Zixin Limited v Billion Straven Limited
[2024] NZHC 3913
•18 December 2024
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2024-409-468
[2024] NZHC 3913
UNDER the Companies Act 1993 IN THE MATTER
of an application to set aside a statutory demand
BETWEEN
ZIXIN LIMITED
Applicant
AND
BILLION STRAVEN LIMITED
Respondent
Hearing: 10 December 2024 Appearances:
A J Summerlee and S R Patient for Applicant M M Gray and P Liu for Respondent
Judgment:
18 December 2024
JUDGMENT OF ASSOCIATE JUDGE PAULSEN
This judgment was delivered by me on 18 December 2024 at 4.30 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date:
ZIXIN LIMITED v BILLION STRAVEN LIMITED [2024] NZHC 3913 [18 December 2024]
[1] The applicant (Zixin) is a shareholder in the respondent (Billion). Billion served Zixin with a statutory demand in respect to an amount of $90,000, which it says is the sum of loans made to Zixin that were repayable on demand and have not been repaid.
[2] Zixin applies to set aside the statutory demand under ss 290(4)(a) and (b) of the Companies Act 1993 on the basis that the amount of the statutory demand is not a debt that is due and owing and it has counterclaims against Billion which exceed the amount of the demand.
[3] The primary issue that arises is whether the amount of the statutory demand is a debt that is due and owing.1 As I consider Zixin has raised a genuine and substantial dispute as to whether that is the case, it is not necessary for me to consider whether Zixin has arguable counterclaims against Billion.
Background
[4] There are significant disputes of fact which cannot be resolved on this application. For present purposes, the relevant background as I understand it to be is as set out below.
[5] Zixin is a 50 per cent shareholder in Billion. Kevin Qin is the sole director of Zixin.
[6] Nathan Lin is the sole director of Billion and the other 50 per cent shareholder in the company. Mr Lin is also an experienced builder and property developer.
[7] In November 2021, Mr Lin and Mr Qin agreed to undertake a project together which involved the purchase of properties at Straven Road, subdividing them to create four sections and selling them for profit.
[8] Billion was the corporate vehicle the parties used for the project. Billion was incorporated on 19 November 2021 and has two shares. Mr Qin (or his company,
1 In its notice of opposition Billion asserted the application to set aside the statutory demand was invalid as it was not properly served but this argument was not pursued.
Zixin) and Mr Lin were to each own one share. Mr Lin was to be the sole director of Billion and was to manage the project.
[9] In around November 2021 Mr Lin entered into an agreement to purchase the Straven Road properties (the properties) for $2.4 million. Mr Qin and Mr Lin agreed to each contribute $1.2 million to be used by Billion to acquire the properties and were to also share the subdivision costs equally. Mr Qin says Mr Lin led him to believe that two of the sections would sell within 12 months. The arrangements were not documented, and the parties have proceeded with a surprising degree of informality.
[10] Mr Qin paid his $1.2 million to Billion via Zixin. He says that unbeknown to him Mr Lin did not pay his $1.2 million to Billion. Rather, Mr Lin arranged for Billion to obtain a loan for $1.6 million from General Finance Ltd, secured by mortgage against the properties (but guaranteed by Mr Lin). Mr Qin says this was a fundamental breach of the arrangement he had with Mr Lin and effectively transferred the risk of the project to him. He also says Billion will have paid very substantial financing and interest charges that should not have been incurred. These matters are the basis for counterclaims he says he has against Billion.
[11]The purchase of the properties was settled by Billion on 25 February 2022.
[12] When Billion was first incorporated the shares in the company were registered in the names of Mr Qin and Mr Lin (one share each). Between February 2022 and March 2024 Mr Lin altered the Companies Office share register without Mr Qin’s knowledge on several occasions. Mr Qin’s view is that these dealings were to enable Mr Lin to borrow against Billion’s properties and were unlawful. Apart from asserting that the loan from General Finance was disclosed to Mr Qin (which Mr Qin does not accept), Mr Lin and his lawyers have not explained the reasons for the several alterations made to the share register or identified upon what authority Mr Lin made them.
