MARYLAND BASSETT COMPANY LTD v TAIHE INNOVATION MANAGEMENT LTD (in rec) [2023] NZHC 801

MARYLAND BASSETT COMPANY LTD v TAIHE INNOVATION MANAGEMENT LTD (in rec) [2023]NZHC 801 [17 April 2023]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2022-404-1302[2023] NZHC 801UNDER s 290 of the Companies Act 1993BETWEEN MARYLAND BASSETT COMPANYLIMITEDApplicantAND TAIHE INNOVATION MANAGEMENTLIMITED (in rec)RespondentHearing: 22 November 2022Appearances: RE Harrison KC and D Liu for the ApplicantRJ Hollyman KC and JD Ryan for the RespondentJudgment: 17 April 2023JUDGMENT OF ASSOCIATE JUDGE SUSSOCKThis judgment was delivered by me on 17 April 2023 at 4pmpursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors/Counsel:Heritage Law, AucklandClaymore Partners, AucklandRE Harrison KC, AucklandRJ Hollyman KC, AucklandIntroduction[1] Maryland Bassett Company Ltd (Maryland) applies to set aside a statutorydemand served on it by Taihe Innovation Management Ltd (in receivership) (Taihe)dated 28 July 2022. The statutory demand seeks recovery of an alleged debt of$659,961.36 (including interest) that Taihe says arises under a loan agreement betweenTaihe and Maryland.[2] Maryland submits that the purported loan agreement was a sham transactionembarked upon by Taihe and Maryland through their respective sole directors, Lei(Andy) Zhang and Weidong (Donny) He.[3] Essentially, Mr He's evidence is that the sums advanced from Taihe toMaryland were to allow an injection of additional capital into a company associatedwith Mr Zhang, with the transaction "structured to look like a regular loan from [Taiheto Maryland] so as to not alert the other shareholders" of that other company.[4] In addition, Maryland relies on the indemnity clauses in a Deed of Trust andIndemnity entered into by Mr He, Maryland, Mr Zhang and Taihe on 7 March 2022(the Deed). Maryland submits that based on those clauses, Maryland has acounterclaim, set-off or cross-demand equal to or exceeding the alleged debt.[5] Taihe opposes the application to set aside on the basis that Maryland's claimthat it has no liability under the loan agreement is both misconceived and unsupportedby material evidence and that instead:(a) Maryland's affidavits confirm the loan agreement; and(b) the receivers and the secured creditor that appointed them are notparties to the alleged "sham transaction" and therefore should be ableto rely on the face of the loan agreement and should not be adverselyaffected by the admitted dishonest motive of Mr He and Maryland.[6] As a consequence, Taihe submits that Maryland:(a) is estopped from relying on the sham transaction; or(b) is liable as trustee of a trust.[7] Even if the Court accepts that it is arguable the loan agreement is void andunenforceable as a sham transaction, Taihe submits it would have a clear right todemand immediate repayment of the funds advanced to Maryland.[8] Furthermore, Taihe says the indemnity under the Deed is limited tocircumstances where either the shares that are the subject of the Deed have been sold,or steps have been taken by Maryland to enforce claims against Mr Zhang (not Taihe).As neither event has happened, Taihe submits the indemnity does not assist Maryland.[9] Finally, Taihe says Maryland is insolvent and so a liquidator ought to beappointed immediately.Legal principles applying to setting aside a statutory demand[10] Failure to comply with a statutory demand is one of the mechanisms by whichinsolvency is established under Part 16 of the Companies Act 1993. A creditor mayserve a statutory demand on a company in respect of any debt owed that is not lessthan the current prescribed amount of $1,000.00.1 A company served with a statutorydemand may apply to the Court to set it aside but must do so within 10 working daysof service.2[11] The Court's discretion to set aside a statutory demand is provided by s 290(4)of the Companies Act:(4) The court may grant an application to set aside a statutory demand ifit is satisfied that—(a) there is a substantial dispute whether or not the debt is owingor is due; or(b) the company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less theamount of the counterclaim, set-off, or cross-demand is lessthan the prescribed amount; or(c) the demand ought to be set aside on other grounds.1 Companies Act 1993, s 289.2 Section 290(2).[12] The Court of Appeal confirmed the principles a court should apply whenexercising the s 290(4) discretion in Confident Trustee Ltd v Garden and Trees Ltd:3[16] The general principles under s 290(4) are well settled:(a) The onus is on the applicant seeking to set aside the statutorydemand to show that there is arguably a genuine andsubstantial dispute as to the existence of the debt. The Court'stask is not to resolve the dispute but to determine whetherthere is a substantial dispute that the debt is due.(b) The mere assertion that a dispute exists is not sufficient.Material short of proof is required to support the claim thatthe debt is disputed.(c) If such material is available, the dispute should normally beresolved first in ordinary civil proceedings before anystatutory demand is issued.(d) If a counterclaim, cross-demand or set-off is suggested anapplicant must establish that this is reasonably arguable in allthe circumstances.