Mangawhai Property Limited v Chen Hong Co Limited (in liq) [2018] NZHC 2961 (15 November 2018)

Last Updated: 20 November 2018

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-1865 [2018] NZHC 2961

BETWEEN	MANGAWHAI PROPERTY LIMITED Applicant
AND	CHEN HONG CO LIMITED (In Liq) Respondent

Hearing:	15 November 2018
Appearances:	J Y Leenoh with M G Kirkland for the Applicant A S Botterill with S M Chambers for the Respondent
Judgment:	15 November 2018

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

K3 Legal Limited (M Kirkland/J Y Leenoh), Auckland, for the Applicant Waterstone Insolvency (A S Botterill), Auckland, for the Respondent

MANGAWHAI PROPERTY LIMITED v CHEN HONG CO LIMITED (In Liq) [2018] NZHC 2961 [15

November 2018]

[1] On 20 August 2018, Cheng Hong Co Ltd (in liq) served a statutory demand under s 289 of the Companies Act 1993 on Mangawhai Property Ltd requiring payment of $100,000. On 31 August 2018, Mangawhai Property Ltd filed and served its application under s 290 of the Companies Act to set aside the statutory demand. That was within the 10 working days’ limit. At the first call of the application on 21 September 2018, I directed the hearing today. In giving those directions, I extended the time for complying with the statutory demand pending further order.

[2] On 6 October 2018, Cheng Hong Co Ltd received $100,000 in reduction of amounts it alleged Mangawhai Property Ltd owed it. Thus, the debt in the statutory demand has apparently been paid and there seems to be little to argue over barring any questions of costs. However, Cheng Hong Co Ltd says that I should ignore the
$100,000 which it acknowledges it has received. Instead, I should uphold the demand and consider what orders I should make under s 291 of the Companies Act.

[3] Mangawhai Property Ltd’s ground for applying to set aside the statutory demand is that there is a substantial dispute as to its liability to Cheng Hong Co Ltd. At the time it made the application, potential areas of dispute were:

(a) whether Cheng Hong Co Ltd was the correct creditor. There was another potential claimant called Niu Niu Bi Co Ltd;

(b) it contended that it had made a part-payment of its liability to Cheng Hong Co Ltd; and

(c) it contested interest claimed by Cheng Hong Co Ltd.

It had already issued a proceeding raising these issues for substantive determination, CIV-2018-404-1737. So far as the statutory demand is concerned, one way or another those matters of dispute have now been resolved as matters of contention.

[4] Mangawhai Property Ltd owns land at Hakaru, between Kaiwaka and Mangawhai in Northland. For some years it has been subdividing the property into
residential lots and lifestyle blocks. Mangawhai Property Ltd’s director is Yan (Bella) Lin. In carrying out its subdivision, Mangawhai Property Ltd has received finance from various lenders. Cheng Hong Co Ltd is one of those lenders. It has had second mortgage ranking as a secured creditor against the properties of Mangawhai Property Ltd for various unsold lots. The evidence shows a first-ranking lender, Inno Capital No.3 Ltd and its assignee Inno Capital No.4 Ltd. Cheng Hong Co Ltd was incorporated in May 2016. Its shareholder is Hong Chen. He is believed to live in China. The director of the company is Jiawen Mao. The company went into insolvent liquidation on 15 December 2017. The liquidators are responsible for the issue of the statutory demand in this proceeding.

[5] The evidence includes a record of the liquidators’ interview of Jiawen Mao. The record suggests that Jiawen Mao had little understanding of the affairs of the company. Her response to many questions was that her partner, Augustine Lau, ran the business, even though he was not a director. Mr Lau has gained some notoriety. He is now bankrupt and serving a two-year term of imprisonment for offences under the Resource Management Act. He is more commonly known in this court for vexatiously lodging caveats against properties.