[13] Early on in the project it was learnt that due to Council planning restrictions the properties could only be subdivided into three sections, rather than four as planned. Mr Qin says as a result Mr Lin proposed that his company, Nathan Construction Ltd,
would build on the sections so they could be sold as house and land packages. There is a dispute as to whether that is the case or whether it was always intended to build houses on the sections. Regardless, Mr Lin continued to manage the project without Mr Qin’s involvement, and he says because Zixin was unable to contribute to its share of expenses he agreed to pay all the expenses and “claim these back after the sections sold, and without charging Zixin any interest”.
[14] Mr Qin says he first learnt that Mr Lin had altered the share register in June 2022. When he raised that with Mr Lin, he was told it was a mistake and the share register was rectified to record that Zixin and Mr Lin each held one share.
[15] On 15 May 2023 and again on 23 January 2024 Mr Lin made what he says were short-term loans of 100,000 RMB to Mr Qin for living costs and family emergencies while Mr Qin was visiting China. These sums are not included in the statutory demand. While Mr Qin accepts that as between himself and Billion these amounts need to be taken account of following completion of the project, the evidence would suggest that these were in fact personal loans. Mr Lin’s lawyers have said in correspondence that proceedings will be taken in the District Court to recover them.
[16] Mr Qin says that on 13 March 2024 he was advised by the Bank of New Zealand that Zixin was not shown as a shareholder of Billion on the register. When Mr Qin raised this with Mr Lin the register was again updated, but this time to reduce the number of shares by one and make Mr Lin and Zixin joint owners of that one share. The register was again updated on 1 May 2024 to increase the number of shares to two. Mr Lin and Zixin are now recorded as owning one share each.
[17] Mr Qin sought legal advice around this time and the relationship between Mr Qin and Mr Lin appears to have become strained.
[18] In early 2024, as a result of complaints by Mr Qin about the lack of sales of sections and resulting financial pressures, Mr Lin suggested that Mr Qin spend using Billion’s bank account. Mr Qin initially spent a total of $6,662.49, and subsequently two payments were made from Billion’s account to Mr Qin (or Zixin):
(a)$33,337.51, transferred on 21 March 2024; and
(b)$50,000, transferred on 5 April 2024.
Mr Lin says he personally transferred $70,000 to Billion’s account so Zixin could withdraw the payments.
[19] On 19 April 2024 Billion paid Zixin $389,797.50, being 50 per cent of the net proceeds of sale of 144 Straven Road. At around this time Mr Lin asked Mr Qin to put $40,000 into Billion to help cover upcoming costs. It appears Mr Qin was intending to do so, but ultimately that did not happen. Mr Qin says this was because he had become aware of Mr Lin’s misconduct in managing Billion, which related to the failure to put his $1.2 million into the company and the unauthorised changes made to the share register.
[20] After Mr Qin obtained legal advice there was correspondence between lawyers. On 13 May 2024 Mr Qin’s lawyers wrote to Mr Lin’s then lawyers seeking an explanation for the changes to the share register. There was a response of 24 May 2024 from the lawyers now acting for Mr Lin and Billion, asserting that Mr Qin was aware of the borrowing to fund Mr Lin’s contribution to Billion but not responding about the share register.
[21] By letter also dated 24 May 2024, the same lawyers acting for Billion and Mr Lin demanded repayment of what were described as the “personal loans” totalling 200,000 RMB to Mr Qin and the “2024 loans”, which are the amounts now the subject of the statutory demand. In respect to the 2024 loans, the lawyers said:
The 2024 Loans were advanced on the basis that they would be made on a short term [sic] basis and payable on demand. Despite Nathan’s requests for repayment, they have not been repaid.
[22] There followed negotiations between the parties with a view to them resolving their differences on the basis that Mr Lin would acquire Zixin’s interest in Billion. However, on or around 15 August 2024 Billion served the statutory demand upon Zixin in respect to “amounts outstanding” as “set out in the letter of demand dated 24 May 2024”.
[23] On 26 August Zixin’s lawyer wrote to Billion’s lawyers, inviting them to withdraw the demand on the basis there was no loan to repay. Billion’s lawyers advised their instructions were not to do so.
[24] Zixin’s lawyers made requests in October 2024 of Billion’s accountants and lawyers for Billion’s financial accounts. On 11 October 2024, Billion’s lawyers advised that Billion would not release the accounts to Zixin.
Legal principles
Section 290 of the Companies Act provides:
Court may set aside statutory demand
(1)The court may, on the application of the company, set aside a statutory demand.
(2)The application must be—
(a)made within 10 working days of the date of service of the demand; and
(b)served on the creditor within 10 working days of the date of service of the demand.