(e) It is not usually possible to resolve disputed questions of facton affidavit evidence alone, particularly when issues ofcredibility arise unless such evidence is contrary to theavailable documents or earlier statements made by the parties.(footnote omitted)Section 290(4)(a): A substantial dispute[13] To succeed in an application under s 290(4)(a) the applicant must demonstratea "fairly arguable"4 basis for the alleged dispute. The onus of establishing the disputeis on the applicant.5 In AAI Ltd v 92 Lichfield Street Ltd (in rec and liq) the Court ofAppeal summarised the applicant's task as follows:6What the applicant must show is that the dispute it raises has substance; theapplicant must explain to the court what the dispute is; and the dispute soshown must be a real and not a fanciful or insubstantial dispute.3 Confident Trustee Ltd v Garden and Trees Ltd [2017] NZCA 578, recently confirmed by the Courtof Appeal in Demasol Ltd v South Pacific Industrial Ltd [2022] NZCA 480 at [26].4 Forge Holding Ltd v Kearney Finance (NZ) Ltd HC Christchurch M149/95, 20 June 1995; UnitedHomes (1998) Ltd v Workman [2001] 3 NZLR 447 at [32].5 JP & BM Holdings Ltd v Commissioner of Inland Revenue HC Auckland CIV-2010-404-5208, 26November 2010, at [7].6 AAI Ltd v 92 Lichfield Street Ltd (in rec and in liq) [2015] NZCA 559, [2016] NZAR 1338 at [22],referring to Re A Company [1991] BCLC 737 (Ch) at 740.[14] Taihe submits that the Court is not required to accept without question a bareassertion of facts, or "whatever unvarnished statements may happen to be made onaffidavit",7 and the debtor company must point to evidence, short of proof, of its claim.[15] The principles developed in fields such as applications to remove caveats, andopposition to summary judgment apply by analogy.8 In this respect, Counsel for Taiheemphasises the following passage from the Court of Appeal's decision in Krukzienerv Hanover Finance Ltd:9The Court will not normally resolve material conflicts of evidence or assessthe credibility of deponents. But it need not accept uncritically evidence thatis inherently lacking in credibility, as for example where the evidence isinconsistent with undisputed contemporary documents or other statements bythe same deponent, or is inherently improbable In the end the Court'sassessment of the evidence is a matter of judgment. The Court may take arobust and realistic approach where the facts warrant it.Section 290(4)(b): A cross-demand[16] The wording in s 290(4)(b) is whether the applicant "appears to have" acounterclaim, set-off or cross-demand. In Industrial Group Ltd v Bakker, the Court ofAppeal held:10[25] The approach required by the "appearance" test in s 290 is a reviewwith a low threshold. The tight time constraints distinguish the s 290discretion from that to be exercised on, say, a summary judgmentapplication, where the presence of complex legal issues is notnecessarily a bar to a remedy. As with leave to appeal an arbitrator'saward, the hearing should, in the normal course, be short and to thepoint, and the judgment likewise.[17] Maryland emphasises that a "cross-demand" is wider than either acounterclaim or a set-off, referring to the following definition of cross-demand in theEnglish decision, In Re A Bankruptcy Notice:11"Cross-demand" seems to me to be a word introduced in order to give a widerambit to the meaning of these claims, something that would not be described,certainly, as a set-off, something that could not have been brought in theaction, something that still lies outside a counterclaim, but is of a nature which7 United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 (CA) at [34].8 At [34].9 Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162 at [26].10 Industrial Group Ltd v Bakker [2011] NZCA 142, (2011) 20 PRNZ 413 (emphasis added).11 In Re A Bankruptcy Notice [1934] Ch 431 at 438, applied in, for example, Re Bennett ex partePreston HC Palmerston North CIV-2007-454-856, 28 October 2008.can be specified and which is of such a nature that it equals or exceeds theamount of the judgment debt [18] In respect of cross-demands, as for set-off and counterclaims, the applicantmust be able to do more than merely assert that there is an available cross-demand. Itmust be able to point to evidence before the court showing that it has a real basis forthe claimed cross-demand and that accordingly the applicant's claim to be a creditoris, to the extent of the cross-demand, in doubt. The applicant must show that there areclear and persuasive grounds.12Issues[19] The issues can therefore be formulated as follows:(a) Has Maryland established that there is arguably a genuine andsubstantial dispute as to the existence of the debt on the basis that theloan agreement is part of a "sham transaction"?(b) In addition, or in the alternative, is it reasonably arguable that Marylandhas a cross-demand that exceeds or is equal to the amount of the debtbased on the indemnity provisions in the Deed?(c) If neither of the above are arguable, is Maryland insolvent?(d) If insolvent, should a liquidator be appointed immediately?Factual Background[20] Mr He, the sole director of Maryland, has sworn an affidavit in support of theapplication to set aside. There was no evidence from Mr Zhang, the sole director ofTaihe. The evidence on behalf of Taihe comes one of its receivers, Mr ChristopherMcCullagh, who had no direct involvement in any of the discussions of which Mr Hegives evidence. Maryland submits that I should infer from this that Mr Zhang'sevidence would not assist Taihe. There may however be many reasons for Mr Zhangnot having given evidence so I do not draw such an inference for the purposes of thisapplication.12 Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA) at 274-275.