Worldwide: From Unsteady Beginnings, Crypto Debt Finds Firm Ground In The Singapore High Court For Supporting A Winding Up Petition. Would The Same Apply In Other Common Law Jurisdictions, Including The BVI?

An interesting and topical cryptocurrency decision was handed down in the Singapore High Court last month. In Aaron Loh Cheng Lee and another v Hodlnaut Pte Ltd [2023] SGHC 323 the Singapore Court held that, under Singapore law, a cypto debt can be used as the basis to demonstrate cash flow insolvency for the purposes of winding up a Singaporean company.

Holdnaut Pte Ltd (Holdnaut) is a Singapore based cryptocurrency platform which was founded in 2019 and at its peak held around $106m in crypto assets. Unfortunately for Holdnaut, like fellow substantial cryptocurrency companies, Three Arrows Capital Limited and Celsuis Network, it ran into unsalvageable difficulties following (amongst other things) its over reliance on the 'stablecoin' TerraUSD (which collapsed in May 2022).

The winding up petition was opposed by Holdnaut's directors who had hoped that the Judge would follow an earlier Singapore decision in Algorand Foundation Ltd v Three Arrows Capital Pte Ltd (Three Arrows Pte) (HC/CWU 246/2022), where the Court (under Singapore law) held that a statutory demand failed as cryptocurrency was not for a sum of money (in fiat currency). In reference to cryptocurrency, the Court in Three Arrows Pte, rhetorically asked: "if a country uses seashells as its international medium of exchange, would the Singapore courts have to recognise that as money?" While this decision may have been badly received by some crypto enthusiasts, the Singapore Court appeared to stress the decision made within the narrow constraints of insolvency and the statutory demand process in which the creditor reaps the benefit of a presumption that the debtor is unable to pay its debts with only a limited evidentiary burden. To benefit from this presumption the asserted debt must, it was determined, be in fiat currency.

Notwithstanding this, the decision in Three Arrows Pte did not dissuade the Singapore Judge from winding up Holdnaut. In so doing Justice Abdullah Judge distinguished Three Arrows Pte stating: "I do not understand Three Arrows to stand for the proposition that pursuing and obtaining a judgment to obtain liquidated damages is necessary before an assessment is made of cash flow insolvency".

Singapore's Insolvency, Restructuring and Dissolution Act 2018 as it relates to winding up company's (s125(1)(e)) mirrors that of England's s 122(1)(f). In the BVI similar legislation is found at s.162(a) of the Insolvency Act, 2003 (as amended) (BVI IA) which is combined with the definition of 'insolvency' to form similar wording "(i) the value of the company's liabilities exceeds its assets; or (ii) the company is unable to pay its debts as they fall due.

In Holdnaut the Judge held [at 11] "the fact that the holdings were in cryptocurrency did not affect the outcome; this was just a particular kind of asset'.

To date there has been limited consideration in the BVI, and indeed in England regarding, regarding the status of a crypto debt as founding the basis for a winding up petition. The BVI benefits from a broad definition of 'liability' under s. 10 of the BVI IA where liability is defined as "...(1) means a liability to pay money or money's worth including a liability under an enactment, a liability in contract, tort or bailment, a liability for a breach of trust and a liability arising out of an obligation to make restitution, and "liability" includes a debt. (2) A liability may be present or future, certain or contingent, fixed or liquidated, sounding only in damages or capable of being ascertained by fixed rules or as a matter of opinion. (3) For the purposes of this Act, an illegal or unenforceable liability is deemed not to be a liability."

Holdnaut is likely therefore to find firm ground in the BVI. Indeed, albeit without consideration of the point, in June 2022 DRB Panama Inc sought (and succeeded) on its winding up petition against Three Arrows Capital Ltd in the BVI based on a largely crypto debt in the sum of $80m. The question as to whether a crypto debt alone would have succeeded was ultimately superseded as, prior to the first hearing, the company submitted its own insolvency petition, admitting to its own insolvency. Of note as well, DRB Panama did not seek to support its winding up petition with an unsatisfied statutory demand.

