N F Global Ltd v Sky Capital Management Ltd
[2020] NZHC 2196
•27 August 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-569
[2020] NZHC 2196
UNDER the Companies Act 1993, section 290 IN THE MATTER OF
an application to set aside a statutory demand
BETWEEN
N F GLOBAL LIMITED
Applicant
AND
SKY CAPITAL MANAGEMENT LIMITED
Respondent
Hearing: 12 August 2020 Appearances:
William Fotherby and Charlotte Wilkinson for the Applicant Katherine Anderson and Harriet L Quinlan for the Respondent
Judgment:
27 August 2020
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 27 August 2020 at 2:00pm
pursuant to Rule 11.5 of the High Court Rules
…………………………. Registrar/Deputy Registrar
Solicitors:
Meredith Connell (W Fotherby/C Wilkinson), Auckland, for the Applicant Anthony Harper (L H George/H L Quinlan), Auckland, for the Respondent
Copy for:
Katherine Anderson, Sangro Chambers, Auckland, for the Respondent
N F GLOBAL LIMITED v SKY CAPITAL MANAGEMENT LIMITED [2020] NZHC 2196 [27 August 2020]
Introduction
[1] NF Global Ltd applies under s 290 of the Companies Act 1993 to set aside Sky Capital Management Ltd’s statutory demand of 23 March 2020 for €2,059,730.86,
being the amount due and owing by you, being funds of Sky Capital Management Ltd that are being held by you which Sky Capital Management Ltd has attempted to transfer from NF Global Ltd’s online platform …
[2] NF Global Ltd says that it is “a New Zealand based independent Financial Service Provider set up to simplify borderless financial services among New Zealand and Europe.” It provides an online payments platform by which funds may be lodged with it and transferred. It is not however a bank.
[3] Sky Capital Management Ltd, one of its customers, had a Euro currency account. NF Global Ltd has not, however, allowed it to operate the account this year. Sky Capital Management Ltd made formal demand on NF Global Ltd for the balance in the account, €2,059,730.86, but NF Global Ltd did not comply. The statutory demand followed.
[4] All other things being equal, a customer such as Sky Capital Management Ltd should be able to operate the account freely and withdraw funds without question. NF Global Ltd, on the other hand, says that the circumstances in this case are not standard. While it did not raise these matters before the statutory demand was served, it says that there is a background of disputed transactions involving other parties. It should not be required to pay Sky Capital Management Ltd until other disputes have been resolved. That would require a full defended hearing which would likely be outside New Zealand.
[5] NF Global Ltd relies on all three grounds under s 290(4) of the Companies Act 1993:
(a)There is a reasonably arguable genuine and substantial dispute whether the debt claimed by Sky Capital Management Ltd is owing;
(b)NF Global Ltd has a counterclaim, set-off or cross-demand that is more than the amount of the demand; and
(c)there are other grounds for setting aside the demand.
The set-off argument is based on disputes involving other parties.
Facts
[6]In this case three groups have dealt with each other:
(a)Sky Capital Management Ltd;
(b)the Zinchenko interests; and
(c)the Northern Fides group.
[7] Sky Capital Management Ltd is a Hong Kong software development company incorporated in March 2018. Mr Nikita Sergeevich Litvin, one of its directors, lives in Moscow. Its area of innovation is in the provision of high-end software solutions for the fintech and adtech sectors. It has been developing software and databases for financial accounting purposes with a view to leasing them to customers. Shareholders have funded the start-up. In June 2019 Sky Capital Management Ltd opened a Euro currency account with NF Global Ltd.
[8] Mr Sergey Mikhailovich Zinchenko, a private investor, is originally from Tajikistan but now lives in Dubai. He is a client of Monsieur Jean-Luc Jourdan of Luxembourg, a chartered accountant whose business provides consulting and advisory services to wealthy people.
[9] The Northern Fides group of companies based in England provides financial management services. The ultimate shareholder is Starboard Capital SA, a Swiss company. The chief executive of the Northern Fides group is Mr Mario Gesué. NF Global Ltd, a New Zealand subsidiary, is a registered financial provider. Its director is Mr Claudio Oberto.
[10] In 2016 M. Jourdan was approached by Northern Fides executives offering services that could benefit his clients. That included offering trustee services in the United Kingdom and financial services in New Zealand through NF Global Ltd. Each trust established in the United Kingdom would have an individual IBAN account number. M. Jourdan thought this could be useful for Mr Zinchenko.
