purchase a further 4,500,000 shares in IFSL from Mr Zhang conditional on IFSL obtaining NZX approval to list on the NXT market within two years of the date of the agreement (i.e. on or before 14 March 2019).
[27] Listing on the NXT market did not proceed as planned and in March 2018 Mr He agreed to waive the NZX approval condition in exchange for Mr Zhang giving Evergreen a put option in respect of the 4,500,000 new shares and indefinitely extending Evergreen’s put option in respect of the original 4,500,000 shares in IFSL.
[28] IFSL did not obtain NZX approval to list on NXT prior to the NXT exchange being disestablished in 2019. Mr Zhang then advised Mr He that IFSL was going to restructure and list on the National Stock Exchange of Australia (NSA) instead. Mr He’s evidence is that Mr Zhang later advised him that through a series of restructures, both Mr He and Evergreen’s shareholdings in IFSL had been converted into shares in an Australian company known as MIE Pay Ltd (MIE Pay).
[29] Mr He deposes that in approximately October 2019, Mr Zhang told him that MIE Pay’s listing with the NSA was imminent but MIE Pay needed additional funding to complete the listing process. Mr Zhang told Mr He that he had the funds available to inject into MIE Pay through subscription for new shares but he did not wish to do so personally. This was apparently because Mr Zhang did not want to upset the other shareholders by breaking the voting power balance and, as Mr Zhang was a director
of MIE Pay, any subscription for new shares by him would require valuation and board approval which would take weeks when MIE Pay urgently needed the additional funding.
[30] Mr He says that Mr Zhang asked him whether he would be willing to help inject additional capital into MIE Pay as bare trustee for Mr Zhang with Mr Zhang providing all the necessary funding needed to complete the share subscription. Mr He’s evidence is “[g]iven the problematic stage the overall dealings with [Mr Zhang] and [Taihe] had reached, I told [Mr Zhang] that I would help”.
[31] Mr He’s evidence is that Mr Zhang’s Australian solicitors then prepared a draft agreement for the subscription for new shares and Mr Zhang asked Mr He to approve and sign the documents as a matter of urgency. A screenshot of the WeChat message history between Mr He and Mr Zhang is annexed to Mr He’s affidavit with an English translation appearing to confirm this.
[32] Mr He says that as he had not received funds from Mr Zhang to complete the subscription, he called Mr Zhang via WeChat and advised him that he would only sign the agreement once the necessary funds had been received. The WeChat screenshot again appears to confirm a call was made by Mr He to Mr Zhang at this time.
[33] Mr He’s evidence is that during that phone call, Mr Zhang told him that funds would be coming from Taihe and that because Taihe had through restructuring become a subsidiary of IE Finance Group Ltd (IEFG) which had shareholders in common with MIE Pay, Mr Zhang asked that the transaction be structured to look like a regular loan from Taihe to Maryland.
[34]Mr He explained the transaction as follows:
[Mr Zhang] stated that this was so as to not alert the other shareholders of MIE, and at the same time to give himself some protection/security in the deal in case I did not proceed with the subscription or later refused to recognise his beneficial interest in the shares. Andy promised me that, as long as I recognised his beneficial interest in those shares, the purported loan would not be enforced by [Taihe] and that he would ask his solicitors to prepare the necessary documents to record the trust arrangement and the promised indemnity from both [Taihe] and him in respect of the purported loan transaction as soon as MIE was listed.
[35] Mr He says he asked Mr Zhang to send through the draft loan agreement so that he could consider the request. The WeChat screenshot referred to above appears to confirm that Mr He sent Mr Zhang a text message to that effect.
[36] The following day, Mr Zhang emailed Mr He the draft loan agreement for approval with a copy of Mr Zhang’s email attached to Mr He’s affidavit. Mr He signed and returned the loan agreement to Mr Zhang on or about the same day and annexes a copy of the loan agreement to his affidavit.
[37] On 30 October 2019 Mr He says that Mr Zhang caused Taihe to pay NZD$541,219.32 (the equivalent of the subscription price of AUD$500,000) into Maryland’s BNZ bank account. A copy of the same day cleared payment report appearing to evidence that payment is annexed to Mr He’s affidavit. The payer name is recorded as Taihe. Mr He’s evidence is that, following receipt of written confirmation of the payment, he:
(a)instructed his solicitor to confirm the terms of the subscription agreement;
(b)signed and returned the subscription agreement to HFW Australia; and
(c)converted NZD$540,735.42 in his HSBC account into AUD$500,000 and transmitted those funds to MIE Pay’s bank account in Australia.