[21] Mr McCullagh's affidavit raises issues with Mr He's evidence in terms ofapparent timing of some events and the entities involved. Mr He in his affidavit inreply objects to the admissibility of Mr McCullagh's comments and what he says areeffectively submissions on the content of Mr He's affidavit and on the interpretationof the Deed. It is not necessary to determine questions of admissibility as only in theclearest of cases will the court determine factual disputes in the context of applicationsto set aside a statutory demand. Furthermore, to the extent that Mr McCullagh'sevidence is submission, those submissions are repeated by Taihe's counsel. I thereforeset out Mr He's evidence on the factual background below and then discuss MrMcCullagh's criticisms in the discussion of the issues.[22] Mr He's explanation of why the loan agreement is a sham requires anunderstanding of the context in which the agreement was reached. I therefore set outin some detail the events leading up to entry into the loan agreement as Mr Hedescribes them.[23] Mr He says that he was introduced to Mr Zhang in 2015 as the owner of acompany he refers to as "IE Money". Mr He says that following that meeting theybecame friends. Mr He subsequently introduced Mr Zhang to senior management atAlibaba Group resulting in Mr Zhang obtaining an exclusive licence for Mr Zhang'scompany, IE Money, to operate Alibaba's online payment platform, Alipay, in NewZealand.[24] Mr He says Mr Zhang invited him to invest in IE Money as a way of thankinghim for making the acquisition of the Alipay licence possible. Mr He's evidence isthat he was initially reluctant but that Mr Zhang was insistent and that he was willingto guarantee Mr He's investment by giving him a put option on all shares subscribedfor plus a guaranteed return of eight per cent per annum.[25] Mr He deposes that Mr Zhang also told him that he was going to give Mr He2,500,000 shares in IE Money to show his appreciation regardless of whether Mr Heinvested in IE Money. Mr He annexes a Companies Office printout to his affidavitconfirming issue of 2,500,000 shares in IE Financial Services Limited (IFSL) on 21December 2016. It appears from this printout that Mr He's references to IE Moneyare to IFSL.[26] Following this, Mr He deposes that on 14 March 2017, in reliance on MrZhang's representations, Mr He's company, Evergreen Investment Group Ltd(Evergreen), entered into the following agreements with Mr Zhang and IFSL:(a) a subscription agreement for 4,500,000 shares in IFSL;(b) a put option whereby Mr Zhang agreed to purchase 4,500,000 shares;and(c) a share sale agreement whereby Evergreen agreed to purchase a further4,500,000 shares in IFSL from Mr Zhang conditional on IFSL obtainingNZX approval to list on the NXT market within two years of the dateof the agreement (i.e. on or before 14 March 2019).[27] Listing on the NXT market did not proceed as planned and in March 2018 MrHe agreed to waive the NZX approval condition in exchange for Mr Zhang givingEvergreen a put option in respect of the 4,500,000 new shares and indefinitelyextending Evergreen's put option in respect of the original 4,500,000 shares in IFSL.[28] IFSL did not obtain NZX approval to list on NXT prior to the NXT exchangebeing disestablished in 2019. Mr Zhang then advised Mr He that IFSL was going torestructure and list on the National Stock Exchange of Australia (NSA) instead. MrHe's evidence is that Mr Zhang later advised him that through a series of restructures,both Mr He and Evergreen's shareholdings in IFSL had been converted into shares inan Australian company known as MIE Pay Ltd (MIE Pay).[29] Mr He deposes that in approximately October 2019, Mr Zhang told him thatMIE Pay's listing with the NSA was imminent but MIE Pay needed additional fundingto complete the listing process. Mr Zhang told Mr He that he had the funds availableto inject into MIE Pay through subscription for new shares but he did not wish to doso personally. This was apparently because Mr Zhang did not want to upset the othershareholders by breaking the voting power balance and, as Mr Zhang was a directorof MIE Pay, any subscription for new shares by him would require valuation and boardapproval which would take weeks when MIE Pay urgently needed the additionalfunding.[30] Mr He says that Mr Zhang asked him whether he would be willing to helpinject additional capital into MIE Pay as bare trustee for Mr Zhang with Mr Zhangproviding all the necessary funding needed to complete the share subscription. MrHe's evidence is "[g]iven the problematic stage the overall dealings with [Mr Zhang]and [Taihe] had reached, I told [Mr Zhang] that I would help".[31] Mr He's evidence is that Mr Zhang's Australian solicitors then prepared a draftagreement for the subscription for new shares and Mr Zhang asked Mr He to approveand sign the documents as a matter of urgency. A screenshot of the WeChat messagehistory between Mr He and Mr Zhang is annexed to Mr He's affidavit with an Englishtranslation appearing to confirm this.