[6] Mangawhai Property Ltd says that Cheng Hong Co Ltd made two loans to it – one under the agreement of 9 August 2016 and the second under an agreement of 17 July 2017. The liquidators have clarified that the statutory demand relies only on the agreement of 9 August 2016. The evidence refers to documents for a loan of
$110,000 allegedly made on 2 November 2016, but Mangawhai Property Ltd says that it never entered into any such agreement. It says that the signatures of its director and her mother in the document are forged. It has put it in evidence a report from a document examiner to support its assertions of forgery. Cheng Hong Co Ltd does not rely on that disputed loan.

[7] The statutory demand has a recital which says that Mangawhai Property Ltd is indebted to Cheng Hong Co Ltd (in liq) “for at least the sum of $100,000 for a debt that has arisen from loan advances”. Details of the loan are attached to the statutory demand. The demand is in regular form. It requires compliance by paying the sum of
$100,000, entering into a compromise under Part 14 of the Companies Act,
compounding with Cheng Hong Co Ltd, or giving a charge over its property to secure payment of the debt to the reasonable satisfaction of Cheng Hong Co Ltd. Cheng Hong Co Ltd is a secured creditor of Mangawhai Property Ltd. That does not bar it from issuing a statutory demand. That is made clear by s 240 of the Companies Act.¹

[8] There are two attachments to the statutory demand. The first is a loan agreement. The loan agreement is not in standard form. It shows the creditor/lender as Cheng Hong Co Ltd and the debtor/borrower as Mangawhai Property Ltd/Yan Lin. The agreement is dated 9 August 2016 and includes the following clauses 1–6:

1 Total loan amount: $693,000

2 Drawdown before 9.8.2016: $93,000

3 Drawdown at 9.8.2016: $600,000

4 Repayment date: 9.9.2016

5 Interest from 9.8.2016 to 9.9.2016: $3,000

6. Repayment penalties after 9.9.2016 will be 120% per annum interest. Priority sum amount: 1 million per title and mortgage memorandum all obligation 2015/4328.

Clause 7 allows mortgages to be registered over certain named lots belonging to Mangawhai Property Ltd. There are additional clauses which are not relevant for this case. The language suggests that English is not the first language of the draftsman.

[9] The other attachment is a trust account record of the law firm acting for Cheng Hong Co Ltd. It shows a payment of $600,000 to the lawyer for Mangawhai Property Ltd on 10 August 2016.

¹ 240 Interpretation

(1) In this Act, unless the context otherwise requires, —

creditor means a person who, in a liquidation, would be entitled to claim in accordance with section 303 that a debt is owing to that person by the company; and includes a secured creditor only—

(a) for the purposes of sections ...289; ...
[10] A letter accompanied the statutory demand. The letter includes this:

We enclose a statutory demand on MPL for the sum of $100,000. For the avoidance of doubt, the liquidator of CHCL view is that much more is owed by MPL to CHCL (as per PLA notices dated 20 July 2018).

For the avoidance of doubt, the amount of the statutory demand in no way prejudices CHCL’s further claims on MPL for the remaining balance. In the interests of pragmatism, at least the amount demanded should not be disputable by MPL.

[11] Clearly the liquidators of Cheng Hong Co Ltd appreciated that at least some of the amounts that they were claiming from Mangawhai Property Ltd were disputable. They considered that there was an amount for which there could not be reasonable grounds for dispute. They fixed that amount at $100,000. In doing that, they were saying that there ought to be compliance with the statutory demand and, if there was not compliance, the presumption of insolvency would arise. If the demand were upheld after an unsuccessful challenge under s 290, the company might face orders under s 291 of the Companies Act for an immediate liquidation for time to be fixed for payment and if the debt were not paid within that time Cheng Hong Co Ltd could apply for a liquidation order.

[12] One of the matters in dispute is how much was actually drawn down. The face value of the loan is $693,000. The evidence for Mangawhai Property Ltd is that only
$600,000 was drawn down. Cheng Hong Co Ltd says that the amount of the loan is in fact $693,000, but the liquidators have not adduced any evidence to show the actual drawdown of the extra $93,000. That is a legitimate matter of dispute between the parties. The liquidators have recognised that by not asserting that there can be no dispute over the $693,000 figure.