[11] These discussions led to the Seevol Trust being established in March 2017 to hold investments for Mr Zinchenko. Mr Zinchenko was the settlor and M. Jourdan was the protector under the trust deed. The trustee was Seevol Trustee Ltd, a United Kingdom company, of which Mr Gesué is the sole director. Seevol Trustee Ltd’s shareholder is a Northern Fides company. The trust held shares. Cash and other liquid investments were held in a UK company, Eversend Marketing Corporation Ltd. Seevol Trustee Ltd is Eversend’s sole shareholder. In July 2019 Mr Gesué, as director of Seevol Trustee Ltd, signed a declaration that the shares in Eversend were held by Seevol Trustee Ltd on behalf of the Seevol Trust. In December 2017 M. Jourdan became Eversend’s sole director. In 2018, Eversend established a Euro account with Northern Fides Global Ltd. More than €23 million was deposited in the account.
[12] During 2019 Eversend invested in Sky Capital Management Ltd with loans and by taking shares:
(a)Under an agreement of 21 June 20219 it lent Sky Capital Management Ltd €100,000 interest-free, repayable on 21 August 2019. The time for repayment could be extended by agreement. English law governs the agreement and disputes are to be decided in London.
(b)Under an agreement of 25 July 2019 it lent Sky Capital Management Ltd €275,000 interest-free, repayable on 21 September 2019. Again, the time for repayment could be extended by agreement. English law governs the agreement and disputes are to be decided in London.
(c)Under an agreement of 15 August 2019, Eversend lent Sky Capital Management Ltd USD 1,000,000 for one year, interest-free. The loan
could be converted into shares. English law governs the agreement, with disputes to be decided in London.
(d)Under an investment agreement on the same day Eversend was allocated 2,987 ordinary shares (being 23 per cent of the shares in the company) in return for an investment of USD 2,300,000. Payment for the issue of the shares was to take place on 30 August 2019. Hong Kong law governs the agreement and any disputes are to be resolved by arbitration in Hong Kong.
These agreements were all signed by M. Jourdan for Eversend and by Mr Litvin for Sky Capital Management Ltd.
[13] As already mentioned Sky Capital Management Ltd opened an account with NF Global Ltd in June 2019. Some of the deposits into the account came from Eversend’s funds. Sky Capital made payments from the account to meet its operating and development expenses.
[14] What I have said so far is not in dispute. But in September and October 2019 there were alleged transactions which the Zinchenko interests rely on but which the Northern Fides group reject, and others which the Zinchenko side deny.
[15] On the Zinchenko side, M. Jourdan says that on 2 September 2019 there was an assignment agreement between Eversend as assignor, YES Europe as assignee, and Sky Capital Management Ltd as debtor. YES Europe is a Luxembourg company associated with M. Jourdan. Under this agreement, Eversend assigned the loans owed by Sky Capital Management Ltd under the agreements of 29 June, 25 July and 15 August 2019. The consideration for the assignment was €256,000 which was to be satisfied by off-setting €256,000 against an amount owed by YES Europe to Eversend. The assignment is said to be effective as at 2 September 2019. While the agreement is in English, it is governed by the laws of Luxembourg. M. Jourdan has signed the agreement for Eversend and for YES Europe. Mr Litvin has signed for Sky Capital Management Ltd. The Northern Fides group do not accept the date of the assignment and point out the inadequacy of the consideration.
[16] On 28 October 2019, Eversend transferred its shares in Sky Capital Management Ltd to Mr Zinchenko for HKD 17,960,831. M. Jourdan signed the agreement for Eversend in Luxembourg. Mr Zinchenko signed the agreement in Moscow. Mr Litvin witnessed Mr Zinchenko’s signature. An extract from Sky Capital Management Ltd’s share register records the change of shareholding on 28 October 2019.
[17] The Northern Fides group do not accept that the loans were assigned or that the shares were transferred. On the other hand, they rely on three documents signed on 5 September 2019.
(a)A “repayment rights” agreement that supplements the investment agreement of 15 August 2019 between Eversend and Sky Capital Management Ltd. M. Jourdan for Eversend and Mr Litvin for Sky Capital Management Ltd have signed this agreement. It does not impose any fresh obligations on Eversend but requires Sky Capital Management Ltd to provide Eversend with information. If Sky Capital Management Ltd is in default under the initial agreement, the repayment rights agreement, or other defined events, Eversend may, on demand, require Sky Capital to repay €2,075,000. It is governed by English law and any disputes are to be decided by courts in England. It includes this provision:
This letter is for the benefit of the parties to it and is not intended to benefit, or be enforceable by, anyone else.
