Zhao v KBS Capital Limited
[2025] NZHC 1129
•16 May 2025
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2024-404-641
[2025] NZHC 1129
BETWEEN JIE ZHAO
Plaintiff
AND
KBS CAPITAL LIMITED
Defendant
CLEARWATER CAPITAL PARTNERS DIRECT LENDING OPPORTUNITIES FUND LIMITED PARTNERSHIP
Non-Party
Hearing: 26 March 2025 and 30 April 2025 Appearances:
Chen Jiang for the Plaintiff Kishen Kommu for the Defendant
Sebastian Bisley and Jonathan Schwarcz for the Non-Party
Judgment:
16 May 2025
JUDGMENT OF ASSOCIATE JUDGE C B TAYLOR
[Application to put a company into liquidation]
This judgment was delivered by me on 16 May 2025 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
…………………………. Registrar/Deputy Registrar
Solicitors:
Tompkins Wake (Chen Jiang/Katie Mills), Auckland, for the Plaintiff Webster Law, Auckland, for the Defendant
Wilson Harle (Felicity Monteiro/Jonathan Schwarcz), Auckland, for the Non-Party
Counsel :
Kishen Kommu, Barrister, Auckland, for the Defendant
Sebastian Bisley, Thorndon Chambers, Wellington, for the Non-Party
JIE ZHAO v KBS CAPITAL LIMITED [2025] NZHC 1129 [16 May 2025]
TABLE OF CONTENTS
Paragraph
The application [1]
Background [5]
Default under the Edison Loan [10]
Clearwater’s lending to KBS [11]
McLeod Green facility and the Deed of Subordination [14]
Legal principles [27]
Analysis [32]
Ms Zhao’s position
Is the debt due? [33]
Discrepancies in versions of the Deed of Subordination [35] Deed of Subordination does not apply to the KBS Loan [37] Is KBS insolvent?
Is KBS cashflow insolvent? [43]
Is KBS balance sheet insolvent [46
Submissions for KBS
Is the KBS Loan due and owing? [48]
Is Ms Zhao a creditor? [48]
Deed of Subordination applies to the KBS Loan [51]
Is KBS Insolvent?
Preliminary issue – Ms Zhao’s evidence on KBS’s solvency [54]
Discretion [62]
Clearwater’s position [64]
Is the Loan due and owing?
Is Ms Zhao a creditor? [68]
Deed of Subordination [69]
Abuse of process [72]
Is KBS solvent? [73]
Clearwater’s evidence [75]
KBS’s evidence [77]
Ms Zhao’s evidence [78
Residual discretion [81]
Result [82]
Is the debt due and owing? [83]
Orders [88]
The application
[1] Ms Jie Zhao (Ms Zhao) is seeking an order that KBS Capital Limited (KBS) be placed into liquidation.
[2]Ms Zhao alleges that KBS has defaulted in its obligation to repay a loan of
$2,727,760 owed to her and has failed to comply with a statutory demand issued in respect of repayment of this loan.
[3] KBS opposes the application on the grounds that, in summary, the debt is not due and owing, the statutory demand cannot be relied upon as evidence of insolvency, and KBS is solvent. KBS further submits that liquidation would result in significant prejudice to its other creditors.
[4] Clearwater Capital Partners Direct Lending Opportunities Fund Limited Partnership (Clearwater) is a significant secured creditor of KBS and has been granted leave to file submissions as a non-party. Clearwater alleges there is a genuine and substantial dispute as to whether the debt is owing, that it would be an abuse of process to order KBS be put into liquidation, and that KBS is not insolvent.
Background
[5] KBS owns property at 48 Esmonde Road, Takapuna, which is currently being developed into apartments (the Amaia Development). The loans with which the Court is concerned in this application relate to the Amaia Development.
[6] The first loan of $4,168,000 (the Edison Loan) was advanced by Ms Zhao to Mr Xu ‘Edison’ Xin (Mr Xin) as the deposit for the land on which the Amaia Development was to be undertaken. The Edison Loan was recorded on 22 January 2019 by a deed of acknowledgement of debt between Ms Zhao, as creditor, and Mr Xin as debtor. The loan amount was incorrectly recorded as $4,000,000 in the deed;
however it is common ground that the true amount of the loan was $4,168,000, which was 10 per cent of the purchase price.
[7] The Edison Loan was for a period of three years expiring in January 2022 and had an interest rate of five per cent per annum. Mr Xin was both the borrower and the guarantor. KBS later guaranteed the Edison Loan in a deed dated 12 January 2021.
[8] KBS was then incorporated by Mr Xin and Mr Wei ‘Wayne’ Liu (Mr Liu), as business partners, to purchase and develop the Amaia Development. Between 2019 and 2020, Ms Zhao advanced $2,727,760 to KBS to cover development costs in respect of the Amaia Development (the KBS Loan). On 11 January 2021, Ms Zhao and KBS entered into a deed of acknowledgement of debt for the KBS Loan. Mr Xin and Mr Liu guaranteed the KBS Loan, which was to expire on 31 December 2023 and had an interest rate of seven per cent per annum.
[9] Ms Zhao, in her affidavit,1 accepts that the KBS Loan was initially advanced by Kingstone Property Ltd (Kingstone), another company associated with Ms Zhao, and her evidence is that she became a creditor under the KBS Loan by transfer of the KBS Loan from Kingstone, treating the KBS Loan as a return of shareholder advances by Kingstone to Ms Zhao and then treating Ms Zhao as the lender to KBS.
Default under Edison Loan
[10] In January 2022, the Edison Loan expired and Mr Xin failed to repay it. Ms Zhao’s evidence is that she expected to be repaid from Clearwater’s refinance of another related company of Mr Xin and Mr Liu, McLeod Green Limited (McLeod Green). She asserts that Mr Xin made representations that the KBS Loan would be repaid from this refinance, however this is disputed by KBS.