[13] Another matter of dispute is whether there has been any repayment under the loan. Mangawhai Property Ltd says that it paid $505,100 in reduction of the debt in November 2016. The liquidators do not accept that. They admit that a payment of
$505,100 was made by Mangawhai Property Ltd to the lawyer acting for Cheng Hong Co Ltd, but they say that that lawyer was also acting for Liansen Mao (father of Jianwen Mao). He had lodged a caveat against the properties. The liquidators point out that his caveat was removed on 30 November 2016, and they contend that the
$500,000 payment went to a reduction of Mangawhai Property Ltd’s debt to
Liansen Mao, not to any indebtedness to Cheng Hong Co Ltd. On the other hand, Mangawhai Property Ltd refers to a discharge of mortgage made at the same time, and a banking record showing an apparent payment to Hong Chen, the shareholder of Cheng Hong Co Ltd.

[14] Another matter of dispute between the parties is the interest rate of 120 per cent per annum – a startling aspect to the transaction. Mangawhai Property Ltd contends that that interest rate gives grounds for obtaining relief under Part 5 of the Consumer Finance and Credit Contracts Act.

[15] Finally, there is the matter of Niu Niu Bi Co Ltd. That company was incorporated in late November 2017, very shortly before Cheng Hong Co Ltd was ordered into liquidation. Niu Niu Bi Co Ltd and Mangawhai Property Ltd were parties to a deed and an apparent agreement for sale and purchase. I have found it difficult to understand the transaction clearly. It may be considered an assignment of a debt for a nominal consideration. It may be considered an agreement for sale and purchase of lots within the subdivision. There are provisions pointing both ways.

[16] For this case, Mangawhai Property Ltd regarded Niu Niu Bi Co Ltd as claiming as assignee of the debts Mangawhai Property Ltd owed to Cheng Hong Co Ltd. Niu Niu Bi Co Ltd lodged a caveat against the properties owned by Mangawhai Property Ltd to protect its interests. Mangawhai Property Ltd took steps to have the caveat lapse. Niu Niu Bi Co Ltd began an application to sustain the caveat. That proceeding was resolved with undertakings that allowed the caveat to lapse. Mangawhai Property Ltd undertook to hold the proceeds for sales then pending, along with the proceeds of sales of three remaining lots, to be held by its solicitors after paying off the first mortgagee, sales costs and legal costs. The first four sales were settled in early April 2018. Partial discharges of mortgage were granted to enable the sales to be completed. The liquidators of Cheng Hong Co Ltd consented to the net settlement proceeds being held on trust pending resolution of the disputes.

[17] When Mangawhai Property Ltd began the application to set aside the statutory demand, its lawyers held some $222,000 in their trust account. According to written submissions for Mangawhai Property Ltd, that amount has reduced. A much lower
sum is held. The liquidators have queried the reductions. I am not required to resolve that issue. I encourage the lawyers for Mangawhai Property Ltd to disclose what transactions have been carried out on their trust account so that there can be a clear accounting for funds held on trust under those undertakings.

[18] Because Niu Niu Bi Co Ltd asserted that it was the creditor to be paid under the loan agreement, and because the validity of the transaction in December 2017 was not clear, Mangawhai Property Ltd pleaded that there was a genuine doubt as to the correct payee.

[19] In the meantime, the liquidators asserted rights they believed Cheng Hong Co Ltd held against Mangawhai Property Ltd. They served notices under s 119 of the Property Law Act 2007. They claimed payment of the face value of the principal under the loan agreement of August 2016 and the later loan agreement of July 2017, plus interest at the default rates at 120 per cent per annum. The payment they required to remedy defaults was $2,246,753.40. They required that to be paid by 9 August 2018.

[20] In response, Mangawhai Property Ltd began another proceeding, CIV-2018- 404-1737. Cheng Hong Co Ltd is the first defendant, and Niu Niu Bi Co Ltd is the second defendant. Mangawhai Property Ltd seeks determinations of a number of questions:

(a) whether it should pay Cheng Hong Co Ltd or Niu Niu Bi Co Ltd;

(b) whether the alleged agreement of 2 November 2016 was a forgery;

(c) it seeks relief against oppression for the interest rate of 120 per cent per annum for the default interest rate; and

(d) whether the $505,100 payment om 30 November 2016 went in reduction of its indebtedness to Cheng Hong Co Ltd.