(b)A loan agreement between NF Global Ltd as lender and Eversend as borrower. The recital records that the borrower is seeking to raise capital to invest in Sky Capital Management Ltd for the purpose of developing an online brokerage platform (called the ZEUS platform). A business plan and valuation are attached as a schedule. The loan is made available by a credit line or any other bank account as agreed by the parties from time to time. The loan is made to fund the borrower for the sole purpose of acquiring ordinary shares in Sky Capital Management Ltd, estimated to be equal to 23 per cent of the
shareholding. The borrower is required to use the loan to purchase the ordinary shares in Sky Capital Management Ltd on the basis of the information set out in the business plan and valuation. The loan amount is €2,075,000. The repayment date is 5 September 2021. The interest rate is 5 per cent, to be paid annually. There is a default interest rate of 3 per cent above the interest rate. The agreement is governed by English law and is subject to the exclusive jurisdiction of the English courts. The copy of the agreement in evidence does not show the signature of Mr Oberto, the sole director of NF Global Ltd. M. Jourdan has apparently signed for Eversend. The person who witnessed the signature of M. Jourdan is not identified, but the initials appear similar to the initials of M. Jourdan in his affidavit sworn on 18 June 2020. In his reply affidavit, Mr Oberto says that he believes he signed the loan agreement, but he has not been able to find a signed copy. He has also asked Northern Fides staff in London to look for a signed copy, but this has not been possible because of lockdown restrictions there.
(c)An “additional investment rights” agreement between Eversend and Sky Capital Management Ltd (signed by M. Jourdan for Eversend and by Mr Litvin for Sky Capital Management Ltd) that supplements the investment agreement of 15 August 2019. English law governs the agreement and disputes are to be decided exclusively in the English courts. Sky Capital Management Ltd will keep the investment amount of €2,075,000 in an account with NF Global Ltd, and will immediately release it on demand if Eversend receives a demand from NF Global Ltd to repay the loan under the NF Global Ltd loan agreement as a result of a default by Sky Capital Management Ltd which triggers repayment of Eversend’s loan to NF Global Ltd. The investment amount is to stay in the NF Global Ltd account until Eversend agrees in writing that the amount can be used by Sky Capital Management Ltd. If Eversend receives a demand to repay its loan to NF Global Ltd because of a failure by Sky Capital Management, Sky Capital Management Ltd agrees immediately to transfer the rest of the amount in accordance with the terms of the repayment rights letter agreement. The investment
amount in the NF Global Ltd account is not to be used for any operational needs or other needs of Sky Capital Management Ltd unless Eversend gives its written approval first. Eversend agrees that, if satisfied, they will release the investment amount on the first anniversary of the investment. The agreement includes:
This letter is for the benefit of the parties to it and is not intended to benefit, or be enforceable by, anyone else.
[18] The Zinchenko interests deny that Eversend entered into any of these agreements. M. Jourdan denies signing any of these agreements on behalf of Eversend. The applicant’s lawyers have requested the Northern Fides group to provide the original agreements so that they may be submitted to a document examiner.
M. Jourdan points out that Eversend did not have to borrow the amount for its investment in Sky Capital Management Ltd because it already held more than enough funds to make the investment. He provides an account statement showing transactions on Eversend’s NF Global account from 1 September 2019 to 16 September 2019. On 5 September 2019 Eversend held €19,853,435.90. There are drawings against that account for the €2,075,000 for the purchase of the shares in Sky Capital Management Ltd and €902,200.00 (equivalent to USD 1 million) under the loan agreement with Sky Capital Management Ltd. The statement does not show any deposits into the account for any loans by the Northern Fides group.
[19] As well as denying that Eversend is bound by any of the agreements of 5 September 2019, the Zinchenko interests say that because of the assignment on 2 September 2019 Eversend is no longer able to enforce the loans made to Sky Capital Management Ltd. Similarly, Eversend is no longer a shareholder in Sky Capital Management Ltd because Mr Zinchenko now owns its shares. They made the assignment and transfer because of a growing mistrust of Mr Gesué.
[20] Conversely, Northern Fides group disregards the assignment of the debt to YES Europe, and the share transfer to Mr Zinchenko but relies on the agreements of 5 September 2019.
[21] For this decision, it is not possible to say conclusively which set of transactions is valid and effective. Only one set is likely to be upheld. It is implausible that both could stand. Once it had assigned the loans on 2 September 2019, Eversend would not have entered into the agreements of 5 September 2019. There are serious questions here, because one side is telling a false story. Finding out which transactions are sound will require a more extensive enquiry with more information than has been provided for this application. I was advised that M. Jourdan had given instructions for a proceeding in England.