Clearwater’s lending to KBS
[11] Clearwater has funded the Amaia Development through loan facilities made available to KBS as follows:
1 Affidavit of Ms Zhao in reply dated 17 March 2025.
(a)Acquisition and Development Facility Agreement dated 21 June 2021, which was amended and restated on 13 December 2023 and 3 December 2024 (the KBS Facility); and
(b)the Development Facility Agreement dated 4 March 2022, which was amended and restated on 28 March 2024 and 8 October 2024 (the KBS Development Facility).
(together, the KBS Facilities).
[12] Clearwater is a first-ranking secured creditor of KBS, and Clearwater’s security includes a general security interest over all of KBS’ real and personal property, including the mortgage over the land in the Amaia Development. Mr Xin is a guarantor and principal debtor of all indebtedness of KBS to Clearwater.
[13] Clearwater’s evidence is that its lending to KBS was part of broader lending to, and cross-collateralised security arrangements from, the larger group of which KBS and Mr Xin formed part, known as the Edison & Wayne Group.
McLeod Green facility and the Deed of Subordination
[14] In June 2022, McLeod Green (part of the Edison & Wayne Group) and Clearwater began negotiating the terms of financing the facility to be provided by Clearwater to McLeod Green to refinance and fund a development by McLeod Green of 148-162 McLeod Road, Te Atatu, Auckland (the McLeod Road Development) (the McLeod Green Facility). KBS (amongst other entities from the Edison & Wayne Group) was to be a guarantor of the McLeod Green Facility. When negotiating the McLeod Green Facility, Clearwater says it became aware that McLeod Green was seeking approximately $4.8million to repay the Edison Loan owed by Mr Xin to Ms Zhao.
[15] Clearwater’s evidence is that, upon learning that KBS might be a guarantor of the Edison Loan, it required all the debts owed by KBS to Ms Zhao to be subordinated to Clearwater’s debts to ensure there was no enforcement action by Ms Zhao until all Clearwater’s debts had been repaid. KBS says this was a condition precedent to Clearwater providing the funding for the refinancing of McLeod Green.
[16] On 1 September 2022, Mr Xin sent Ms Zhao a draft deed of subordination prepared by Clearwater’s lawyers (the Deed of Subordination).
[17] From 1 to 7 September 2022, Ms Zhao and Mr Xin negotiated the Deed of Subordination. Ms Zhao’s evidence is that Mr Xin advised her that she needed to sign this deed for the Edison Loan to be repaid from the McLeod Green Facility and that she asked that the Deed of Subordination be conditional on the Edison Loan being repaid immediately or within a short period of time. Ms Zhao states that Mr Xin initially advised that this was not agreed to by Clearwater, but later advised he would obtain written approval from Clearwater.
[18] It appears from the evidence that Clearwater was unwilling to fund the repayment of the Edison Loan from the principal drawdown of the McLeod Green Facility but was potentially willing to provide a payment as a “working capital release”, which was provided for the McLeod Green Facility. The final Deed of Subordination included a condition subsequent that the deed would terminate should the junior debtor (Ms Zhao) not be repaid from a working capital release prior to the “date of termination” of the Deed of Subordination. The “date of termination” was defined in the Deed of Subordination to mean the date upon which all the Edison & Wayne Group’s indebtedness to Clearwater was repaid.
[19] On 6 September 2022, Mr Xin sent Ms Zhao screenshots of a schedule to the McLeod Green Facility, which listed the Edison Loan as an “approved expense”. Ms Zhao’s evidence is that Mr Xin refused to provide a copy of the McLeod Green Facility on the basis it was confidential, and she believed the purpose of Mr Xin’s conduct was to prevent disclosure of a clause in the McLeod Green Facility which stated that the release of funds to pay the Edison Loan was subject to various conditions and was at the discretion of Clearwater.
[20] On the morning of 7 September 2022, Ms Zhao signed the Deed of Subordination and sent it to Mr Xin. Her evidence is that he had promised to hold it on escrow until Clearwater gave written confirmation that the Edison Loan would be immediately repaid from the McLeod Green Facility. She also says that Mr Xin
promised to provide the McLeod Green Facility to her after she signed the Deed of Subordination. Mr Xin denies making these representations.
[21] In the evening of 7 September 2022, Ms Zhao requested that Mr Xin disclose the McLeod Green Facility. In response, she says Mr Xin advised that the McLeod Green Facility failed and did not settle. Mr Xin maintains that he was only referring to the first drawdown which would not be used for any repayments to Ms Zhao in any event.
[22] During September 2022, Mr Xin says he sought from Clearwater an agreement the Edison Loan be included in various drawdowns from the McLeod Green Facility, but KBS says this did not happen.
[23] On 7 October 2022, Ms Zhao’s lawyers wrote to Clearwater’s lawyers advising that the Deed of Subordination signed by Ms Zhao was subject to an escrow arrangement, and that she was withdrawing her offer contained in the Deed of Subordination and that it was null and void in any event. Mr Xin denies that there was any such escrow arrangement.
[24] On 14 October 2022, Clearwater’s lawyers responded advising that the McLeod Green Facility had settled on 7 September 2022. They attached a copy of the Deed of Subordination signed by KBS and Clearwater. This document contains similar content to the document signed by Ms Zhao on 7 September 2022, but it contained several formatting differences.
[25] On 31 December 2023, the KBS Loan became due for repayment. On 22 January 2024, Ms Zhao’s lawyers sent a letter to KBS, formally demanding repayment. No repayment was received.
[26] On 31 January 2024, Ms Zhao’s lawyers issued a statutory demand to KBS in respect of the KBS Loan. On 15 February 2024, the statutory demand expired unremedied. However, KBS says that after discussions, Ms Zhao agreed to extend the period to comply with the demand, and therefore KBS did not take any steps to set
aside the statutory demand. On 7 March 2024, Ms Zhao filed this liquidation application.