It also seeks determinations for aspects of the loan agreement of July 2017. Mangawhai Property Ltd applied for interim relief. An accommodation was reached, which I will refer to shortly.
[21] In the meantime, Mangawhai Property Ltd had entered into agreements to sell two further lots in the subdivision, lots 22 and 23. The liquidators were satisfied that those sales were bona fide arm’s length sales to a purchaser with no connection to any of the parties. The liquidators adopted those sales under s 179 of the Property Law Act 2007. That led to arrangements which were recorded in a consent memorandum to the court on 4 September 2018 in the proceeding CIV-2018-404-1737. The consent memorandum recorded the issue of the Property Law Act 2007 notices, the agreements to sell lots 22 and 23, Cheng Hong Co Ltd’s adoption of those agreements under s 179, and the parties’ wishes not to impede the sales and to allow the transfer to be carried out to preserve the value of the agreements and sales. Clause 2.5 of the consent memorandum says:

2.5(c) From the settlement proceeds a payment of $100,000 will be made to the first respondent. This payment is made as a deduction of the current amount claimed by the first respondent and is without prejudice to them.

[22] Other proceeds of sale were to be held in the trust account of Vlatkovich and McGowan, independent solicitors who did not act for any of the parties in this proceeding. Importantly, Niu Niu Bi Co Ltd is a party to the joint memorandum and consented to the payment of $100,000 to Cheng Hong Co Ltd under clause 2.5(c). The sales settled. Apparently $425,000 has been held in the trust account of Vlatkovich and McGowan, pending further resolution, and $100,000 was paid to Cheng Hong Co Ltd.

[23] In the meantime, the liquidators took steps to deal with Niu Niu Bi Co Ltd. The liquidators served on Niu Niu Bi Co Ltd a notice under s 141 of the Companies Act 1993. That provides that a transaction entered into by a company in which a director of the company is interested may be avoided by the company at any time within three months after the transaction is disclosed to shareholders. The transaction cannot be avoided if the company received fair value under it. The liquidators rely on the transaction with Niu Niu Bi Co Ltd as being for nominal consideration only. Jiawen Mao was both a director of Cheng Hong Co Ltd and Niu Niu Bi Co Ltd at the time of the transaction. The liquidators point out that the shareholders did not approve the transaction under s 129 of the Companies Act. Although they have not sought to avoid the transaction under the voidable transaction provisions of the Companies Act,
there were arguable grounds for challenging the transaction under that head as well, or as a transaction to defeat creditors under the Property Law Act 2007.

[24] Lawyers acting for Niu Niu Bi Co Ltd advised the liquidators on 3 October 2018 that they accepted the validity of the notice under s 141 and that Niu Niu Bi Co Ltd no longer relied on that transaction. As between Cheng Hong Co Ltd and Niu Niu Bi Co Ltd, that issue has been resolved. The setting aside of that transaction is consistent with Niu Niu Bi Co Ltd giving its consent in the memorandum in September 2018.

[25] Given those facts, there is some sense to the statutory demand. The liquidators have accepted that there are proper grounds for dispute as to the interest payable under the loan agreement of August 2016. They have recognised that there is a dispute as to payment of the $500,000 in November 2016.

[26] There were proper grounds for Mangawhai Property Ltd to query whether it should pay Cheng Hong Co Ltd or Niu Niu Bi Co Ltd when it was served with the statutory demand. That matter is no longer in dispute, especially in the light of the consent memorandum of 6 September 2018.

[27] Mangawhai Property Ltd had one genuine ground for challenging the statutory demand. That was the matter of the identity of the creditor. That question has been resolved while this application has been pending. During the same time, Cheng Hong Co Ltd has received $100,000 in reduction of the amount it claims under the Property Law Act notice and is due under the agreements of August 2016 and July 2017. In his written submissions, Mr Botterill provided a calculation to show that the amount now payable to Cheng Hong Co Ltd, as at the date of his submissions, is $2,157,368.93.