(3)No extension of time may be given for making or serving an application to have a statutory demand set aside, but, at the hearing of the application, the court may extend the time for compliance with the statutory demand.
(4)The court may grant an application to set aside a statutory demand if it is satisfied that—
(a)there is a substantial dispute whether or not the debt is owing or is due; or
(b)the company appears to have a counterclaim, set-off, or cross- demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or
(c)the demand ought to be set aside on other grounds.
(5)A demand must not be set aside by reason only of a defect or irregularity unless the court considers that substantial injustice would be caused if it were not set aside.
(6)In subsection (5), defect includes a material misstatement of the amount due to the creditor and a material misdescription of the debt referred to in the demand.
(7)An order under this section may be made subject to conditions.
[26] The principles that apply when the Court is exercising the discretion under s 290(4) of the Companies Act are well established and were confirmed by the Court of Appeal in Confident Trustee Ltd v Garden and Trees Ltd.2 In summary:
(a)The onus is on the applicant to show there is a fairly arguable basis on which it is not liable for the amount claimed. The task for the Court is not to resolve the dispute but to determine whether there is a substantial dispute that the debt is due.
(b)The mere assertion a dispute exists is not sufficient. Material short of proof is required to support the claim that the debt is disputed. If such material is available, the dispute should normally be resolved by means of ordinary civil proceedings.
(c)If a counterclaim, cross-demand or set-off is suggested, an applicant must establish that this is reasonably arguable in all the circumstances.
(d)It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise unless such evidence is contrary to the available documents or earlier statements made by the parties.
[27] In AAI Ltd v 92 Lichfield Street Ltd (in rec and liq), where the Court of Appeal summarised the onus on an applicant as:3
What the applicant must show is that the dispute it raises has substance; the applicant must explain to the court what the dispute is; and the dispute so shown must be a real and not a fanciful or insubstantial dispute. The Court must bear in mind that it is operating in the summary jurisdiction, with the accompanying disadvantages that brings for any applicant. The Court must
2 Confident Trustee Ltd v Garden and Trees Ltd [2017] NZCA 578 at [16].
3 AAI Ltd v 92 Lichfield Street Ltd (in rec and liq) [2015] NZCA 559, [2016] NZAR 1338 at [22] (footnote omitted).
also keep in mind the requirement that what is intended to be a summary hearing should not be converted into a full-blown trial.
Is the amount of the statutory demand a debt due and owing?
[28] Zixin says there is a genuine and substantial dispute as to whether the $90,000 that is the subject of the statutory demand was a loan repayable on demand (as Billion contends), or an advance distribution of profits in respect of its investment in Billion (as Zixin contends).
[29] Counsel took me to matters raised in the evidence that support their client’s position. I will deal with what I consider are the most important of those matters.
[30] Mr Summerlee for Zixin emphasises the context against which the $90,000 was received by Zixin. He says the payments were made because of the delay in obtaining sales of the sections and that Mr Qin raised his disappointment and concern with Mr Lin, whom he considered honour bound to make good the situation.
[31] Mr Qin is clear in his evidence that the payments were an early distribution of what he would be entitled to from the project. He says:
19.Nathan agreed that Zixin ought to receive a distribution early. Nathan suggested that I simply spend funds through Billion’s accounts. In total I spent $6,662.49. However, I was uncomfortable with this arrangement, and so Nathan agreed that Billion would distribute these funds to Zixin. A total of $90,000 was paid to Zixin:
...
20.There was no discussion about any repayment terms, let alone these funds being a loan, because it was not a loan. However, because Billion is a 50:50 investment for Nathan and Zixin, the $90,000 is to be taken into account to ensure equal distributions and returns between shareholders.
[32]To similar effect, in his reply affidavit Mr Qin says:
23. As explained above and in my first affidavit, these were advances on Zixin’s investment to be taken into account at the investment’s conclusion. There was never any agreement that these transfers were loans repayable on demand. These amounts, together with the subdivision costs, are amounts [Mr Lin] was happy to advance to Zixin to make up for the fact that he had not delivered on the project on time, ...
[33] In response to Mr Qin’s evidence that the payments were an early distribution, Mr Lin says that Billion could not afford to make early distributions as without sales there was nothing to distribute. His evidence is:
37.There was never any agreement between Zixin/[Mr Qin] and Billion/I that the money Billion was lending was an early distribution. Billion simply could not afford to make early distributions. Without the sales of the land, there was nothing to distribute to shareholders. Land development is not like other cash flow businesses where early distributions are possible/commonplace.