[32] Mr He says that as he had not received funds from Mr Zhang to complete thesubscription, he called Mr Zhang via WeChat and advised him that he would only signthe agreement once the necessary funds had been received. The WeChat screenshotagain appears to confirm a call was made by Mr He to Mr Zhang at this time.[33] Mr He's evidence is that during that phone call, Mr Zhang told him that fundswould be coming from Taihe and that because Taihe had through restructuring becomea subsidiary of IE Finance Group Ltd (IEFG) which had shareholders in common withMIE Pay, Mr Zhang asked that the transaction be structured to look like a regular loanfrom Taihe to Maryland.[34] Mr He explained the transaction as follows:[Mr Zhang] stated that this was so as to not alert the other shareholders ofMIE, and at the same time to give himself some protection/security in the dealin case I did not proceed with the subscription or later refused to recognise hisbeneficial interest in the shares. Andy promised me that, as long as Irecognised his beneficial interest in those shares, the purported loan would notbe enforced by [Taihe] and that he would ask his solicitors to prepare thenecessary documents to record the trust arrangement and the promisedindemnity from both [Taihe] and him in respect of the purported loantransaction as soon as MIE was listed.[35] Mr He says he asked Mr Zhang to send through the draft loan agreement sothat he could consider the request. The WeChat screenshot referred to above appearsto confirm that Mr He sent Mr Zhang a text message to that effect.[36] The following day, Mr Zhang emailed Mr He the draft loan agreement forapproval with a copy of Mr Zhang's email attached to Mr He's affidavit. Mr He signedand returned the loan agreement to Mr Zhang on or about the same day and annexes acopy of the loan agreement to his affidavit.[37] On 30 October 2019 Mr He says that Mr Zhang caused Taihe to payNZD$541,219.32 (the equivalent of the subscription price of AUD$500,000) intoMaryland's BNZ bank account. A copy of the same day cleared payment reportappearing to evidence that payment is annexed to Mr He's affidavit. The payer nameis recorded as Taihe. Mr He's evidence is that, following receipt of writtenconfirmation of the payment, he:(a) instructed his solicitor to confirm the terms of the subscriptionagreement;(b) signed and returned the subscription agreement to HFW Australia; and(c) converted NZD$540,735.42 in his HSBC account into AUD$500,000and transmitted those funds to MIE Pay's bank account in Australia.[38] Copies of the emails and Mr He's HSBC bank statement apparently confirmingthe above steps are annexed to his affidavit.[39] Mr He explains that the reason he paid the funds out of his HSBC bank account,instead of Maryland's, was because the funds had to be paid to MIE Pay's bankaccount in Australia and Maryland's BNZ account did not have the capability to effectinternational money transfers without having to go into a bank branch.[40] MIE Pay then issued 5,000,000 ordinary shares in Mr He's name. A copy ofthe share certificate is annexed to Mr He's affidavit.[41] There was further delay in the listing of MIE Pay on the NSA. Mr He'sevidence is that Mr Zhang was not prepared to sign documents recording the trust andindemnity arrangement he had promised until after MIE Pay had been listed but MrZhang tried to alleviate Mr He's concerns by suggesting that the "debt" be transferredto a shell company. Mr He says that he started to prepare a Deed of Novation totransfer Maryland's obligations under the purported loan agreement to a "defunctcompany, Jet Faith NZ Limited". Mr He explains that he did not progress it furtherhowever "both because the directors of Jet Faith NZ Limited are my wife and herfriend and I did not want to get them into trouble by getting their company liquidated,and because events were superseded by MIE's listing on [NSA] on 18 May 2020".[42] Mr He says that following MIE Pay's listing, Mr Zhang told him that he wouldget his solicitors to prepare the necessary documents to record the trust arrangementbut failed to do so. Mr He explains that by June 2020 he was very disappointed by MrZhang's repeated failure to fulfil his promises as well as MIE Pay's lacklustreperformance on the NSA.[43] Mr He says that he told Mr Zhang that he wanted to have nothing further to dowith MIE Pay and that he asked him to buy back the IFSL shares from Mr He andEvergreen as promised. Mr He's evidence is that Mr Zhang agreed to honour hispromise and on 24 July 2020, Mr He's solicitor sent through a draft put optionagreement for Mr Zhang's approval. A copy of this email and draft agreement areannexed to Mr He's affidavit.[44] In his evidence, Mr He makes a point of noting that the 5,000,000 shares heheld on trust for Mr Zhang were not included in the draft put option agreement. MrMcCullagh comments that the draft put option agreement relates to shares in PAL TechLtd, not MIE Pay. As Mr McCullagh also records in his affidavit however, PAL Techis the new name for IFSL. Furthermore, as already noted above, Mr He's evidence isthat Mr He and Evergreen's shareholding in IFSL had been converted into shares inMIE Pay. In the context of this application, I cannot therefore discount Mr He's pointthat the shares that he holds as bare trustee were not included in the draft put optionagreement.