The Interplay of Cryptocurrency with Insolvency Law: Singapore High Court clarifies that cryptocurrency liabilities are a debt under the Insolvency, Restructuring, and Dissolution Act 2018

Introduction

• The world of cryptocurrencies and blockchain technology has witnessed exponential growth and widespread adoption in recent years.
• Restructuring and corporate recovery involving crypto assets require careful consideration of regulatory compliance, asset valuation, creditor rights, and the unique challenges of managing digital assets. The complexities of blockchain-based assets can pose additional hurdles during insolvency proceedings or restructuring efforts.
• The Singapore High Court has lately been seeing novel disputes involving cryptocurrencies. In this case update, we examine one such recent case.
• The definition of “debt” under section 125(2)(c) of the Insolvency, Restructuring, and Dissolution Act 2018 (“IRDA”) was clarified by the Singapore High Court in the recent case of Aaron Loh Cheng Lee and Others v. Hodlnaut Pte Ltd [2023] SGHC 323 to include obligations incurred in the form of cryptocurrency to creditors. This resulted in the winding up of Hodlnaut Pte Ltd.

Background facts

• The Claimants, who were interim judicial managers of the defendant company, Hodlnaut Pte Ltd (“the Company”), filed an application to wind up the Company under s. 125(2)(c) of IRDA.
• The Company was a Singapore-based cryptocurrency trading platform where users could deposit cryptocurrencies and earn interest on them. Accordingly, a substantial portion of its assets comprised cryptocurrencies and it correspondingly owed its users substantial obligations to repay cryptocurrencies.

Parties’ Arguments

• The Claimants argued that the Company was cash flow insolvent, owing to its current liabilities (which included its liabilities to repay cryptocurrencies) exceeded its current assets.
• The directors of the Company (“Directors”) sought to resist the winding up application, arguing that the cryptocurrencies held from various creditors does not fall within the definition of “debt” under the IRDA, and that it only includes liabilities arising out of fiat money or actual money.
• Furthermore, the Directors also contended that its liability to repay its creditors cryptocurrencies had not yet arisen as the Company imposed a halt on withdrawals by its users, and the obligation to pay its cryptocurrency creditors had not materialised.

The Singapore High Court’s Decision – Does Cryptocurrency amount to a “debt” under the IRDA?

• The court ruling in favour of the Claimants, held that cryptocurrency liabilities can amount to debt under s. 125(2)(c).
• The High Court observed that the test of cash flow insolvency as set out in the Court of Appeal’s decision in Sun Electric Power Pte Ltd v RCMA Aasia Pte Ltd [2021] 2 SLR 478 is a broad one, and that the Court ought to look at the “holistic position of the company”. This includes not just monetary and liquidated claims but also claims on the “non-monetary assets of the company, though which may ultimately be payable in money”.
• The High Court distinguished the present case from Algorand Foundation Ltd v Three Arrows Capital Pte Ltd (HC/CWU 246/2022) (“Algorand”), where the General Division of the High Court held that a debt in cryptocurrency did not constitute a money debt capable of fulfilling the conditions for a statutory demand under s. 125(2)(a). In Algorand, the winding up application was made under s. 125(2)(a), which involves “indebtedness” measured by reference to a specific amount of money on a specific claim (as opposed to the more holistic approach under s. 125(2)(c)).
• The High Court highlighted the fact that a debt might be defined in money or money’s worth does not mean that the debt arises on when actual quantification of assets in monetary terms is determined through court proceedings. Holdings of various kinds of assets — such as wine, commodities, or even non-fungible tokens (NFTs) — can be assessed by the court in a winding up application. Whether the court accepts the applicant’s valuation of assets would depend on the evidence presented to the court.
• The High Court also disagreed with the Directors’ contention that the halt on withdrawals of cryptocurrency meant that no liability was owed. The Court noted that the halt on withdrawal simply meant that the asset could not be withdrawn, and not that the base liability was extinguished. The High Court noted that it may well be that an appropriately drafted clause could effectively bar anyone holding an account subject to a withdrawal halt from pursuing a winding up of a company on the basis of an unsatisfied demand under s. 125(2)(a), or even preclude him from establishing cash flow insolvency under section 125(2)(c), but found that the present withdrawal halt provisions in the user terms did not have such an effect.

Key Takeaways:

• The decision gives some clarity with regards to cryptocurrency-related insolvencies given the effect of Algorand, where it was understood that a creditor who is owed cryptocurrency would have to first obtain a judgement for liquidated damages before commencing a winding up application under section 125(2)(a).
• The decision also clarifies that creditors can commence a winding up application under section 125(2)(c), without first obtaining a judgement for liquidated damages before an assessment is made of cash flow insolvency. Creditors can demonstrate that the company is unable pay its debts, including those in cryptocurrencies, as they fall due.
• Pertinently, applicants for winding up should be cautious on the section they are bringing the winding up under (between section 125(2)(a) which requires a judgment for liquidated damages denominated in fiat currency and the broad nature of section 125(2)(c) which requires cash flow insolvency).
• Solicitors acting for entities which hold monies or assets on behalf of clients may also wish to consider the High Court’s note to consider drafting clauses that “effectively bar anyone holding an account subject to a withdrawal halt from pursuing a winding up of a company.”
• As experienced cryptocurrency lawyers we can aid you in navigating through the complex regulatory landscape surrounding cryptocurrency assets including in bankruptcy, insolvency, fraud and asset recovery, and tax matters.

This article was authored by our Managing Partner and Head of Dispute Resolution, Bazul Ashhab, and Partner Lionel Chan. The authors thank Brandon Lim, from the University of Cambridge for his valuable assistance with the article.

Oon & Bazul LLP have substantial experience in handling cryptocurrency related matters. Restructuring and corporate recovery involving crypto assets require careful consideration of regulatory compliance, asset valuation, creditor rights, and the unique challenges of managing digital assets. The complexities of blockchain-based assets can pose additional hurdles during insolvency proceedings or restructuring efforts. We have cryptocurrency lawyers who can aid you in navigating through the complex regulatory landscape surrounding cryptocurrency assets during restructuring and recovery with their understanding of bankruptcy, insolvency, and tax regulations.

Our team boasts extensive experience in various cryptocurrency dispute resolution methods, including mediation, arbitration, and litigation. We recognise that not all disputes require traditional courtroom proceedings, and alternative methods can often lead to faster and more cost-effective resolutions. Through skilled mediation, our lawyers can foster open dialogue and guide parties towards a resolution that meets their interests and preserves relationships. Should it lead to arbitration, our law firm’s arbitration experience allows us to handle complex crypto disputes while maintaining confidentiality and expediency efficiently. In situations where litigation becomes necessary to protect your interests, our legal team is well-prepared to advocate vigorously in court. We combine our deep understanding of blockchain and cryptocurrencies with robust courtroom skills, ensuring our clients’ rights and assets are vigorously defended.

You may visit our Blockchain and Cryptocurrency Disputes page to learn more about our practice.