It follows from the above, that the Singapore Court's decision in Holdnaut will come as welcome news to creditors globally – particularly those looking for some comfort in an area of law that, despite its rapid development, remains in its infancy.

Holdnaut Pte Ltd (Holdnaut) is a Singapore based cryptocurrency platform which was founded in 2019 and at its peak held around $106m in crypto assets. Unfortunately for Holdnaut, like fellow substantial cryptocurrency companies, Three Arrows Capital Limited and Celsuis Network, it ran into unsalvageable difficulties following (amongst other things) its over reliance on the 'stablecoin' TerraUSD (which collapsed in May 2022).

The winding up petition was opposed by Holdnaut's directors who had hoped that the Judge would follow an earlier Singapore decision in Algorand Foundation Ltd v Three Arrows Capital Pte Ltd (Three Arrows Pte) (HC/CWU 246/2022), where the Court (under Singapore law) held that a statutory demand failed as cryptocurrency was not for a sum of money (in fiat currency). In reference to cryptocurrency, the Court in Three Arrows Pte, rhetorically asked: "if a country uses seashells as its international medium of exchange, would the Singapore courts have to recognise that as money?" While this decision may have been badly received by some crypto enthusiasts, the Singapore Court appeared to stress the decision made within the narrow constraints of insolvency and the statutory demand process in which the creditor reaps the benefit of a presumption that the debtor is unable to pay its debts with only a limited evidentiary burden. To benefit from this presumption the asserted debt must, it was determined, be in fiat currency.

Notwithstanding this, the decision in Three Arrows Pte did not dissuade the Singapore Judge from winding up Holdnaut. In so doing Justice Abdullah Judge distinguished Three Arrows Pte stating: "I do not understand Three Arrows to stand for the proposition that pursuing and obtaining a judgment to obtain liquidated damages is necessary before an assessment is made of cash flow insolvency".

Singapore's Insolvency, Restructuring and Dissolution Act 2018 as it relates to winding up company's (s125(1)(e)) mirrors that of England's s 122(1)(f). In the BVI similar legislation is found at s.162(a) of the Insolvency Act, 2003 (as amended) (BVI IA) which is combined with the definition of 'insolvency' to form similar wording "(i) the value of the company's liabilities exceeds its assets; or (ii) the company is unable to pay its debts as they fall due.

In Holdnaut the Judge held [at 11] "the fact that the holdings were in cryptocurrency did not affect the outcome; this was just a particular kind of asset'.

To date there has been limited consideration in the BVI, and indeed in England regarding, regarding the status of a crypto debt as founding the basis for a winding up petition. The BVI benefits from a broad definition of 'liability' under s. 10 of the BVI IA where liability is defined as "...(1) means a liability to pay money or money's worth including a liability under an enactment, a liability in contract, tort or bailment, a liability for a breach of trust and a liability arising out of an obligation to make restitution, and "liability" includes a debt. (2) A liability may be present or future, certain or contingent, fixed or liquidated, sounding only in damages or capable of being ascertained by fixed rules or as a matter of opinion. (3) For the purposes of this Act, an illegal or unenforceable liability is deemed not to be a liability."

Holdnaut is likely therefore to find firm ground in the BVI. Indeed, albeit without consideration of the point, in June 2022 DRB Panama Inc sought (and succeeded) on its winding up petition against Three Arrows Capital Ltd in the BVI based on a largely crypto debt in the sum of $80m. The question as to whether a crypto debt alone would have succeeded was ultimately superseded as, prior to the first hearing, the company submitted its own insolvency petition, admitting to its own insolvency. Of note as well, DRB Panama did not seek to support its winding up petition with an unsatisfied statutory demand.

It follows from the above, that the Singapore Court's decision in Holdnaut will come as welcome news to creditors globally – particularly those looking for some comfort in an area of law that, despite its rapid development, remains in its infancy.

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