Statutory demand – s 290 of the Companies Act 1993, setting aside of statutory demand – s 290(4) (a) substantial dispute regarding debt – sham transaction – s 290(4) (b) counterclaim, set-of, cross demand – indemnity – s 290 (4) discretionary – applicant’s solvency.

Maryland Bassett Company Ltd v Taihe Innovation Management Ltd (in rec) [2023] NZHC 801 [17 April 2023 (Associate Judge Sussock)

This is a successful application by Maryland Bassett Company Ltd under s 290(4) of the Companies Act 1993 to set aside a statutory demand issued by Taihe Innovation Management Ltd (in rec).

Receivers were appointed to Taihe on 5 July 2022 and a statutory demand was issued on 28 July 2022 for repayment of a loan from Taihe to Maryland. Maryland claimed under s 290(4) (a) that there was an arguable and substantial dispute in respect of the debt, claiming the loan agreement was a sham. Maryland also claimed under s 290(4) (b) that it was indemnified for the debt by the terms of a deed of trust. Taihe disputed both these claims.

The facts are based on an affidavit from Maryland’s director and shareholder, Donny He, because Taihe did not adduce evidence.

In 2015, He met Andy Zhang, Taihe’s director and shareholder. They formed a social and business relationship after He introduced Zhang to some senior managers. The introduction enabled Zhang to obtain an exclusive licence for his company, E Money. Zhang rewarded He by selling and giving him shares in E Money. Zhang was endeavoring to list E Money on the NXT.

The NXT was disestablished in 2019 before E Money was listed. Zhang then decided to list on the National Stock Exchange of Australia (NSA). Before the listing was completed, Zhang informed He that E Money needed an urgent injection of funds to complete the listing. To facilitate this, Zhang asked He to purchase E Money shares as Zhang’s bare trustee.

Zhang had the funds but if he owned the shares, it would upset the other shareholders. Because he was the sole director, Zhang was also concerned that the required additional procedures would delay the injection of funds even more. Zhang would provide He with the funds through a loan to Maryland from Taihe. He would then purchase the shares.

Zhang, Taihe, He, and Maryland would sign the deed recording the trust and indemnifying Maryland from all its obligations under the agreement. The shares would eventually be transferred to Zhang. The transaction was completed, and the deed was eventually signed by all parties in March 2022.

Taihe submitted the receivers and the secured creditors were innocent third parties and should therefore be able to rely on the loan. Taihe said it had a right to demand immediate repayment and that the indemnity clauses applied only to the sale of Taihe shares.

Applicable principles – 10 working days to file application – court discretion to set aside demand – applicant to establish arguable dispute – proof not necessary but mere assertion insufficient – dispute should be resolved in civil proceedings before demand -counterclaim must be reasonably arguable in all the circumstances -not usually possible to resolve disputed questions of fact by affidavit -court not to accept evidence uncritically – s 290 appearance test low threshold – cross-demand wider then counterclaim or set-off -not applicable to infer anything from failure to give evidence – the case must be clear for the court to determine factual disputes in such proceedings -sham gives the appearance of creating legal rights different from actual legal rights intended – determination of motives not necessary to determine application – contract law relevant to the determination of the admissibility of evidence – applying s 290(4) inappropriate to conclude whether interpretations were commercially absurd.

Held:

• It is reasonably arguable the loan agreement is a sham
• The demand was issued by Taihe, not innocent third parties
• The deed does not provide for immediate repayment
• Zhang appeared to confirm on 2 June 2022 that Maryland was released from its obligations under the loan agreement
• Maryland has a cross-demand

Maryland Bassett Co Ltd v Taihe Innivation Management Ltd(in rec)