[45] Mr He's evidence is that Mr Zhang did not in mid-2020 or at any time thereaftermeet his obligations under the put option. Mr He says that Mr Zhang never came backto his lawyer and disappeared from his social circle. A copy of an email chain betweenMr He's solicitor and Mr Zhang is attached to Mr He's affidavit showing Mr He'ssolicitor following up several times, with Mr Zhang first saying it was with his solicitorand then saying he was restructuring. Mr He explains that he became fed up withincurring legal costs trying to regularise affairs but getting nowhere so he did nothingfurther during 2021.[46] In February 2022 Mr He's evidence is that he contacted Mr Zhang anddemanded that he fulfil his earlier promises, "in particular his promise to extricate[Maryland] from the purported loan agreement". Mr He says:At the end of that confrontation, it was agreed that I would get my solicitor toprepare the necessary legal documents to record the trust and indemnityarrangement, and that [Mr Zhang] would ensure that the bare trustarrangement for the shares was wound-up of [sic] and [Maryland] dischargedfrom any obligations under the purported loan agreement. [Mr Zhang] alsoagreed that he would sign a deed recording these arrangements as soon aspossible.[47] Mr He's solicitors drafted the Deed between Mr He, Maryland, Mr Zhang andTaihe and Mr He forwarded it to Mr Zhang on 4 March 2022. Mr Zhang signed theDeed on behalf of himself and Taihe and returned it on 7 March 2022. A copy of thefully signed Deed is attached to Mr He's affidavit.[48] Recital A to the Deed records that at the request of Mr Zhang, Mr He subscribedfor 5,000,000 shares in MIE Pay, funding the purchase by "causing his company,Maryland, to enter into a loan agreement with the Beneficiary's company, Taihe ".Recital B says that Mr He and Maryland entered into these transactions in reliance oncertain assurances given to them by Taihe and Mr Zhang. Recital C then states thatthe parties are entering into the Deed to record "the bare trust arrangement" betweenMr He and Mr Zhang and the assurances that have been given by Taihe and theBeneficiary in favour of Maryland and the Trustee.[49] Mr Zhang is defined as the Beneficiary in cl 1.1 of the Deed.[50] Clause 2 of the Deed sets out a declaration of trust by Mr He in favour of MrZhang in respect of the shares and all dividends and interests accrued or to accrue. Itincludes at cl 2.2 an obligation on Mr He, subject to Mr Zhang and Taihe complyingwith their obligations under the Deed in all respects, to transfer, pay and deal with theShares, dividends and interests payable as directed by Mr Zhang.[51] Clause 3 of the Deed provides indemnities with cl 3.1 providing an indemnityby Mr Zhang in favour of Mr He and cl 3.2 importantly providing an indemnity toMaryland by both Taihe and Mr Zhang in the following terms:3.2 Taihe and the Beneficiary will at all times indemnify and keepindemnified Maryland against any and all costs, claims, actions,damages, liabilities of any kind arising out of or in connection withthe Loan Agreement, as well as Maryland's enforcement or attemptedenforcement of its rights and remedies under this deed.[52] Clause 4 provides "Beneficiary's Warranties" including an obligation in cl 4.1that before 1 June 2022 Mr Zhang would cause the shares to be sold to a third party:4.1 and that any and all monies payable by [Maryland] under the LoanAgreement will be fully repaid from the sale proceeds of the Shares(and topped-up by the personal funds of the Beneficiary should therebe a shortfall).[53] Clause 4.2 of the Deed provides that to the extent that Mr Zhang fails to complywith the above obligation, Mr Zhang would cause the shares to be transferred tohimself:4.2 and any and all remaining indebtedness, obligations and amountsof any kind whatsoever owed by Maryland under the Loan Agreementshall be transferred and assigned from Maryland to the Beneficiaryand shall be netted by Taihe against the Beneficiary's shareholder'scurrent account with Taihe as a shareholder drawing.[54] Importantly cl 5.1 provides that Mr He could resign at any time as trustee bynotice in writing subject to cl 6 of the Deed.[55] Clause 6 provides:6 Discharge of Trustee6.1 The obligations of the Trustee upon resignation or removal as trusteeunder this deed shall be discharged in full when the Trustee makesavailable to the Beneficiary the certificate or other documents of title,if any, and a form of transfer duly executed by the Trustee wherebythe Shares are capable of being transferred to the Beneficiary. Suchtransfer may be executed and delivered to the Beneficiary at any timethe Trustee so desires. The Beneficiary shall immediately uponreceipt of the documents of title and transfer lodge the same with theCompany for approval and registration, and Taihe and the Beneficiaryshall contemporaneously do all things necessary to release Marylandof its obligations under the Loan Agreement.[56] At the close of business on 1 June 2022, the day that Mr Zhang was requiredto meet the warranties in cl 4, as set out at [52], Mr He's solicitor wrote to Mr Zhangasking for confirmation that Mr Zhang's obligations would be met by the end of thatday with the email adding:Please also confirm that [Maryland's] obligations under the Loan Agreementhas already been, or will before the end of today be, fully discharged andprovide us with confirmation/evidence of the discharge.