Legal principles
Section 241 of the Companies Act 1993 provides:
241 Commencement of liquidation
(1) A company may be put into liquidation by the appointment as liquidator of a named person or of an Official Assignee for a named district.
…
The court may appoint a liquidator if it is satisfied that—
(a)the company is unable to pay its debts; or
(b) the company or the board has persistently or seriously failed to comply with this Act; or
(ba) the company, or 1 or more of its directors or shareholders, has intentionally provided the Registrar with inaccurate information; or
(bb) the company, or 1 or more of its directors or shareholders, has in a persistent or serious way failed to comply with duties relating to the company—
(i)under this Act; or
(ii)under the Financial Reporting Act 1993 while in force, except that this subparagraph does not apply after 5 years have elapsed after this subparagraph came into force; or
(c)the company does not comply with section 10; or
(d) it is just and equitable that the company be put into liquidation.
(3) The liquidation of a company commences on the date on which, and at the time at which, the liquidator is appointed.
[28] The Court has a discretion to stay or dismiss a liquidation proceeding founded on a debt that is the subject of a genuine and substantial dispute. Enforcing a genuinely disputed debt by liquidation may constitute an abuse of process.2
2 Cummins v Body Corporate 172108 [2021] NZCA 145, [2021] 3 NZLR 17 at [20], citing Re Bayoil SA [1999] 1 WLR 147 (CA) at 156. See also Yan v Mainzeal Property and Construction Ltd (in rec and in liq) [2014] NZCA 190 at [61].
[29] A defendant company may raise a dispute in a liquidation proceeding even though the company did not apply to set aside the statutory demand on the basis that the debt was disputed.3
[30] The failure to apply to set aside a statutory demand is a factor that may be taken into account when the Court considers whether a dispute raised later by the defendant is genuine.4
[31] Where the relevant requirements under s 241 of the Companies Act 1993 for the appointment of a liquidator have been met, the applicant is generally entitled to an order putting a company into liquidation. The Court retains a discretion, exercised sparingly, not to place the company into liquidation.5
Analysis
[32]The issues to be determined in this judgment are:
(a)whether there is a genuine dispute as to whether the KBS Loan is due and owing;
(b)whether KBS is cashflow insolvent or balance sheet insolvent; and
(c)if there is any basis for the Court to exercise its discretion against ordering the liquidation of KBS.
Ms Zhao’s position
Is the debt due?
[33] Ms Zhao has applied for the liquidation of KBS on the basis it has failed to comply with her statutory demand.
3 Heron’s Flight Ltd v NZ Properties International Ltd [2012] 1 NZLR 424 (HC) at [23], [25] and [27].
4 National Finance 2000 Ltd v All Star Cars Ltd [2002] BCL 972 at [37].
5 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 at [3]; Feltex Carpets Ltd (in rec) v N&I Investments Ltd [2007] BCL 137 at [38].
[34] Mr Jiang, for Ms Zhao, submits there is a statutory evidential presumption that KBS is insolvent, while acknowledging that KBS’s position is that the KBS Loan has not fallen due because of the Deed of Subordination.
Discrepancies in versions of the Deed of Subordination
[35] Mr Jiang in his written submissions submits that KBS cannot rely on the Deed of Subordination because, although the Deed provides for it to be executed in counterparts, the two counterparts are not the same document. He submits there are substantial formatting differences, and one document appears to have been created much later than the other. Ms Zhao also disputes that the Deed of Subordination is binding on her either as a deed or as an agreement.
[36] However, at the hearing, Mr Jiang acknowledged that the issues relating to the different versions of the Deed of Subordination and whether the Deed of Subordination was binding on Ms Zhao—either as a deed or agreement—were reasonably arguable. Consequently they were issues properly dealt with at trial. Accordingly, he did not pursue paragraphs 27 to 33 of his written submissions and these issues are not dealt with further in this judgment.
Deed of Subordination does not apply to the KBS Loan
[37] Mr Jiang submits that the Deed of Subordination only applies to the Edison Loan and not the KBS Loan. He submits that the operative clause of the Deed, cl 3.1, provides that the “Junior Debt” is subordinate to the “Senior Debt”. The agreement defined the “Junior Debt” as:
all indebtedness of the Obligor [Mr Xin] (whether alone, or jointly or jointly and severally with any other person and whether as principal debtor, guarantor, surety or otherwise) to the Junior Creditor [Ms Zhao] or incurred by the Junior Creditor on behalf of the Obligor or sustained in any way by the Junior Creditor in connection with any such indebtedness or the enforcement or attempted enforcement of any such indebtedness, including under the Junior Facility Agreement.
[38]The “Junior Facility Agreement” is defined as:
The unsecured loan evidenced by and recorded in the “Deed of Acknowledgement of Debt” dated 22 January 2019 between, among others,
the Junior Creditor (as lender) and the Obligor (as borrower) as may be amended and/or supplemented from time to time and any other loan agreements, deeds or other documents entered into at any time between the Junior Creditor and the Obligor and each other document constituting or evidencing any financial accommodation made available by the Junior Creditor to the Obligor or otherwise relating to the provision of any Junior Debt from time to time.
[39] Mr Jiang submits that the meaning of “Junior Debt” is all indebtedness of Mr Xin to Ms Zhao, including the Edison Loan and any other loans made by Ms Zhao to Mr Xin. He refers to the definition of “Senior Debt” and submits that covers all indebtedness of McLeod Green, Mr Xin, and KBS to Clearwater.
[40] Mr Jiang submits therefore that the meaning of cl 3.1 is that all indebtedness of Mr Xin to Ms Zhao (including the Edison Loan) is subordinated to all indebtedness of McLeod Green, KBS and Mr Xin to Clearwater. But, only all indebtedness of Mr Xin to Ms Zhao is subordinated, and cl 3.1 does not extend to the KBS Loan, which is an indebtedness of KBS to Ms Zhao.