[22] Two aspects are, however, clear. First, the repayment rights agreement between Sky Capital Management Ltd and Eversend and the additional investment rights agreement between Sky Capital Management Ltd and Eversend each provide:
This letter is for the benefit of the parties to it and is not intended to benefit, or be enforceable by, anyone else.
NF Global Ltd is not a party to either agreement and therefore cannot claim that these agreements were intended to benefit it or that it is entitled to enforce the agreements.
[23] Second, the loan agreement between NF Global Ltd and Eversend Marketing Corp Ltd was for advances to be made “by credit line”. As M. Jourdan denied that Eversend received any funds lent by NF Global Ltd, it could be expected that NF Global Ltd would give reply evidence to refute that if funds had been advanced. It did not do so. Mr Fotherby for NF Global Ltd accepted that there was no evidence that Eversend had drawn down funds under the loan agreement of 5 September 2019. This means that NF Global Ltd cannot claim to be a creditor of Eversend and that Eversend cannot rely on the loan agreement with NF Global Ltd to enforce any rights against Sky Capital.
[24] To resume the narrative, Sky Capital Management Ltd made business payments from its Euro currency account with NF Global Ltd. On 6 September 2019, it held €3,009,121.67 in the account. That balance reflects the loan agreement of USD 1 million, and Eversend’s purchase of shares for €2,075,000. By 5 February 2020 the balance had reduced to €2,059,735.87 - the amount in the statutory demand. Mr Litvin says that there were difficulties with operating the account. In December
2019 some transactions had not been processed. One was a payment of €94,500 to a development company, Cronus Systems Ltd, to be made on 13 December 2019. In response to contacts by Sky Capital Management Ltd, NF Global Ltd did not give any reason for not allowing payments to be made from the account, even when Sky Capital Management Ltd followed up in January. Sky Capital Management Ltd says that Cronus imposed further charges because of non-payment.
[25] On 10 February 2020, NF Global Ltd sent a notification that it was replacing all existing IBANs. Sky Capital Management Ltd enquired when payments could be resumed and received a response on 24 February 2020:
I also wish to advise we are still working on this. As soon as we are able to confirm new IBAN, we will let you know.
[26] On 4 March 2020, Sky Capital Management Ltd tried to remove all the funds in its account but NF Global Ltd blocked that.
[27] Given these difficulties, Sky Capital Management Ltd instructed New Zealand lawyers who made formal demand. The solicitors’ letter required the funds held to the credit of Sky Capital Management Ltd to be paid to XHK Company Ltd, a Hong Kong company. In response, Mr Oberto sent an email saying:
We are collating all the relevant information in connection to your client’s accounts and in accordance with your recommendation, are seeking legal advice and will revert once such advice has been provided. In the meantime, please confirm who is XHK Ltd, the proposed accountholder of the amount to which you request payments be made to.
[28] In response to the solicitor’s advice that XHK Ltd was Sky Capital Management’s brokerage account in Hong Kong and renewing the request for payment, Mr Oberto replied on 23 March 2020:
Your client is well aware that the funds in question are not available for transfer. Further, the client has not requested such transfer to us directly, but has instead chosen to make the requests through you first.
We shall defend our position with all the means necessary.
[29] Mr Oberto gave no further explanation. He did not rely on the matters now raised in opposition to the statutory demand.
[30] In the meantime, other steps had been taken in Eversend’s name. On 29 October 2019, Mr Gesué became director of Eversend. On 12 March 2020, again using his control of the shareholder, Mr Gesué had M. Jourdan removed as a director of Eversend.
[31] On 9 December 20109, Mr Gesué sent a letter in the name of Eversend to Sky Capital Management Ltd in Hong Kong requesting information. Although the letter did not say so, the request was apparently made under the repayment rights agreement. Sky Capital Management Ltd did not reply.
[32] Mr Oberto says that on 9 December 2019 and 14 January 2020 he wrote to Eversend requesting information to which NF Global Ltd was entitled under the loan agreement. He has not, however, put those letters in evidence. It is hard to see how he could request that information when no funds had been drawn down under the loan agreement. It is also alleged that Mr Gesué made a fresh request for information on 14 January 2020, but that letter is not in evidence. On 20 March 2020, Mr Gesué sent a fresh letter, renewing the request for information and requiring an answer in seven days.