[28] The question is how to regard the payment of $100,000 made under cl 2.5(c) of the consent memorandum of 4 September 2018. Mangawhai Property Ltd’s position is plain and simple. The statutory demand required payment of $100,000 as an undisputable portion of its liability to Cheng Hong Co Ltd; Cheng Hong Co Ltd has received $100,000 in reduction of that liability; therefore the requirements of the statutory demand have been met.
[29] Cheng Hong Co Ltd puts the matter differently. It points out that there was a sale by a mortgagee arranged by adopting agreements under s 179 of the Property Law Act. In other words, it made the sales itself, not Mangawhai Property Ltd, and therefore there was no payment by Mangawhai Property Ltd in reduction of its liability. That ignores the substance of what happened. Various mechanisms are available under which a mortgagor’s liability to a mortgagee may be reduced. A mortgagor may make payments in the ordinary course of business so that liabilities are eventually paid off. Another way is to sell the property and apply the proceeds of sale to discharge its indebtedness. A mortgagee, after default, can issue notices under s 119 of the Property Law Act and it may then exercise a power of sale itself. In that event, it will be paid the amounts owing to it out of the proceeds of sale, following the order of priority under s 185 of the Property Law Act. In all these cases, there are payments received by the mortgagee which reduce the indebtedness of the mortgagor to the mortgagee. In some cases the payments are made by the mortgagor directly. In other cases the payment comes out of proceeds of sale of the property. The same thing happens under s 179. Indebtedness is reduced, although under s 179 it is carried out by the mortgagee having adopted agreements for sale and purchase entered into by the mortgagor. What is common throughout is that indebtedness is reduced. Clause 2.5(c) recognises that. When it says that the payment is a deduction of the current amounts claimed by the first respondent and without prejudice to them, that recognises that Cheng Hong Co Ltd says that it is entitled to more than the $100,000 and that, by accepting the $100,000, it was not giving away its rights to ask for more. At the same time, it was a reduction of indebtedness of $100,000 claimed under the statutory demand. The payment out of the proceeds of sale not only is partial satisfaction of any liability payable under the loan agreements but is also a payment for which the statutory demand had been made, the undisputable portion of the debt.

[30] In submissions, Mr Botterill argued that the statutory demand had not been satisfied because there was further indisputable debt owed by Mangawhai Property Ltd to Cheng Hong Co Ltd. He asked me to look more closely into the question of the payment of the $500,000. He presented an argument that I should find conclusively that that payment was made to discharge any liability to Liansen Mao rather than any liability to Cheng Hong Co Ltd.
[31] Clearly, the liquidators recognised that that amount was disputable when they issued the statutory demand. Having seen the evidence and heard submissions, I consider that was the right call. The liquidators ought not to be allowed to change course. After having issued a statutory demand for an amount which they considered to be indisputable, they cannot contend that there are further amounts that are indisputable for which they can require further payments before the statutory demand is satisfied. That would, in effect, involve re-writing the statutory demand and increasing the amounts payable from $100,000 to $200,000. The court has to consider the statutory demand on the terms on which it was made. It cannot re-write the statutory demand during an application under s 290 to impose a greater burden on the debtor company.

[32] I am accordingly satisfied that Mangawhai Property Ltd has complied with the statutory demand. It did so promptly after the lawyers for Niu Niu Bi Co Ltd accepted the validity of the s 141 notice. The legitimate ground of dispute for challenging the statutory demand was resolved while the period for complying for the notice had been extended. There has accordingly been compliance with the statutory demand. In those circumstances, the appropriate order to make is to declare that the statutory demand, having been satisfied, cannot be relied upon to give rise to a presumption of insolvency. The application is granted to that extent.

[33] On costs, Ms Leenoh seeks indemnity costs. If I am to consider an application for indemnity costs I ought to hear full argument from counsel. I direct the Mangawhai Property Ltd to file submissions in support of costs within five working days, and I direct Cheng Hong Co Ltd to file its submission in response within a further five working days. If indemnity costs are sought, I require copies of invoices and any supporting invoices for disbursements. I ask counsel to address any question of GST.



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Associate Judge R M Bell