[41] Mr Jiang submits that the parties did not contemplate the KBS Loan in the Deed of Subordination and there is no evidence of any intention that the KBS Loan be covered by the Deed of Subordination. He submits that the parties’ negotiations and subsequent conduct also accords with this interpretation of the Deed of Subordination and points to the following to support this view:
(a)Ms Zhao says that at the time the Deed of Subordination was signed (September 2022) the Edison Loan was due and Mr Xin had advised her that the Edison Loan would be repaid from a drawdown under the McLeod Green Facility. The KBS Loan was not due until 31 December 2023 and was never in contemplation of the parties.
(b)Mr Xin confirms that the Deed of Subordination related to repaying the Edison Loan.
(c)Clearwater was only aware of the Edison Loan at the time of the Deed of Subordination which is why the Edison Loan was included as an approved expense in Schedule 7 of the McLeod Green Facility.
Clearwater did not know about the KBS Loan and only became aware of the KBS Loan in October 2024.
(d)Mr Xin, who was a director of KBS at the time of the Deed of Subordination, did not instruct his solicitors, Brookfields, to include the KBS Loan in the Deed of Subordination, namely by including it in the definition of “Junior Debt”.
(e)Clearwater, did not instruct their solicitors, Buddle Findlay, to include KBS as a party to the Deed of Subordination and include references to the KBS Loan in the definition of “Junior Debt”.
(f)Both Mr Xin and Clearwater confirm their discussions revolved around whether the Deed of Subordination would be conditional upon the Edison Loan being repaid from the McLeod Green Facility, or the Edison Loan would be immediately repaid from the McLeod Green Facility and Clearwater has confirmed it was not aware of the KBS Loan at the time and it never featured in any negotiations.
[42] Mr Jiang submits that it is clear the KBS Loan falls outside the scope of the Deed of Subordination and accordingly there is no genuine dispute that the KBS Loan is due and owing.
Is KBS insolvent?
Is KBS cashflow insolvent?
[43] KBS’s accountant, Mr Dragonson, has filed an affidavit attaching KBS’s cashflow summary and balance sheet as at 31 March 2025. Mr Jiang submits:
(a)The cashflow balance shows that KBS has no income, and its only cashflow comes from loan advances from Clearwater.
(b)There is a cash balance of $9,802 as at 31 January 2025. The apartment complex being developed on the Amaia Development has not been completed, and as Mr Bartlow has deposed that less than $1 million will
be required to complete it, this means the cash balance of $9,802 must by now be depleted, and more funds must have been drawn down from the KBS Development Facility.
[44] Mr Jiang relies on the Supreme Court’s comments in Yan v Mainzeal Property and Construction Ltd (In Liquidation), where the Court commented that an assurance of cashflow support may be relevant to whether it was appropriate for directors to continue trading, but if those assurances were not legally binding or practically enforceable, there are likely to be questions as to the reasonableness of reliance on them.6 He submits that cl 10.4 of both KBS Facilities provides a loan-to-value covenant of 75 per cent and Clearwater has confirmed this has been breached and accordingly cl 13.5 applies which triggers default interest and constitutes an event of default under cl 13.6, at the discretion of Clearwater.
[45] He submits that as a result of these proceedings, an insolvency event has occurred under cl 13.1(e) which is an event of default, and as a result Clearwater has no obligation to lend to KBS. Therefore, having regard to the Supreme Court comments in Yan, Clearwater is not legally bound to continue lending to KBS, and accordingly KBS is cashflow insolvent.
Is KBS balance sheet insolvent?
[46] Mr Jiang submits that the KBS Facility has a balance owing of $47,503,043 and the KBS Development Facility has a balance owing of $87,808,154 and adding unsecured loans of $19,990,152, KBS’s total liability is approximately $155,291,349. He submits KBS’s asset position is only $143,519,858, and therefore KBS has a total negative equity of $-11,771,491.
[47] Mr Jiang submits that, given the apartments in the Amaia Development are selling very slowly (with few sold since 2021), and the interest rates applying to the KBS Facilities, the position of KBS will deteriorate rapidly from its already poor
6 Yan v Mainzeal Property and Construction Ltd (In Liquidation) [2023] NZSC 113, [2023] 1 NZLR 296 at [216].
position. He submits the Court should make an order for liquidation of KBS now to protect unsecured creditors, who will otherwise be left with nothing.
Submissions for KBS
Is the KBS Loan due and owing?
Is Ms Zhao a creditor?
[48] Mr Kommu, for KBS, submits that there is uncertainty as to whether the KBS Loan is owed to Ms Zhao and accordingly whether she is a creditor of KBS. He notes that the KBS Loan was initially advanced from Kingstone to KBS, and he points to various correspondence where Ms Zhao says that she no longer has management authority, is unsure as to whether she is the main party, describes herself as a proxy, and as having been dismissed by the investors for handling things poorly.
[49] Mr Kommu submits this doubt concerning whether Ms Zhao is a creditor is further reinforced by the wording of the caveat lodged by Mr Yuan ‘Anson’ Gao on the title of the land comprised in the Amaia Development, which states that Ms Zhao borrowed the money from Mr Ao to develop the Amaia Development.
[50] Mr Kommu submits in light of the above, there is evidence that the KBS Loan is not owing to Ms Zhao, but actually to other parties behind the scenes, and accordingly it is arguable that Ms Zhao is not a creditor of KBS.
Deed of Subordination applies to the KBS Loan
[51] Mr Kommu submits that the terms of the Deed of Subordination mean the KBS Loan (and any other sums) are within the definition of “Junior Debt”. He submits:
(a)Mr Xin is named as one of the guarantors in the KBS Loan and under clause 7 of the KBS Loan he is also a principal debtor of the KBS Loan.