[33] On 26 March 2020, Mr Oberto wrote to Eversend for the attention of Mr Gesué, requiring immediate repayment of the €2,075,000 under the loan agreement of 5 September 2019. He alleged a default for not replying to information requests made on 9 December 2019 and 14 January 2020. That was futile, because no funds had been drawn down and there is no evidence that NF Global Ltd did request the information. On the same date, Mr Gesué wrote to Sky Capital Management Ltd in the name of Eversend, recording the demands for information to the letters of 9 December 2019, 14 January 2020 and 20 March 2020, and noting that in the light of the failure to provide the information Eversend exercised its right to demand immediate repayment of the €2,075,000.
[34] Mr Litvin replied the same day, pointing out that Eversend ceased to be a shareholder in Sky Capital Management Ltd on 28 October 2019.
[35] In his response of 27 March 2020, Mr Gesué asked for information about the alleged transfer of Eversend’s shares. That was news to him.
[36] In his reply of 2 April 2020, Mr Litvin supplied information as to the change of shareholder and in return requested information about the letter agreement of 5 September 2019 which Mr Gesué had referred to. That was news to Mr Litvin.
[37] On 6 May 2020, after the statutory demand had been served and NF Global Ltd had begun the present application, London solicitors instructed by Eversend wrote to Sky Capital Management Ltd’s New Zealand solicitors. The letter recorded the agreements of 5 September 2019 on which the Northern Fides group relies; Sky Capital Management Ltd’s failure to provide information requested on 9 December 2019 and 20 March 2020; the alleged transfer of Eversend’s shares without authorisation; NF Global Ltd’s demand for repayment under its loan agreement; and Sky Capital Management Ltd’s alleged failure to repay monies under the convertible loan agreement. Demand was made in the name of Eversend for repayment of all monies. Sky Capital Management Ltd was required to:
(a)instruct NF Global Ltd to transfer €2,075,000 into a specified account,
(b)pay a further €275,000 to the same account; and also
(c)pay US1 million.
Principles on applications to set aside statutory demands under s 290
[38] The purpose of a demand under s 289 of the Companies Act 1993 is to create a presumption of insolvency if the company served with the demand does not comply with it within 15 working days of service. The presumption arises under s 287(a) of the Companies Act 1993. It can be rebutted. There are, however, cases where it would be unjust to allow the presumption of insolvency to arise on non-compliance with the demand. The general purpose of s 290 is to allow statutory demands to be set aside. Section 290(4) sets out one general and two particular grounds where it would be unjust for the presumption of insolvency to arise. The discretion under s 290(4) is
accordingly limited to the question whether the statutory demand ought to stand so that non-compliance with it will give rise to the insolvency presumption. That discretion is relatively confined. On a liquidation application the court has a wider discretion. At that stage the court may have to take into account competing considerations: not only the interests of the creditors seeking the liquidation of the company but also the interests of other stakeholders, including shareholders and other creditors who see benefits in the company not going into liquidation. I have set that out to make it clear that on this application I am only concerned to exercise the discretion under s 290(4) of the Companies Act 1993. I am not required to predetermine how a liquidation application might be decided.
[39] On an application under s 290(4)(a), the onus is on the applicant to show a substantial dispute. Mere assertion of a dispute is not enough. The applicant has to show a fairly arguable basis for the dispute. The court does not resolve disputed questions of fact on affidavits, and it does not decide the substantive merits of the dispute. If there is a genuine dispute, it should more properly be decided in other proceedings.
[40] Under s 290(4)(b) a demand may be set aside if the company has a counterclaim, set-off or cross-demand and the amount in the demand less the amount of the cross-claim is less than $1,000. It is helpful to compare this with the application of insolvency set-off under s 310 of the Companies Act 1993. Insolvency set-off arises when there have been mutual dealings between a person and a company. The set-off is substantive, not procedural. It is self-executing and mandatory.1 Contracting out is not permitted.2 The set-off establishes a new net balance, which replaces the earlier claim and cross-claim. It applies to all claims that may be made in a liquidation, including contingent claims.3 A creditor’s claim will be extinguished if the company’s cross-claim against it is for a greater sum. Section 290(4)(b) can be seen as anticipating the effect of insolvency set-off. If on liquidation there will not be a net indebtedness to the creditor so that it will not be able to claim, it should not be allowed to use non-compliance with a statutory demand to create a presumption of insolvency.
1 See Lord Hoffmann’s exposition in Stein v Blake [1995] UKHL 11, [1996] 1 AC 243 at 250-255.
2 National Westminster Bank Ltd v Halesowen Presswork and Assemblies Ltd [1972] AC 785 (HL),
Rendell v Doors and Doors Ltd [1975] 2 NZLR 191 (SC) at 197.