[38] Copies of the emails and Mr He’s HSBC bank statement apparently confirming the above steps are annexed to his affidavit.
[39] Mr He explains that the reason he paid the funds out of his HSBC bank account, instead of Maryland’s, was because the funds had to be paid to MIE Pay’s bank account in Australia and Maryland’s BNZ account did not have the capability to effect international money transfers without having to go into a bank branch.
[40] MIE Pay then issued 5,000,000 ordinary shares in Mr He’s name. A copy of the share certificate is annexed to Mr He’s affidavit.
[41] There was further delay in the listing of MIE Pay on the NSA. Mr He’s evidence is that Mr Zhang was not prepared to sign documents recording the trust and indemnity arrangement he had promised until after MIE Pay had been listed but Mr Zhang tried to alleviate Mr He’s concerns by suggesting that the “debt” be transferred to a shell company. Mr He says that he started to prepare a Deed of Novation to transfer Maryland’s obligations under the purported loan agreement to a “defunct company, Jet Faith NZ Limited”. Mr He explains that he did not progress it further however “both because the directors of Jet Faith NZ Limited are my wife and her friend and I did not want to get them into trouble by getting their company liquidated, and because events were superseded by MIE’s listing on [NSA] on 18 May 2020”.
[42] Mr He says that following MIE Pay’s listing, Mr Zhang told him that he would get his solicitors to prepare the necessary documents to record the trust arrangement but failed to do so. Mr He explains that by June 2020 he was very disappointed by Mr Zhang’s repeated failure to fulfil his promises as well as MIE Pay’s lacklustre performance on the NSA.
[43] Mr He says that he told Mr Zhang that he wanted to have nothing further to do with MIE Pay and that he asked him to buy back the IFSL shares from Mr He and Evergreen as promised. Mr He’s evidence is that Mr Zhang agreed to honour his promise and on 24 July 2020, Mr He’s solicitor sent through a draft put option agreement for Mr Zhang’s approval. A copy of this email and draft agreement are annexed to Mr He’s affidavit.
[44] In his evidence, Mr He makes a point of noting that the 5,000,000 shares he held on trust for Mr Zhang were not included in the draft put option agreement. Mr McCullagh comments that the draft put option agreement relates to shares in PAL Tech Ltd, not MIE Pay. As Mr McCullagh also records in his affidavit however, PAL Tech is the new name for IFSL. Furthermore, as already noted above, Mr He’s evidence is that Mr He and Evergreen’s shareholding in IFSL had been converted into shares in MIE Pay. In the context of this application, I cannot therefore discount Mr He’s point that the shares that he holds as bare trustee were not included in the draft put option agreement.
[45] Mr He’s evidence is that Mr Zhang did not in mid-2020 or at any time thereafter meet his obligations under the put option. Mr He says that Mr Zhang never came back to his lawyer and disappeared from his social circle. A copy of an email chain between Mr He’s solicitor and Mr Zhang is attached to Mr He’s affidavit showing Mr He’s solicitor following up several times, with Mr Zhang first saying it was with his solicitor and then saying he was restructuring. Mr He explains that he became fed up with incurring legal costs trying to regularise affairs but getting nowhere so he did nothing further during 2021.
[46] In February 2022 Mr He’s evidence is that he contacted Mr Zhang and demanded that he fulfil his earlier promises, “in particular his promise to extricate [Maryland] from the purported loan agreement”. Mr He says:
At the end of that confrontation, it was agreed that I would get my solicitor to prepare the necessary legal documents to record the trust and indemnity arrangement, and that [Mr Zhang] would ensure that the bare trust arrangement for the shares was wound-up of [sic] and [Maryland] discharged from any obligations under the purported loan agreement. [Mr Zhang] also agreed that he would sign a deed recording these arrangements as soon as possible.