(b)“Junior Debt” under the Deed of Subordination is defined to include:
…all indebtedness of the Obligor [Mr Xin] (whether alone, or jointly or jointly and severally with any other person and
whether as principal debtor, guarantor, surety or otherwise) to the Junior Creditor [Ms Zhao]…”
(c)As the KBS Loan and any other sums owing under the KBS loan deed are Junior Debt under the Deed of Subordination, then those sums are not due for payment under clause 3.1 of the Deed of Subordination.
(d)Ms Zhao is prohibited from making demand or enforcing the KBS Loan (or any other sums owing under the KBS loan deed) under clause 3.3 of the Deed of Subordination.
[52] In support of KBS’s position that the Deed of Subordination applies to the KBS Loan, Mr Kommu submits:
(a)The effect and intention of the parties was to subordinate Ms Zhao’s debts to Clearwater’s debts to ensure that no enforcement action could be taken by her until all Clearwater’s debts had been repaid. This was a condition precedent to Clearwater providing funding under the McLeod Green Facility.
(b)The Deed of Subordination went through a number of rounds of negotiation, in which Ms Zhao was involved and was assisted by Mr Liu Yang (Mr Yang) and represented by Heritage Law. The negotiations resulted in additions to the Deed of Subordination, namely the inclusion of a definition for ‘working capital release”, an additional cl 3.10 permitting payment to Ms Zhao as the junior creditor by Mr Xin as “the obligor” where that further payment is made by way of a working capital release, and the termination clause 9.17 stating that:
… this Deed shall terminate and cease to be of any effect … if the junior debtor [Ms Zhao] is not repaid from the working capital release on or prior to the termination date.
(c)It was objectively clear that the use of the very broad definition of “junior debt” in the Deed of Subordination was to ensure that all lending to which Mr Xin and Ms Zhao were parties would be subordinated to Clearwater’s debt. This makes commercial sense given the vastly
greater sums that Clearwater was lending to KBS and the Edison & Wayne Group.
(d)In response to Ms Zhao’s argument that KBS not applying to set aside the statutory demand is evidence of post-contractual conduct supporting Ms Zhao’s interpretation of the Deed of Subordination, the reason why KBS did not take steps to set aside the statutory demand was due to discussions and promises made by Ms Zhao to Mr Xin to extend the period to comply with the statutory demand.
[53] Accordingly, Mr Kommu submits that the interpretation of the Deed of Subordination which subordinates the KBS Loan (and any other sums owing under the KBS loan deed) to Clearwater’s debts, is the most plausible interpretation based on the objective intentions of the parties.
Is KBS solvent?
Preliminary issue – Ms Zhao’s evidence on KBS insolvency
[54] Mr Kommu submits that Ms Zhao’s evidence in her reply affidavit of 17 March 2025 in relation to the financial position of KBS should be excluded. He submits that Mr Dragonson is a chartered accountant who was qualified to give evidence as to whether a company is solvent, whereas Ms Zhao is not. He relies on the decision in Smart Pay Ltd v Kumar where Downs J considered that evidence as to solvency was the domain of accountants, and that a licensed insolvency practitioner was not an “expert” in determining a company’s solvency.7
[55] I accept Mr Kommu’s submission and paragraphs 26 to 50 and 68 and 69 of Ms Zhao’s reply affidavit are excluded. I note later in the judgment that even if this evidence was read by the Court, it is still reasonably arguable that KBS is solvent, particularly if KBS’ solvency is considered against the wider lending arrangements to the Edison & Wayne Group, as advocated by Mr Bisley, for Clearwater.
7 Smartpay Ltd v Kumar [2022] NZHC 997 at [53]–[57].
[56] Mr Kommu submits that KBS is able to pay its debts as they become due; the value of its assets exceed its liabilities; and that KBS is not currently in default of any of its payment obligations under the KBS Facility Agreement or the KBS Development Facility Agreement. He refers to Mr Dragonson’s evidence that:
(a)KBS is reasonably expected to meet its debts as they become due in the ordinary course of business;
(b)KBS does not have any outstanding tax obligations to the IRD; and
(c)as at 31 January 2025, KBS had a cash balance of $9,802.28 and total net assets of negative $3,807,181.84. The negative asset position is only due to the purchasers of the sold apartments not having settled at that time.
[57] Mr Kommu refers to Mr Xin’s updating affidavit8 which describes the imminent settlement of the apartments in the Amaia Development which have been sold, as at the date of the updating affidavit, as:
(a)the sales of 53 residential apartments and 1 commercial unit in Stage 1 are in the process of settling;
(b)most of the sales will settle on 3 April 2025; and
(c)it is anticipated that the settlement of the sales will result in $54,407,468 of income for KBS.
[58] In the resumed hearing on 30 April 2025, Mr Kommu refers to a further updating affidavit of Mr Xin9 and points to the following from Mr Xin’s updating affidavit as further evidence of the solvency of KBS:
(a)as at 28 April 2025, 36 units of the unconditional apartment sales had settled, leading to an income of $36,819,418 for KBS;
8 Updating affidavit of Xu (Edison) Xin, sworn 24 March 2025.
9 Second updating affidavit of Xu (Edison) Xin sworn 29 April 2025.
(b)a further eight units of the unconditional apartment sales have had the settlement date extended as the purchasers required further time to organise finance. The value of those eight units totals $6,575,000 and it is anticipated those sales would settle in two to three weeks’ time from the date of Mr Xin’s affidavit;
(c)the 10 remaining units of the unconditional apartment sales which have not settled have now had settlement notices in respect of them, with deposits of $936,152.50 being retained;
(d)the following apartments are now under contract (not unconditional) between KBS and the various purchasers:
(a)unit 703 (residential) for a purchase price of $830,000;
(b)unit PU 213 (commercial) for a purchase price of $900,000;
(c)unit PU 5 (commercial) for a purchase price of $480,000
(e)on 5 April 2025 KBS settled the sale of Stage 2 and 3 residual land for the Amaia Development for $28,500,000.