[57] Mr Zhang replied by email the next day, 2 June 2022:I confirmed that [Maryland]'s obligations under the Loan Agreement hasalready been released. The transfer of shares will take place next week.[58] Mr He's evidence is that the transfer of shares never occurred.[59] Mr McCullagh and Mr Steve Lawrence were appointed receivers of Taihe on5 July 2022. The receivers sent an email on 20 July 2022 attaching a letter demandingrepayment of the amount the receivers alleged was outstanding under the LoanAgreement. Although the principal was not yet due for payment the receivers allegedthat as the eight per cent interest payable on the first and second anniversaries of theloan had not been paid, both the outstanding interest and outstanding balance of theloan were payable. The total amount of $659,012.37 was therefore demanded to bepaid within two business days of receipt of the letter.[60] Mr He deposes that he was taken aback by the receivers' letter and immediatelyrang Mr Zhang who "promised that he would straighten matters out with thereceivers."[61] The statutory demand for $659,961.36 (including further accrued interest) wasthen served on 28 July 2022.[62] On 1 August 2022 Maryland's lawyers wrote to the receivers in response to thematters raised in the receivers' 20 July 2022 letter. Maryland's letter records that the"so-called loan was, in reality, a device initiated and requested by Taihe to enable it toprovide financial assistance to its director and ultimate controlling person", Mr Zhang,and that Maryland entered into the "purported loan transaction" at the request of Taiheand in reliance on Taihe's representations concerning the transaction and promise toindemnify it in all respects. The letter enclosed a copy of the Deed, referringspecifically to the indemnity in cl 3.2. The letter noted that the indemnity extended tolegal expenses incurred by Maryland in enforcement of its rights and remedies underthe Deed. The letter further referred to Mr Zhang's email dated 2 June 2022 (at [57])confirming that Maryland's remaining obligations under the "purported loanagreement" had been released.[63] The letter therefore sought withdrawal of the statutory demand and advisedthat otherwise an application to set aside the demand would be made with costs soughton an indemnity basis.[64] The receivers responded to this letter on 2 August 2022, stating that they didnot accept that there was never any loan from Taihe to Maryland.[65] Maryland filed its application to set aside the demand on 5 August 2022.Is it reasonably arguable that the loan agreement is a sham?Legal principles for assessing whether a sham[66] The test for assessing whether a contract is a sham was set out by the Court ofAppeal in Nisha v LSG Sky Chefs NZ Ltd. The Court was concerned with a shamemployment contract but the Court applied the established test for a sham trust, asfollows:13[12] First, the correct test for analysis of an allegedly sham transaction isset out authoritatively in this Court's decision in Clayton v Clayton, in theseterms:13 Nisha v LSG Sky Chefs NZ Ltd [2016] NZCA 21 at [12].[61] To determine whether a particular transaction constitutes asham, the court will focus on the actions and intentions of theparties to the transaction and compare them with the acts doneor documents created. In doing so, the court will not berestricted to the legal form of the transaction, but will examineits substance in light of all the relevant evidence relating tothe parties' intentions. As the issue will be whether thetransaction was intended to be genuine, the focus will be onthe actions and words of the parties, both contemporary andsubsequent.[62] This approach reflects equity's preference for substance overform and the conceptual basis of the sham doctrine which"lies in the court's ability to see through acts or documents"intended to disguise or conceal the truth of the matter.The consequence of a finding that a purported contract is a sham is the contractwill be inoperative to the extent the parties did not intend to create genuinelegal relations (footnotes omitted)[67] Counsel for both parties relied on the English decision, Snook v London andWest Riding Investments Ltd, where Diplock LJ held:14 [the legal concept of "sham"] means acts done or documents executed bythe parties to the "sham" which are intended by them to give to third partiesor to the court the appearance of creating between the parties legal rights andobligations different from the actual legal rights and obligations (if any) whichthe parties intended to create [F]or acts or documents to be a "sham", withwhatever legal consequence follow from this, all parties thereto must have acommon intention that the acts or documents are not to create the legal rightsand obligations which they give the appearance of creating.[68] Taihe's submissions included a later passage in the same paragraph in DiplockLJ's judgment where he went on to say:No unexpressed intentions of a "shammer" affect the rights of a party whomhe deceived. There is an express finding in this case that the defendants werenot parties to the alleged "sham". So this contention fails.