[47] Mr He’s solicitors drafted the Deed between Mr He, Maryland, Mr Zhang and Taihe and Mr He forwarded it to Mr Zhang on 4 March 2022. Mr Zhang signed the Deed on behalf of himself and Taihe and returned it on 7 March 2022. A copy of the fully signed Deed is attached to Mr He’s affidavit.
[48] Recital A to the Deed records that at the request of Mr Zhang, Mr He subscribed for 5,000,000 shares in MIE Pay, funding the purchase by “causing his company, Maryland, to enter into a loan agreement with the Beneficiary’s company, Taihe … ”. Recital B says that Mr He and Maryland entered into these transactions in reliance on certain assurances given to them by Taihe and Mr Zhang. Recital C then states that the parties are entering into the Deed to record “the bare trust arrangement” between Mr He and Mr Zhang and the assurances that have been given by Taihe and the Beneficiary in favour of Maryland and the Trustee.
[49]Mr Zhang is defined as the Beneficiary in cl 1.1 of the Deed.
[50] Clause 2 of the Deed sets out a declaration of trust by Mr He in favour of Mr Zhang in respect of the shares and all dividends and interests accrued or to accrue. It includes at cl 2.2 an obligation on Mr He, subject to Mr Zhang and Taihe complying with their obligations under the Deed in all respects, to transfer, pay and deal with the Shares, dividends and interests payable as directed by Mr Zhang.
[51] Clause 3 of the Deed provides indemnities with cl 3.1 providing an indemnity by Mr Zhang in favour of Mr He and cl 3.2 importantly providing an indemnity to Maryland by both Taihe and Mr Zhang in the following terms:
3.2 Taihe and the Beneficiary will at all times indemnify and keep indemnified Maryland against any and all costs, claims, actions, damages, liabilities of any kind arising out of or in connection with the Loan Agreement, as well as Maryland’s enforcement or attempted enforcement of its rights and remedies under this deed.
[52] Clause 4 provides “Beneficiary’s Warranties” including an obligation in cl 4.1 that before 1 June 2022 Mr Zhang would cause the shares to be sold to a third party:
4.1… and that any and all monies payable by [Maryland] under the Loan Agreement will be fully repaid from the sale proceeds of the Shares (and topped-up by the personal funds of the Beneficiary should there be a shortfall).
[53] Clause 4.2 of the Deed provides that to the extent that Mr Zhang fails to comply with the above obligation, Mr Zhang would cause the shares to be transferred to himself:
4.2… and any and all remaining indebtedness, obligations and amounts of any kind whatsoever owed by Maryland under the Loan Agreement shall be transferred and assigned from Maryland to the Beneficiary and shall be netted by Taihe against the Beneficiary’s shareholder’s current account with Taihe as a shareholder drawing.
[54] Importantly cl 5.1 provides that Mr He could resign at any time as trustee by notice in writing subject to cl 6 of the Deed.
[55]Clause 6 provides:
6Discharge of Trustee
6.1The obligations of the Trustee upon resignation or removal as trustee under this deed shall be discharged in full when the Trustee makes available to the Beneficiary the certificate or other documents of title, if any, and a form of transfer duly executed by the Trustee whereby
the Shares are capable of being transferred to the Beneficiary. Such transfer may be executed and delivered to the Beneficiary at any time the Trustee so desires. The Beneficiary shall immediately upon receipt of the documents of title and transfer lodge the same with the Company for approval and registration, and Taihe and the Beneficiary shall contemporaneously do all things necessary to release Maryland of its obligations under the Loan Agreement.
[56] At the close of business on 1 June 2022, the day that Mr Zhang was required to meet the warranties in cl 4, as set out at [52], Mr He’s solicitor wrote to Mr Zhang asking for confirmation that Mr Zhang’s obligations would be met by the end of that day with the email adding:
Please also confirm that [Maryland’s] obligations under the Loan Agreement has already been, or will before the end of today be, fully discharged and provide us with confirmation/evidence of the discharge.
[57]Mr Zhang replied by email the next day, 2 June 2022:
I confirmed that [Maryland]’s obligations under the Loan Agreement has already been released. The transfer of shares will take place next week.
[58]Mr He’s evidence is that the transfer of shares never occurred.