[59]Mr Kommu also points to the statements in Mr Xin’s updating affidavit that:
(a)as the apartments in Stage 1 of the Amaia Development are being marketed as completed units, KBS has instructed its listing real estate agents, Wallace Real Estate, to put together a proposal for them to be marketed and sold; and
(b)the values provided by Wallace Real Estate as appraisals of the unsold apartments are higher than the prices which the pre-sales of the apartments in Stage 1 were marketed at.
[60] Mr Kommu submits Clearwater’s evidence is that it continues to fund KBS to complete the Amaia Development and KBS is currently paying its debts as they fall due using agreed funding from Clearwater.
[61] Mr Kommu submits that, in reliance on the evidence set out at [56] to [60] above, KBS is solvent.
Discretion
[62] Mr Kommu submits that the Court should exercise its discretion not to put KBS into liquidation because doing so would substantially reduce the proceeds from the sale of the apartments in the Amaia Development and would prejudice other unsecured creditors, including Ms Zhao. He submits it would also jeopardise the imminent settlement of the apartments and the continuation of KBS likely presents the best opportunity for a recovery.
[63] Mr Kommu notes that KBS’s largest creditor by far is Clearwater, who opposes liquidation, and the fact that a significant majority of creditors oppose the application is relevant to the exercise of the Court’s discretion.
Clearwater’s position
[64] Clearwater filed submissions as a non-party. Mr Bisley recites Clearwater’s status as the first ranking secured creditor of KBS, whose security includes a general security interest over all of KBS's real and personal property, including a mortgage over the land comprised in the Amaia Development.
[65] Mr Bisley makes broadly similar submissions to those made on behalf of KBS by Mr Kommu, namely that the KBS Loan is not a debt due and owing because:
(a)there is doubt as to whether Ms Zhao is the lender under the KBS Loan and therefore entitled to bring the liquidation application as a creditor for the purposes of s 241(4)(a) of the Companies Act 1993; and
(b)Ms Zhao is prevented from bringing the liquidation application because the KBS Loan is subordinated to Clearwater’s KBS Facilities by the Deed of Subordination.
[66] He submits that for the above reasons there is a genuine dispute as to whether the KBS Loan is due and owing, and accordingly the statutory demand cannot be relied upon as evidence of KBS’s insolvency.
[67] Mr Bisley makes the following further submissions in opposition to Ms Zhao’s application for a liquidation order:
(a)The application for liquidation of KBS is arguably an abuse of process.
(b)KBS is not insolvent.
(c)The Court should exercise its discretion not to order the liquidation of KBS.
Is the KBS Loan due and owing?
Is Ms Zhao a creditor?
[68] Mr Bisley spent some time analysing the various WeChat messages contained in the evidence, pointing in particular to the messages where Ms Zhao suggests in her own evidence that she is not the creditor and is representing a third party behind the scenes. The messages referred to by Mr Bisley have largely been referred to by Mr Kommu and are noted at [48] of this judgment.
Deed of Subordination
[69] Similar to Mr Kommu, Mr Bisley submits that the KBS Loan is squarely encompassed by the definition of “junior debt” in the Deed of Subordination. He points out that the definition of “Junior Debt” is broadly drawn and includes:
(a)the indebtedness to Mr Xin, “whether a loan, or jointly or jointly and severally, with any other person and whether as principal debtor, guarantor, surety or otherwise” to Ms Zhao;
(b)indebtedness incurred by Ms Zhao on behalf of Mr Xin or sustained in any way by Ms Zhao in connection with any such indebtedness; and
(c)indebtedness under a Junior Facility Agreement.
[70]Mr Bisley submits that:
(a)As Mr Xin is both guarantor and principal debtor under the KBS Loan, the KBS Loan is clearly encompassed by the definition of “Junior Debt”.
(b)Clearwater’s purpose with the Deed of Subordination provisions was to ensure that all lending to which Mr Xin and Ms Zhao were parties was subordinated to Clearwater’s debt, and this purpose was objectively clear.
(c)It would have made no commercial sense to exclude some lending owed by Mr Xin which would have allowed the precise outcome Clearwater was contracting to avoid, namely, a demand for repayment of the debts owed by Mr Xin to Ms Zhao, before Clearwater’s much more substantial loans were repaid.
[71] As to Ms Zhao’s argument that the parties’ subsequent conduct supports a narrower interpretation of the Deed of Subordination, Mr Bisley submits that is a matter for trial, and in any event such conduct does not support her interpretation because:
(a)Clearwater had no knowledge (until it became aware of these proceedings) of the KBS Loan, which is why their solicitors, Buddle Findlay, did not mention it in correspondence of 14 October 2022;
(b)when Clearwater became aware of the KBS Loan, it immediately said the Deed of Subordination applied to it; and
(c)while the KBS Loan is not expressly referred to in Heritage Law’s letter of 7 October 2022, Heritage Law do refer to “Ms Zhao’s loans” (plural, not singular).
Abuse of process
[72] Mr Bisley submits that Mr Zhao’s application to put KBS into liquidation is an abuse of process for the following reasons:
(a)Ms Zhao sought payment for her Loans but then accepted her claim could be subordinated;
(b)she took no action to enforce the Edison Loan from January 2022, when it fell due for repayment, onwards;
(c)she pursued enforcement of the KBS Loan rather than the Edison Loan because it would be more “cost-efficient”;
(d)the Deed of Subordination means she is a contingent creditor requiring leave to bring an application for liquidation under s 241 of the Companies Act 1993;
(e)she declined a stay to allow the issues to be resolved;
(f)she believes KBS cannot meet her debts so any payment must come from Clearwater;
(g)the liquidation would endanger the entire Edison & Wayne Group, and Clearwater’s lending to the same, thereby exerting pressure on Clearwater to meet debts owing to Ms Zhao.
Is KBS solvent?