[69] Counsel for Taihe further relies on National Westminster Bank plc v Joneswhere Lord Neuberger held:15Because a finding of sham carries with it a finding of dishonesty, becauseinnocent third parties may often rely upon the genuineness of a provision or14 Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at 802 and see Stone (Inspectorof Taxes) v Hitch [2001] EWCA Civ 63 (CA) at [1]–[2], [64]–[69] and [85]–[86].15 National Westminster Bank plc v Jones [2000] EWHC 1565 (Ch) at [59].an agreement, and because the court places great weight on the existence andprovisions of a formally signed document, there is a strong and naturalpresumption against holding a provision or a document a sham.Is a sham reasonably arguable on the facts?[70] I consider that it is reasonably arguable on the facts that the Loan Agreementis a sham transaction as it is arguable the Loan Agreement gives the appearance ofcreating legal rights and obligations between the parties different from the actual legalrights and obligations the parties intended to create (see Snook above at [67]).[71] Taihe submits that Maryland's affidavits contain no contemporaneousdocuments in support of its contentions that it entered into the Loan Agreement as partof a "sham transaction". However, there are emails and screenshots of WeChatmessages and phone calls annexed to Mr He's affidavit that appear to be consistentwith Mr He's version of events. Mr He has also explained why the Deed was notcontemporaneous with the Loan Agreement. Furthermore, the fact that the LoanAgreement does not record that it was a trust arrangement is again consistent with itbeing part of a "sham transaction' — if it recorded that there was a trust arrangementit would defeat the purpose of structuring it "to make it look like a loan".[72] Taihe submits that the background to the statutory demand is relevant,explaining that Taihe was placed into receivership by third party secured creditors aftertheir funds had been advanced to various parties, including Maryland, on allegedlyuncommercial terms without their knowledge. As the receivers and the securedcreditors who appointed them are not parties to the alleged "sham transaction" Taihesubmits they should be able to rely on the face of the Loan Agreement.[73] But the party that issued the demand is Taihe, not the receivers or the securedcreditors that appointed them. Contrary to the position in Snook discussed above,Taihe is alleged to have been a party to the alleged "sham."[74] Furthermore, in his reply affidavit, Mr He deposes that he and Maryland hadno knowledge of or involvement in the matters involving Taihe's secured creditors.Mr He's evidence is not contradicted and therefore I am not prepared to draw anyadverse inferences from the context set out.[75] In addition, Taihe submits that the actions taken by Mr He to extricateMaryland from the Loan Agreement and the Deed itself supports Taihe's position thatthe Loan Agreement is not a "sham transaction." But the Recitals to the Deed explainthat the Loan Agreement was entered into in reliance on assurances now documentedin the Deed.[76] The operative clauses to the Deed, in addition to the indemnity which I discussfurther below, include cl 5 of the Deed which allows Mr He to resign at any time(subject to cl 6) and if he does so Maryland is released from all its obligations underthe Loan Agreement. Clause 6 simply requires Mr He to deliver an executed form ofshare transfer to Mr Zhang "at any time [Mr He] so desires". Immediately uponreceipt, Mr Zhang is required to lodge the transfer with MIE Pay for approval andregistration "and Taihe and [Mr Zhang] shall contemporaneously do all thingsnecessary to release Maryland of its obligations under the Loan Agreement" (emphasisadded). Mr Zhang appears to confirm by his email dated 2 June 2022 that Marylandis released of its obligations under the Loan Agreement.[77] Taihe further submits that the loan to Maryland was made to defeat disclosureobligations regarding funding of MIE Pay — a company in which Taihe says both MrZhang and Mr He have an interest and that Maryland ought not to be able to rely onits admitted dishonest motive. Whether Maryland had a dishonest motive or not is nota matter that can be determined in this application to set aside on the basis of theevidence that has been filed. I do not therefore consider the implications of such anargument further.[78] Finally, Taihe submits that even if the loan agreement is void andunenforceable as a sham transaction (which Taihe denies), Taihe would have a clearright to demand immediate repayment of the funds advanced to Maryland. Thissubmission is made on the basis that if it is not a loan agreement Taihe says it is not atall clear what the transaction was intended to be. But this submission ignores the termsof the Deed which set out the circumstances in which sums owing under the LoanAgreement are payable. Those circumstances do not appear to include a right todemand immediate repayment including because the Deed includes an indemnity incl 3.2 that extends to "liabilities of any kind arising out of or in connection with theLoan Agreement." I discuss the interpretation of the indemnity further below.