3 Companies Act 1993, s 303.
Nevertheless there are differences between the provisions. The power to set aside under s 290(4)(b) is discretionary, not mandatory. In some cases, “pay now, argue later” considerations have been allowed to prevail over the effect of liquidation.4 While “counterclaim, set-off, or cross-demand” is given broad scope, it does not cover claims that are not actionable, such as contingent claims. To show a claim within the subsection the company must show a real basis for it with evidence. It cannot rely on assertion alone but must show clear and persuasive grounds.5
[41] As for the general “other grounds” provision in s 290(4)(c), I follow the approach of the English Court of Appeal in Re a Debtor (No.1 of 1987). Referring to the injustice of the insolvency presumption arising, Nicholls LJ said:6
The circumstances which normally will be required before a court can be satisfied that the demand ought to be set aside are circumstances which would make it unjust for the statutory demand to give rise to those consequences in the particular case. The court’s intervention is called for to prevent that injustice.
Is there a substantial dispute whether or not the debt is owing or is due?
[42] Sky Capital Management Ltd says that it was entitled to draw money from its account with NF Global Ltd as and when it wished. NF Global Ltd was not entitled to prevent it from making electronic payments on its online platform. A debt had undoubtedly fallen due when NF Global Ltd blocked payments by Sky Capital Management Ltd and did not meet the formal demand by Sky Capital Management’s lawyers. This argument is close to one that a customer would make against a bank for breach of mandate.7 In the interests of commerce, there is a strong prima facie rule that banks should ordinarily honour their customer’s instructions.8 The same considerations apply to companies such as NF Global Ltd that offer on-line payment platforms.
4 Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd (2005) 18 PRNZ 97 (HC),
Browns Real Estate Ltd v Grand Lakes Ltd [2010] NZCA 425, (2010) 13 NZCPR 349.
5 Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA) at 274-275.
6 Re a Debtor (No.1 of 1987) [1989] 1 WLR 271 (CA) at 276. The Insolvency Rules in that case have a similar “other grounds” provision.
7 See, for example, Westpac New Zealand Ltd v MAP & Associates Ltd [2011] NZSC 89, [2011] 3 NZLR 751.
8 Grey v Johnston (1868) LR 3 HL 1.
[43] NF Global Ltd says that there are standard terms and conditions for its accounts. They were exhibited only in Mr Oberto’s reply affidavit. They are not evidence in reply. Mr Oberto’s evidence does not show what was done to make Sky Capital Management Ltd bound by those terms and conditions. There is, for example, no evidence of any account opening form signed by Sky Capital Management Ltd.
[44]Besides, the terms I was referred to do not assist NF Global Ltd.
Clause 6.4: The Company shall have the right and the authority to restrict or refuse to authorise any use of their Services, in any jurisdiction in any case where it has reasonable suspicion the use of such Services is causing or could cause a breach of this agreement or where the User or a third party has committed or is about to commit a criminal offence or other abuse in connection with the Service offered to it by the Company. In most instances the Company will inform the User unless it is not permitted to do so by law.
[45] The clause does not apply here. Sky Capital Management Ltd’s withdrawal of its funds was not a breach of the agreement. There is nothing to suggest that Sky Capital Management Ltd was committing a criminal offence or was about to commit a criminal offence. Mr Fotherby did not suggest that there was any abuse in connection with Sky Capital’s use of the payment platform. For my part, there are problems with “abuse”. Its scope is so uncertain that I am not confident that it can be applied meaningfully. If it is to have any application, it is likely to be considered as similar to committing a criminal offence; that is, the abuse must amount to some reprehensible activity. There is no such abuse by Sky Capital Management Ltd.
[46]Mr Fotherby also referred to this clause:
1.16(sic) If the User’s account is not used for ninety (90) consecutive days, it might be closed by the Company. The User can request at any time the Redemption of any unused E-Money held in the account as long as:
(a)the Company believes the User has not acted fraudulently; and
(b)the Company is not prohibited from doing so by any applicable law, regulation, court order or instruction or guidance of a competent regulatory authority or agency.
He accepted however that the 90-day provision did not apply because Sky Capital Management Ltd had tried to make payments on the system in that time before the lawyers made demand.
[47] Although he had not raised it in his written synopsis, Mr Fotherby also suggested that Mallon J’s decision in Scott v ANZ Bank New Zealand Ltd9 might give ground for NF Global Ltd to resist its customer’s instructions. I take his submission to mean that if NF Global Ltd could incur liability to a third party through paying Sky Capital Management Ltd, that would be a reason not to meet the demand. In Scott v ANZ Bank, victims of a Ponzi scheme run by Ross Asset Management Ltd are suing the bank through which Ross Asset Management Ltd ran its investment business. The plaintiffs alleged that the bank was responsible for the losses because it knew that their investment money was being applied for purposes other than the terms on which Ross Asset Management Ltd held the funds. One of the causes of action was for dishonest assistance.