[73] Mr Bisley submits that as there is a substantial dispute as to whether the KBS Loan is due and owing and Ms Zhao is a contingent creditor only, she cannot rely on failure to satisfy the statutory demand as evidence of KBS’ insolvency, and she bears the burden of proving KBS is insolvent. He submits in these circumstances there is no presumption of insolvency arising from the non-payment of the statutory demand, relying on the decision in Precinct Property Holdings Ltd v Golden Tower NZ Ltd.10
[74] Mr Bisley submits that KBS is a property development company, and determining whether it should be put into liquidation, the question is not whether KBS is “balance sheet” solvent, but whether KBS can pay its debts as they fall due, including from banking accommodation. He refers, among other authorities, to Yan v Mainzeal Property and Construction Ltd (In Receivership and In Liquidation).11 He submits that KBS has not failed to pay any debts due, is paying its debts as they fall due and is therefore cashflow solvent.
[75] Mr Bisley makes the following submissions regarding the evidence in support of KBS’ solvency:
Clearwater’s evidence
(a)Clearwater’s lending to KBS is part of broader lending arrangements to other companies in the Edison & Wayne Group. Clearwater has four loan facilities with the Edison & Wayne Group, of which two relate to the Amaia Development—the KBS Development Facility and the KBS Facility. All lending by Clearwater to members of the Edison & Wayne Group is guaranteed by members of the Group under a cross-guarantee;
(b)the KBS Development Facility relates to Stage 1 of the Amaia Development which is almost complete. Clearwater understands that less than $1 million of costs remains to complete Stage 1 and it intends to fund those costs;
10 Precinct Property Holdings Ltd v Golden Tower NZ Ltd [2019] NZHC 3225 at [5].
11 Yan v Mainzeal Property and Construction Ltd (In Rec and In Liq) [2014] NZCA 190 at [58].
(c)Clearwater has not declared any default, KBS is not in default of its payment obligations to Clearwater, and Clearwater intends to provide funding to KBS to pay its debts as they fall due; and
(d)the evidence shows that KBS’ solvency cannot be assessed in isolation and it should be understood considering:
(a)the support that has been and will continue to be provided by Clearwater;
(b)the debt owed to Clearwater is, in significant part, owed by the Edison & Wayne Group as security against the Group’s assets; and
(c)at this stage of development KBS has acquired and developed the Amaia Development by taking on debt and logically, on the cusp of realising its assets, its debts are likely to be the greatest.
[76] Mr Bisley submits that KBS is also “balance sheet” solvent, when its lending from Clearwater is considered, either as it just relates to KBS, or lending across the entire Edison & Wayne Group. At the resumed hearing on 30 April 2025, Mr Bisley produced a table showing the lending under the KBS Facility in respect of the Amaia Development Stage 1, and a table showing lending in relation to the Amaia Development and the other Edison & Wayne Group lending under the KBS Facility. Mr Bisley extracts figures from these tables that he submits demonstrates, in respect of funding to KBS alone under the KBS Development Facility, total assets exceed total liabilities by $36,521,611.00, and under the KBS Facility (which is integrated into the Edison & Wayne lending) there is a surplus of assets over liabilities of $14,591,919.00. These tables suffer from the same objection as has been made to Ms Zhao’s evidence regarding the solvency of KBS, namely they are lay evidence and not produced by a qualified accountant with accounting expertise.
KBS’ evidence
[77] As to KBS’ evidence, Mr Bisley points to the evidence of Mr Dragonson, a chartered accountant, who confirmed by affidavit that KBS is solvent. He notes Mr Dragonson:
(a)confirms that as at 31 January 2025 KBS’s negative asset position is due to the fact that the apartments within the Amaia Development which have been sold had not yet settled;
(b)considered KBS was reasonably expected to be able to meet its debts as they fell due; and
(c)KBS had no outstanding debt to Inland Revenue.
Ms Zhao’s evidence
[78] Mr Bisley submits Ms Zhao’s evidence on insolvency is unsatisfactory in a number of respects. He submits she purports to provide an analysis of the accounts prepared by Mr Dragonsen annexed to his affidavit, and much of her evidence should be disregarded because:
(a)Ms Zhao is not an expert witness and insofar as her evidence consists of opinions on solvency and the property market, it is of doubtful utility and inadmissible;
(b)the bulk of her evidence relates to KBS’ balance sheet solvency, which is of reduced relevance in the present context; and
(c)she does not assert that KBS is failing to pay its debts as they fall due.
[79] Mr Bisley submits that Ms Zhao, despite having the evidential burden, did not introduce an independent expert analysis of the solvency of KBS and instead supplies a lay analysis that concludes that KBS has “no income” and a “significant negative asset position, which is understated”.
[80] In paragraphs 5.13 to 5.22 of his submissions, Mr Bisley criticises the various assumptions and analysis of Ms Zhao, pointing out that in many cases the assumptions are flawed, or are speculative, and concludes that Ms Zhao has not discharged the onus of proving KBS’ insolvency on either a cash-flow or balance sheet basis. He submits the only reliable evidence before the Court is from Clearwater and KBS, and this evidence clearly establishes that KBS is solvent.
Residual discretion
[81] Mr Bisley submits that the Court should exercise its residual discretion not to put KBS into liquidation for the following reasons:
(a)Clearwater considers that liquidation would almost certainly result in a reduction in the sale proceeds of the apartments in the Amaia Development and no funds would be available to meet debts owing to Ms Zhao. Other creditors would also recover nothing, and funding for other developments in the Edison & Wayne Group may be prejudiced.
(b)KBS is completing a property development and its ongoing existence is unlikely to pose a risk to the public or potential creditors.
(c)Clearwater is the largest creditor of KBS by some margin, with KBS owing over $165 million to Clearwater as at January 2025 (noting the KBS Facility and the KBS Development Facility is not all owed solely by KBS).
(d)No other creditor has come forward in support of Ms Zhao’s application, and the fact that the majority of creditors by value opposes the liquidation, and only one creditor supports the liquidation, is in favour of the Court exercising its discretion not to put KBS into liquidation.