38.After transferring the $50,000, I told [Mr Qin] that I had no money left and noted the $90,000 and ¥200,000 Yen which I had lent him so far. I said that the company (Nathan Construction) would be bankrupt. [Mr Qin] replied that next week he would have money for me. I told him to put it in the company (Billion) name, as this was where the money was taken from.
[34] Billion’s counsel also submits that it was not realistic for Mr Qin to suggest the payments were advance distributions when the venture was ongoing. She argues that Mr Qin “likely knew” or “ought to have known” that Billion did not have sufficient cashflow to make advance payments.
[35] Both Mr Lin’s evidence and counsel’s submissions overlook several matters. First, in respect to what Mr Qin did or did not know, it was Mr Lin who was in sole charge of the management of Billion and the project. Second, as far as Billion’s inability to pay is concerned, the payments to Mr Qin were primarily from advances that Mr Lin personally made to Billion. Third, even on Mr Lin’s evidence, the parties were proceeding on the basis that there would be a wash-up between them upon completion of the project. Mr Lin says there was “no strict agreement” as to when they would see a return on their investment, but in the interim he “agreed to pay all of the ongoing expenses and claim these back after the sections sold, and without charging Zixin any interest”.
[36] The mechanism by which Mr Lin first transferred money to Billion to pay to Mr Qin supports Zixin’s position. As Mr Summerlee submits, if the payments were simply an on-demand loan there was no need for the money to pass through Billion. He also submits, and I agree, that the fact Mr Lin provided the money personally
supports Mr Qin’s evidence that Mr Lin was making up for the failure of the project to proceed in a timely manner.
[37] Billion largely relies upon WeChat messages that passed between Mr Qin and Mr Lin, which it is said support Billion’s position because of references to “lend”, “repayment”, “loan” and the like. Despite Mr Liu’s careful submissions taking me through the messages, they do not assist me. They are extremely confusing. The messages lack context and have been translated into English where nuances of the language used in the original messages are not apparent. Some of the messages relate to the personal loans, but it is often not clear whether the personal loans or other payments made to Mr Qin are being referred to. Almost all the messages Billion relies upon post-date the payments in dispute. Mr Summerlee submits, and I cannot discount, that the messages represent Mr Lin’s post facto characterisation of the payments, at a time when the parties’ relationship was breaking down.
[38] I am therefore satisfied it is arguable that the sum of Billion’s demand is not presently due. However, there is another fundamental difficulty with Billion’s demand which I raised with counsel at the hearing and goes to whether Zixin is indebted to Billion in any sum at all.
[39] There is no dispute Zixin advanced $1.2 million to Billion that was then used to acquire the properties. In the ordinary course, when a shareholder introduces funds to a company in this manner it would be credited to the shareholder’s current account against which any withdrawals made from the company to the shareholder would subsequently be debited. Here, the amounts received by Zixin from Billion appear to be limited to the $90,000 that is the subject of the statutory demand and $389,797.50 from the sale of 144 Straven Road. Assuming Zixin’s $1.2 million advance has been treated in the manner indicated, Billion would remain indebted to Zixin by more than
$1.7 million. Mr Lin refuses to disclose Billion’s accounts, notwithstanding that Zixin is a 50 per cent shareholder in the company and that they have been requested. Nonetheless, it appears there must be an arguable case that Zixin is a substantial creditor, not a debtor, of Billion.
[40] The Court has a discretion not to set aside a statutory demand aside even if grounds for setting it aside under s 290(4) exist, although the discretion is rarely exercised.4 No submissions were made that the discretion should be exercised in this case.
Result
[41]Zixin’s application to set aside the statutory demand is granted.
[42] Zixin is entitled to costs. Mr Summerlee asked to be heard on costs. Accordingly, I direct that if counsel cannot agree on costs memoranda may be filed and costs will be determined on the papers. Memoranda should be no longer than five pages and are to be filed prior to 1 February 2025.
O G Paulsen Associate Judge
Solicitors:
Parry Field, Christchurch
Tavendale and Partners, Christchurch
4 Alfex Doors and Windows Ltd v Alutech Windows and Doors Ltd (2001) 16 PRNZ 963 (CA).
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