[48]Mallon J identified the elements of a dishonest assistance cause of action as:
(a)the existence of a trust;
(b)the breach of the trust by the trustee that results in loss;
(c)conduct by a third party (the defendant) that assists the breach of trust; and
(d)dishonesty on the part of the defendant in so resisting.
[49] To consider whether NF Global Ltd could be liable for dishonest assistance, I assume that the Northern Fides group may be able to prove and establish the validity of the agreements of 5 September 2019, to disprove the assignment of the loans to Yes Europe and the share transfer to Mr Zinchenko and to show that Eversend was entitled to call on Sky Capital Management Ltd to repay the €2,075,000 invested in the company. NF Global Ltd cannot enforce the 5 September 2019 agreements because, as already noted, it is not a party to them. Nor can it claim potential liability for assisting in a breach of trust. That is because there is no evidence that Sky Capital Management Ltd held the funds received from Eversend on trust for Eversend. The funds Sky Capital received from Eversend became the property of Sky Capital. It was required to repay the loans with equivalent sums, not the same money. As the funds paid for the shares were for the free disposal of the company, no trust arises. Admittedly the additional investment rights agreement imposes restrictions on
9 Scott v ANZ Bank New Zealand Ltd [2020] NZHC 906.
Sky Capital Management Ltd’s use of the funds paid for the shares, but those are only contractually binding. In Twinsectra v Yardley Lord Millett explained:10
A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose. A lender will often inquire into the purpose for which a loan is sought in order to decide whether he would be justified in making it. He may be said to lend the money for the purpose in question. But that is not enough to create a trust; once lent the money is at the free disposal of the borrower. Similarly payments in advance for goods or services are paid for a particular purpose, but such payments do not ordinarily create a trust. The money is intended to be at the free disposal of the supplier and may be used as part of his cash flow. Commercial life would be impossible if this were not the case.
Because Sky Capital Management Ltd did not hold funds in its account with NF Global Ltd on trust for anyone else, NF Global Ltd cannot be liable for dishonest assistance by returning the money to Sky Capital Management Ltd at its request. There is no basis for suggesting a risk of liability.
[50] As the account holder, Sky Capital Management Ltd is entitled to the funds held at call in its name. NF Global has not shown a substantial defence to Sky Capital’s demand to be repaid. There is however another question – is there a cross- claim against Sky Capital Management Ltd which would make it unjust for it to enforce its right to be repaid?
Can NF Global Ltd allege a set-off against Sky Capital Management Ltd?
[51] NF Global Ltd says that it can raise an equitable set-off to set aside the statutory demand. That is the equitable set-off discussed in the Court of Appeal’s decision in Grant v NZMC Ltd.11
The defendant may set up a cross-claim which so affects the plaintiff’s claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard to the other; the defendant’s claim calls into question or impeaches the plaintiff’s demand. It is neither necessary, nor decisive, that claim and cross-claim arise out of the same contract.
10 Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164 at [73]-[74].
11 Grant v New Zealand Motor Corporation Ltd [1989] 1 NZLR 8 (CA) at 12-13.
[52] In Hamilton Ice Arena Ltd v Perry Developments Ltd the Court of Appeal emphasised the requirement for mutuality, that is, a set-off may only be maintained where the claims to be set off against each other exist between the same parties and in the same right. The Court said:12
The need for identity of parties is also consistent with the proposition that the cross-claim is regarded in equity as fully or pro tanto extinguishing the plaintiff’s right to judgment on the claim. The concept of extinguishment is difficult if the cross-claim is made by a different party.
…While we would not wish to rule out the possibility that in some unusual circumstance it might be appropriate to allow equitable set-off where there is no identity of parties, any such circumstance (other than one justifying the lifting of the corporate veil) would have to be consistent with the extinguishment rationale.
[53] For equitable set-off to be available, each party should be debtor and creditor in the same capacity. In this case that means that in response to Sky Capital Management Ltd’s right to be repaid the funds held in its account, NF Global Ltd would have a claim against Sky Capital Management Ltd that meets the test in Grant v New Zealand Motor Corporation Ltd.13 It has not shown any cross-claim against Sky Capital Management Ltd. As Hamilton Ice Arena v Perry Developments Ltd14 illustrates, a claim by NF Global Ltd against some third party will not do, because a claim against a third party would not extinguish the debt to Sky Capital Management Ltd. Moreover, NF Global Ltd has not shown an arguable case for a claim against any third party. Specifically, Eversend is not indebted to NF Global Ltd under the loan agreement of 5 September 2019. In the absence of any claim by NF Global Ltd against Sky Capital Management Ltd or anyone else, there is no basis for alleging any cross- claim that might amount to an equitable set-off.