Result
[82] I am of the view that Ms Zhao’s application for liquidation of KBS should be dismissed. I set out the reasons for my view in the following paragraphs of this judgment.
Is the debt due and owing?
[83] In my view there is a reasonable argument that there is a substantial dispute regarding whether the KBS Loan is due and owing to Ms Zhao. The reasons for this are:
(a)There is some evidence that Ms Zhao may not be the lender under the KBS Loan, although in my view this evidence is only circumstantial, based on the WeChat comments made by Ms Zhao. This is ultimately a matter that needs to be tested at trial.
(b)More importantly, however, there is a substantial dispute as to whether the Deed of Subordination covers the KBS Loan. If so, Ms Zhao would be unable to bring the liquidation application because of the restrictions contained in the Deed of Subordination on enforcing her debts against KBS until debts to Clearwater have been repaid. In my view, because the definition of “Junior Debt” applies to Mr Xin, because it applies to his obligations as guarantor of, and principal debtor under, the KBS Loan. Therefore the KBS Loan is included in the definition of “Junior Debt”. While the KBS Loan may not have been specifically discussed between Mr Xin, Clearwater and Ms Zhao when the Deed of Subordination was being put in place, there is a reasonable argument that it was Clearwater’s intention to ensure that all lending which KBS was involved in in respect of Ms Zhao was subordinated to Clearwater’s loans. Although this issue may ultimately need to be determined at trial, it is certainly reasonably arguable that the KBS Loan is not due and owing as a consequence of this dispute.
[84] Because there is a substantial dispute as to whether the debt underlying the statutory demand issued by Ms Zhao to KBS, on which the liquidation application is based, the failure by KBS to make payment under the statutory demand does not create a presumption of insolvency.12 The onus of establishing KBS’ insolvency then rests on Ms Zhao.
[85] I have reached the view that Ms Zhao’s evidence as set out in paragraphs 26 to 50 and 68 and 69 of her affidavit should not be read as they include lay assessment and opinion.13 However, even if these paragraphs were to be taken into consideration, she has not discharged the burden of demonstrating that KBS is insolvent. On the contrary, on the evidence of Clearwater and KBS, it is reasonably arguable that KBS is solvent on both a balance sheet and cashflow basis. The reasons for this are:
(a)Mr Dragonson’s evidence, as a chartered accountant, confirms that KBS can meet its debts as they fall due. He explains the reason for a negative asset figure as at 31 January 2025 is due to the fact that sold apartments in the Amaia Development have yet to be settled. Mr Xin’s second updating affidavit indicates that a significant number of sales of the apartments have occurred, and funds have flowed into KBS.
(b)Clearwater is supportive of KBS completing the Amaia Development and marketing the completed apartments for sale. Notwithstanding, as pointed out by Mr Jiang, that KBS may be in default of some of the provisions under the KBS Development Facility and/or the KBS Facility, Clearwater has indicated that it will continue to make funds available to KBS and on that basis KBS continues to be cashflow solvent.
(c)The figures in Mr Bisley’s tables produced at the resumed hearing cannot be relied upon as they are not provided by a qualified accountant and derivation of a number of figures in his table requires closer examination and suffer form the same objection to the objection raised
12 Precinct Property Holdings, above n 10, at [5].
13 Smartpay Ltd v Kumar, above n 8.
in respect of Ms Zhao’s evidence as to the solvency or otherwise of KBS. However what the they do demonstrate, irrespective of the final accuracy of the figures, is that when KBS’ position is considered in the framework of the wider lending by Clearwater to the Edison & Wayne Group, KBS is arguably solvent. It is clear that expert evidence will be required, given the reasonably complex position under the wider lending by Clearwater to the Edison & Wayne Group, to definitively establish the financial position, assets and liabilities of KBS. It is sufficient for the purposes of this judgment that Ms Zhao has not established clearly that KBS is insolvent.
[86] It is arguable that the liquidation application brought by Ms Zhao was an abuse of process. Her pursuit of the KBS Loan, and her attempts to leverage repayment of the Edison Loan from Clearwater’s refinancing of the Edison & Wayne Group investments, indicates that there was an intention to put pressure on Clearwater to repay the debts owed to her by bringing the liquidation application. While this is ultimately a matter to be determined at trial, there is a sufficient argument raised to weigh against granting Ms Zhao’s application for liquidation of KBS.
[87] The Court should exercise its discretion not to order the liquidation of KBS. The reasons for this are:
(a)The majority creditor, Clearwater, opposes the liquidation and has indicated continuing financial support for KBS to complete selling the Amaia Development apartments, as this is perceived as the best method of obtaining returns for all creditors of KBS;
(b)no other creditors of KBS have sought a liquidation order, or have supported Ms Zhao’s application for liquidation; and
(c)there is no significant risk to the public or commercial community with KBS continuing, particularly as the Amaia Development is almost completed, with the completed apartments to be marketed for sale. Stage 2 and 3 land in the Amaia Development has been sold,
ameliorating any risk of exposure of creditors to KBS if that part of the development had proceeded.
Orders
[88]I make the following orders:
(a)Ms Zhao’s evidence in paragraphs 26 to 50 and 68 and 69 of her reply affidavit dated 17 March 2025 is excluded;
(b)Ms Zhao’s application for an order putting KBS into liquidation is dismissed;
(c)as KBS and Clearwater are the successful parties, costs should follow the event. Counsel are directed to endeavour to agree costs and, failing agreement being reached within a period of 20 working days from the date of this judgment, counsel for KBS and Clearwater will file a memorandum as to costs (not to exceed five pages) within 5 working days after the expiry of the 20 working day period, and counsel for Ms Zhao will file a memorandum (not to exceed five pages) in response within 5 working days of receipt of counsel for KBS and Clearwater’s memoranda. A decision as to costs will then be made on the papers.
…………………………….. Associate Judge Taylor
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