[59] Mr McCullagh and Mr Steve Lawrence were appointed receivers of Taihe on 5 July 2022. The receivers sent an email on 20 July 2022 attaching a letter demanding repayment of the amount the receivers alleged was outstanding under the Loan Agreement. Although the principal was not yet due for payment the receivers alleged that as the eight per cent interest payable on the first and second anniversaries of the loan had not been paid, both the outstanding interest and outstanding balance of the loan were payable. The total amount of $659,012.37 was therefore demanded to be paid within two business days of receipt of the letter.
[60] Mr He deposes that he was taken aback by the receivers’ letter and immediately rang Mr Zhang who “promised that he would straighten matters out with the receivers.”
[61] The statutory demand for $659,961.36 (including further accrued interest) was then served on 28 July 2022.
[62] On 1 August 2022 Maryland’s lawyers wrote to the receivers in response to the matters raised in the receivers’ 20 July 2022 letter. Maryland’s letter records that the “so-called loan was, in reality, a device initiated and requested by Taihe to enable it to provide financial assistance to its director and ultimate controlling person”, Mr Zhang, and that Maryland entered into the “purported loan transaction” at the request of Taihe and in reliance on Taihe’s representations concerning the transaction and promise to indemnify it in all respects. The letter enclosed a copy of the Deed, referring specifically to the indemnity in cl 3.2. The letter noted that the indemnity extended to legal expenses incurred by Maryland in enforcement of its rights and remedies under the Deed. The letter further referred to Mr Zhang’s email dated 2 June 2022 (at [57]) confirming that Maryland’s remaining obligations under the “purported loan agreement” had been released.
[63] The letter therefore sought withdrawal of the statutory demand and advised that otherwise an application to set aside the demand would be made with costs sought on an indemnity basis.
[64] The receivers responded to this letter on 2 August 2022, stating that they did not accept that there was never any loan from Taihe to Maryland.
[65]Maryland filed its application to set aside the demand on 5 August 2022.
Is it reasonably arguable that the loan agreement is a sham?
Legal principles for assessing whether a sham
[66] The test for assessing whether a contract is a sham was set out by the Court of Appeal in Nisha v LSG Sky Chefs NZ Ltd. The Court was concerned with a sham employment contract but the Court applied the established test for a sham trust, as follows:13
[12] First, the correct test for analysis of an allegedly sham transaction is set out authoritatively in this Court’s decision in Clayton v Clayton, in these terms:
13 Nisha v LSG Sky Chefs NZ Ltd [2016] NZCA 21 at [12].
[61]To determine whether a particular transaction constitutes a sham, the court will focus on the actions and intentions of the parties to the transaction and compare them with the acts done or documents created. In doing so, the court will not be restricted to the legal form of the transaction, but will examine its substance in light of all the relevant evidence relating to the parties’ intentions. As the issue will be whether the transaction was intended to be genuine, the focus will be on the actions and words of the parties, both contemporary and subsequent.
[62]This approach reflects equity’s preference for substance over form and the conceptual basis of the sham doctrine which “lies in the court’s ability to see through acts or documents” intended to disguise or conceal the truth of the matter.
The consequence of a finding that a purported contract is a sham is the contract will be inoperative to the extent the parties did not intend to create genuine legal relations …
(footnotes omitted)
[67] Counsel for both parties relied on the English decision, Snook v London and West Riding Investments Ltd, where Diplock LJ held:14
… [the legal concept of “sham”] means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intended to create … [F]or acts or documents to be a “sham”, with whatever legal consequence follow from this, all parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.
[68] Taihe’s submissions included a later passage in the same paragraph in Diplock LJ’s judgment where he went on to say:
No unexpressed intentions of a “shammer” affect the rights of a party whom he deceived. There is an express finding in this case that the defendants were not parties to the alleged “sham”. So this contention fails.
[69]Counsel for Taihe further relies on National Westminster Bank plc v Jones
where Lord Neuberger held:15
Because a finding of sham carries with it a finding of dishonesty, because innocent third parties may often rely upon the genuineness of a provision or
14 Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at 802 and see Stone (Inspector of Taxes) v Hitch [2001] EWCA Civ 63 (CA) at [1]–[2], [64]–[69] and [85]–[86].
15 National Westminster Bank plc v Jones [2000] EWHC 1565 (Ch) at [59].
an agreement, and because the court places great weight on the existence and provisions of a formally signed document, there is a strong and natural presumption against holding a provision or a document a sham.