[79] On the evidence filed, I consider that it is reasonably arguable that the LoanAgreement is part of a "sham transaction" and so there is a substantial dispute as towhether the Loan Agreement can be relied upon as establishing a debt due byMaryland. The application to set aside the demand ought therefore to be granted onthe basis that Maryland has brought itself within s 290(4)(a).Is it reasonably arguable that Maryland has a cross-demand that exceeds or isequal to the amount of the debt because of the indemnity provisions in the Deed?[80] Because of the view that I have come to on the first ground I do not need toconsider this second ground, but I do so briefly as it supports the position that thestatutory demand ought to be set aside.[81] Taihe does not challenge the authenticity of the Deed. It instead submits thatas a matter of construction and in light of the factual matrix of the Deed, cls 2.1, 2.2,3.2, 4.1 and 4.2 interpreted together mean that the indemnity under cl 3.2 is limited tocircumstances where the shares have been sold or steps are required to be taken byMaryland to enforce claims against Mr Zhang and not Taihe.[82] The principles applying to the interpretation of a contract are settled. Ininterpreting the Deed, a court is required to adopt an objective approach to ascertain"the meaning which the document would convey to a reasonable person having all thebackground knowledge which would reasonably have been available to the parties inthe situation in which they were at the time of the contract".16 In doing so the court isnot concerned with uncommunicated subjective intention of one of the parties to acontract.17 In addition, while issues relating to admissibility are determined by the lawof evidence, they are not to be determined independently of the law of contractualinterpretation as it is the latter which ultimately determines what is relevant.1816 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL)at 912 per Lord Hoffmann, cited in Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC147, [2015] 1 NZLR 432 at [60].17 Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696 at [48].18 At [54]–[55].[83] Taihe submits that Maryland's interpretation of the Deed is:(a) a commercially absurd interpretation of the kind that gave the Courtconcern in E & E Developments Ltd v Housing New Zealand Ltd,19noting that the key differences in this case are that Maryland'sinterpretation:(i) is entirely inconsistent with business common sense andpractice: that when funding is provided, there is an expectationthat funding will be repayable; and(ii) means that Maryland has no liability to Taihe, but Mr He isentitled to retain the shares; and(b) plainly contrived to support an argument that is inconsistent with theLoan Agreement.[84] Taihe continues that if the Court accepts Maryland's interpretation, this groundto set aside the statutory demand is in any event academic as until the shares are sold,Taihe's liability under the purported indemnity cannot be resolved.[85] The wording of cl 3.2 is very broad. It provides that both Taihe and Mr Zhangwill "at all times" indemnify Maryland (with cl 3.1 providing a separate indemnity toMr He). In E & E Developments Ltd v Housing New Zealand Ltd the Court of Appealin fact held that it is inappropriate to be definitive on the question of whetherinterpretations put forward by opposite parties are commercially absurd in the contextof a summary judgment application.20 That is equally the case here in the context ofan application to set aside a statutory demand. Taihe's submissions refer to the factualmatrix of the Deed being relevant to interpretation and at this stage that matrix has notbeen fully explored.19 E & E Developments Ltd v Housing New Zealand Ltd [2012] NZCA 7.20 At [21].[86] Furthermore, Taihe's submissions do not address cl 5 of the Deed. Clause 5allows Mr He to resign as trustee at any time, following which Mr Zhang and Taiheare required to immediately take all steps to release Maryland from its obligationsunder the Loan Agreement, provided the procedure outlined at [76] is followed. It isnot therefore only where the shares have been sold or steps have been taken byMaryland to enforce claims against Mr Zhang that the indemnity applies, as Taihesubmits.[87] In these circumstances I find that it is reasonably arguable that the cl 3.2indemnity may apply so that Maryland has a cross-demand that is at least equal to theamount of the statutory demand, bringing itself within s 290(4)(b).Solvency issues[88] Because I have reached the view that the statutory demand ought to be set asideI do not go on to consider the issues relating to Maryland's solvency.Result[89] Maryland's application to set aside the statutory demand served on it by Taiheand dated 28 July 2022 is granted on the grounds that Maryland has established thatthere is arguably:(a) a substantial dispute as to whether the debt demanded is due, in termsof s 290(4)(a) of the Companies Act; and(b) a cross-demand available to Maryland as a result of the indemnity incl 3.2 of the Deed equal at least to the alleged debt, in terms ofs 290(4)(b).Costs[90] As Maryland has succeeded, in the usual course it will be entitled to costs.Maryland seeks costs on an indemnity basis pursuant to the indemnity in cl 3.2 of theDeed. I did not hear fully from the parties on costs so ask that the parties confer and,only if agreement cannot be reached, file memoranda, on behalf of Maryland within20 working days of this judgment and of Taihe within a further 10 working days._________________________Associate Judge Sussock