[54] Other claims are asserted, but not by NF Global Ltd. The Northern Fides group has control of Eversend. Through its English solicitors’ letter of 6 May 2020, it has alleged that Sky Capital Management Ltd is indebted to Eversend for USD 1 million and €2,350,000. But claims against Sky Capital Management Ltd by a third party (such as Eversend) cannot give rise to a cross-claim which NF Global Ltd can raise as
12 Hamilton Ice Arena Ltd v Perry Development Ltd [2002] 1 NZLR 309 (CA) at [8] and [9].
13 Grant v New Zealand Motor Corporation [1989] 1 NZLR 8 (CA).
14 Hamilton Ice Arena v Perry Developments Ltd [2002] 1 NZLR 309 (CA).
a set off to defeat the statutory demand. In Hamilton Ice Arena v Perry Developments Ltd, the Court of Appeal left open the possibility that in some unusual circumstance it might be appropriate to allow equitable set-off where there is no identity of the parties. It did not give examples. Derham on the Law of Set-Off15 cites cases where equitable set off has been allowed, even where the requirements for mutuality were not met.16 As an example, in ex p Hanson, joint debtors were sued. One of them had a separate claim against the creditor. Mutuality was missing but equitable set off was allowed. Other cases are in a similar vein. A common element is that the party sued is alleging that it has a claim affecting the other side, even if there is no mutuality. None of the cases cited resemble this one, where the debtor is relying on alleged claims by a third party against the creditor as a reason for not paying the creditor.
[55] Accordingly, NF Global Ltd does not have any basis for raising equitable set off.
Are there other grounds for setting aside the statutory demand?
[56] There is a procedural aspect which might have made it unjust for Sky Capital Management Ltd to rely on the statutory demand. On Monday 23 March 2020, a process server served the statutory demand at the registered office of NF Global Ltd when the premises were closed. The statutory demand was also served on Mr Oberto on Wednesday 25 March 2020. That was just before New Zealand went into COVID- 19 Level 4 lockdown, which halted all commercial activity except essential services. NF Global Ltd did not file and serve its application until 8 April 2020. It did not file any supporting affidavit until later. Initially, Sky Capital Management Ltd took the point that NF Global Ltd had not met the 10 working day limit under s 290(2) of the Companies Act 1993. It later withdrew that objection, enabling the application to be decided on its substantive merits. Service of the statutory demand on Mr Oberto on the day the lockdown started obviously caused difficulties and gives a ready explanation for filing the application after the 10 working days and for filing
15 Rory Derham Derham on The Law of Set-Off (4th ed, Oxford University Press, Oxford, 2010). See the discussion at paras 4.67-4.81.
16 Vulliamy v Noble (1817) 3 Mer 593, 36 ER 228, Ex parte Hanson (1811) 18 Des Jem 232, Clarkson and Smith v Goldberg [1926] 1 DLR 509 (Ontario Court of Appeal), Baillie v Edwards (1848) 2 HLC 724 (HL), Hamp v Jones (1840) 9 LJ Ch 258, Sovereign Life Assurance Company v Dodd [1892] 2 QB 573.
Mr Oberto’s first affidavit on 30 April 2020. As the objection has been withdrawn, it is not necessary to grant any relief for any injustice arising from the difficulty in lodging an application under s 290 in time.
[57] Mr Fotherby objected that the statutory demand should not be used as a debt- collecting process. In fact statutory demands are regularly used for debt-collecting. They assist in establishing whether a company is insolvent and provide an incentive to companies to demonstrate their solvency. Where all the formal and substantive requirements for a statutory demand are met, there can be no ground for complaint because the creditor hopes that the company will want to demonstrate its solvency by meeting the demand.
Result
[58] For these reasons I uphold the statutory demand and dismiss the application to set it aside.
[59] Under s 291(1) of the Companies Act 1993, I order NF Global Ltd to pay to Sky Capital Management Ltd €2,059,730.86 by 18 September 2020. Payment is to be made to the euro bank account of Sky Capital Management Ltd’s solicitors, Euro- BDK-119708-EUR-304-01-EUR.
[60] NF Global Ltd is to pay Sky Capital Management Ltd the costs of the application. If counsel cannot agree costs, memoranda may be filed.
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Associate Judge R M Bell
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