Is a sham reasonably arguable on the facts?
[70] I consider that it is reasonably arguable on the facts that the Loan Agreement is a sham transaction as it is arguable the Loan Agreement gives the appearance of creating legal rights and obligations between the parties different from the actual legal rights and obligations the parties intended to create (see Snook above at [67]).
[71] Taihe submits that Maryland’s affidavits contain no contemporaneous documents in support of its contentions that it entered into the Loan Agreement as part of a “sham transaction”. However, there are emails and screenshots of WeChat messages and phone calls annexed to Mr He’s affidavit that appear to be consistent with Mr He’s version of events. Mr He has also explained why the Deed was not contemporaneous with the Loan Agreement. Furthermore, the fact that the Loan Agreement does not record that it was a trust arrangement is again consistent with it being part of a “sham transaction’ — if it recorded that there was a trust arrangement it would defeat the purpose of structuring it “to make it look like a loan”.
[72] Taihe submits that the background to the statutory demand is relevant, explaining that Taihe was placed into receivership by third party secured creditors after their funds had been advanced to various parties, including Maryland, on allegedly uncommercial terms without their knowledge. As the receivers and the secured creditors who appointed them are not parties to the alleged “sham transaction” Taihe submits they should be able to rely on the face of the Loan Agreement.
[73] But the party that issued the demand is Taihe, not the receivers or the secured creditors that appointed them. Contrary to the position in Snook discussed above, Taihe is alleged to have been a party to the alleged “sham.”
[74] Furthermore, in his reply affidavit, Mr He deposes that he and Maryland had no knowledge of or involvement in the matters involving Taihe’s secured creditors. Mr He’s evidence is not contradicted and therefore I am not prepared to draw any adverse inferences from the context set out.
[75] In addition, Taihe submits that the actions taken by Mr He to extricate Maryland from the Loan Agreement and the Deed itself supports Taihe’s position that the Loan Agreement is not a “sham transaction.” But the Recitals to the Deed explain that the Loan Agreement was entered into in reliance on assurances now documented in the Deed.
[76] The operative clauses to the Deed, in addition to the indemnity which I discuss further below, include cl 5 of the Deed which allows Mr He to resign at any time (subject to cl 6) and if he does so Maryland is released from all its obligations under the Loan Agreement. Clause 6 simply requires Mr He to deliver an executed form of share transfer to Mr Zhang “at any time [Mr He] so desires”. Immediately upon receipt, Mr Zhang is required to lodge the transfer with MIE Pay for approval and registration “and Taihe and [Mr Zhang] shall contemporaneously do all things necessary to release Maryland of its obligations under the Loan Agreement” (emphasis added). Mr Zhang appears to confirm by his email dated 2 June 2022 that Maryland is released of its obligations under the Loan Agreement.
[77] Taihe further submits that the loan to Maryland was made to defeat disclosure obligations regarding funding of MIE Pay — a company in which Taihe says both Mr Zhang and Mr He have an interest and that Maryland ought not to be able to rely on its admitted dishonest motive. Whether Maryland had a dishonest motive or not is not a matter that can be determined in this application to set aside on the basis of the evidence that has been filed. I do not therefore consider the implications of such an argument further.
[78] Finally, Taihe submits that even if the loan agreement is void and unenforceable as a sham transaction (which Taihe denies), Taihe would have a clear right to demand immediate repayment of the funds advanced to Maryland. This submission is made on the basis that if it is not a loan agreement Taihe says it is not at all clear what the transaction was intended to be. But this submission ignores the terms of the Deed which set out the circumstances in which sums owing under the Loan Agreement are payable. Those circumstances do not appear to include a right to demand immediate repayment including because the Deed includes an indemnity in
cl 3.2 that extends to “liabilities of any kind arising out of or in connection with the Loan Agreement.” I discuss the interpretation of the indemnity further below.
[79] On the evidence filed, I consider that it is reasonably arguable that the Loan Agreement is part of a “sham transaction” and so there is a substantial dispute as to whether the Loan Agreement can be relied upon as establishing a debt due by Maryland. The application to set aside the demand ought therefore to be granted on the basis that Maryland has brought itself within s 290(4)(a).
Is it reasonably arguable that Maryland has a cross-demand that exceeds or is equal to the amount of the debt because of the indemnity provisions in the Deed?
[80] Because of the view that I have come to on the first ground I do not need to consider this second ground, but I do so briefly as it supports the position that the statutory demand ought to be set aside.
[81] Taihe does not challenge the authenticity of the Deed. It instead submits that as a matter of construction and in light of the factual matrix of the Deed, cls 2.1, 2.2, 3.2, 4.1 and 4.2 interpreted together mean that the indemnity under cl 3.2 is limited to circumstances where the shares have been sold or steps are required to be taken by Maryland to enforce claims against Mr Zhang and not Taihe.
[82] The principles applying to the interpretation of a contract are settled. In interpreting the Deed, a court is required to adopt an objective approach to ascertain “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”.16 In doing so the court is not concerned with uncommunicated subjective intention of one of the parties to a contract.17 In addition, while issues relating to admissibility are determined by the law of evidence, they are not to be determined independently of the law of contractual interpretation as it is the latter which ultimately determines what is relevant.18
16 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 912 per Lord Hoffmann, cited in Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60].
17 Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696 at [48].
18 At [54]–[55].
[83]Taihe submits that Maryland’s interpretation of the Deed is:
(a)a commercially absurd interpretation of the kind that gave the Court concern in E & E Developments Ltd v Housing New Zealand Ltd,19 noting that the key differences in this case are that Maryland’s interpretation:
(i)is entirely inconsistent with business common sense and practice: that when funding is provided, there is an expectation that funding will be repayable; and
(ii)means that Maryland has no liability to Taihe, but Mr He is entitled to retain the shares; and
(b)plainly contrived to support an argument that is inconsistent with the Loan Agreement.
[84] Taihe continues that if the Court accepts Maryland’s interpretation, this ground to set aside the statutory demand is in any event academic as until the shares are sold, Taihe’s liability under the purported indemnity cannot be resolved.
[85] The wording of cl 3.2 is very broad. It provides that both Taihe and Mr Zhang will “at all times” indemnify Maryland (with cl 3.1 providing a separate indemnity to Mr He). In E & E Developments Ltd v Housing New Zealand Ltd the Court of Appeal in fact held that it is inappropriate to be definitive on the question of whether interpretations put forward by opposite parties are commercially absurd in the context of a summary judgment application.20 That is equally the case here in the context of an application to set aside a statutory demand. Taihe’s submissions refer to the factual matrix of the Deed being relevant to interpretation and at this stage that matrix has not been fully explored.
19 E & E Developments Ltd v Housing New Zealand Ltd [2012] NZCA 7.
20 At [21].
[86] Furthermore, Taihe’s submissions do not address cl 5 of the Deed. Clause 5 allows Mr He to resign as trustee at any time, following which Mr Zhang and Taihe are required to immediately take all steps to release Maryland from its obligations under the Loan Agreement, provided the procedure outlined at [76] is followed. It is not therefore only where the shares have been sold or steps have been taken by Maryland to enforce claims against Mr Zhang that the indemnity applies, as Taihe submits.
[87] In these circumstances I find that it is reasonably arguable that the cl 3.2 indemnity may apply so that Maryland has a cross-demand that is at least equal to the amount of the statutory demand, bringing itself within s 290(4)(b).
Solvency issues
[88] Because I have reached the view that the statutory demand ought to be set aside I do not go on to consider the issues relating to Maryland’s solvency.
Result
[89] Maryland’s application to set aside the statutory demand served on it by Taihe and dated 28 July 2022 is granted on the grounds that Maryland has established that there is arguably:
(a)a substantial dispute as to whether the debt demanded is due, in terms of s 290(4)(a) of the Companies Act; and
(b)a cross-demand available to Maryland as a result of the indemnity in cl 3.2 of the Deed equal at least to the alleged debt, in terms of s 290(4)(b).
Costs
[90] As Maryland has succeeded, in the usual course it will be entitled to costs. Maryland seeks costs on an indemnity basis pursuant to the indemnity in cl 3.2 of the Deed. I did not hear fully from the parties on costs so ask that the parties confer and,
only if agreement cannot be reached, file memoranda, on behalf of Maryland within
20 working days of this judgment and of Taihe within a further 10 working days.
Associate Judge Sussock
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