The UK Jurisdiction Taskforce has published a comprehensive Legal Statement on Digital Assets and English Insolvency Law.
In this article we review the key aspects relevant to Cayman Islands Insolvency Practitioners.
Introduction
The UK Jurisdiction Taskforce (UKJT), a division of LawtechUK[1], plays a pivotal role in clarifying legal principles related to emerging technologies. The UKJT has published several legal statements to address the status and legal implications of digital assets and smart contracts. Their latest, the Legal Statement on Digital Assets and English Insolvency Law (the Statement)[2], provides a comprehensive analysis of how digital assets are treated under English[3] insolvency law. The Statement aims to resolve uncertainties for investors and legal practitioners regarding the treatment of digital assets in insolvency scenarios.
Relationship Between Cayman Islands law and English law
The Cayman Islands, as a prominent offshore financial centre, often relies on English common law principles, particularly in areas of corporate and insolvency law. The Cayman Islands’ legal framework, although distinct, is heavily influenced by English law. Therefore, the analysis and conclusions drawn under English insolvency law are highly relevant and persuasive in the Cayman Islands context. Insolvency practitioners in the Cayman Islands can draw valuable insights from the UKJT Statement to navigate the complexities associated with digital assets in insolvency proceedings.
Main areas covered by the Statement
The UKJT Statement discusses several critical aspects of digital assets within the framework of English insolvency law, including:
- Classification of digital assets as property. Affirming that digital assets are capable of being classified as “property” in English law.
- Jurisdictional issues. Applying the Centre of Main Interests (COMI) test to determine jurisdiction in cases involving digital assets.
- Claims to digital assets. Distinguishing between personal and proprietary claims and their implications in insolvency.
- Obligations of office-holders. Outlining the duties of insolvency practitioners in managing and realising digital assets.
- Avoidance of prior transactions. Addressing the reversal of transactions at an undervalue and preferences involving digital assets.
Key areas of interest for Cayman Islands Insolvency Practitioners
As can be seen above, the report covers a wide range of areas, but we consider that the following are among the most relevant:
Classification of digital assets as property
One of the most fundamental aspects of the Statement is the classification of digital assets as property. This classification underpins many subsequent legal determinations, such as the ability to assert proprietary claims over digital assets and being able to include them in the insolvency estate, thereby protecting creditors’ interests and facilitating equitable distribution.
State of case law in the Caribbean and wider common law world
In the Caribbean and wider common law world, case law on digital assets in insolvency is evolving. For example, courts in the BVI[4], England,[5] Singapore,[6] Canada,[7] New Zealand[8] and Hong Kong[9] have also recognised cryptocurrencies as items of property or assets. Although courts have been consistent in reaching this view, it has been the subject of considerable academic discussion.[10] While the Cayman Grand Court has yet to determine this issue, the Statement joins these cases in providing valuable precedents for Cayman Islands practitioners, highlighting the importance of recognising digital assets as property and ensuring equitable treatment of creditors in insolvency proceedings.
Digital assets and liquidation
In the liquidation process, if insolvency practitioners decide to cause the company to dispose of its assets, they are obliged to obtain the best reasonably obtainable price (Statement, para 93). Given the volatility of digital assets, the timing and method of liquidation are critical. Practitioners must carefully monitor market conditions and consider the potential benefits of distributing assets in specie, which involves transferring the actual digital assets to creditors instead of converting them to fiat currency (Statement, para 98). This approach can mitigate risks associated with market fluctuations and ensure creditors receive the precise assets they are entitled to, enhancing the fairness of the distribution process.
Fraud and digital assets
Addressing fraudulent transactions involving digital assets is crucial for protecting creditors. English law allows for the reversal of transactions at an undervalue and preferences (Statement, para 106-114). Similar provisions apply under Cayman law. However, the immutable nature of blockchain transactions presents practical challenges. The Statement considers that courts can order recipients of such transactions to make an equal and opposite transfer, effectively reversing the economic impact (Statement, para 121). This principle ensures that insolvency practitioners can recover assets and maintain the integrity of the insolvency process, even in the face of advanced technological complexities.
Jurisdictional issues
Jurisdictional challenges are particularly pronounced with digital assets due to their lack of physical presence. The Statement emphasises the importance of the COMI test, which considers factors such as the debtor’s business operations and creditor perceptions (Statement, para 27-34). Cases like Zipmex[11] in Singapore illustrate how courts may determine COMI based on the administration of digital assets. In determining COMI in Zipmex, the Court considered the locations of the following to be of particular importance: (a) exercise of control of the cryptoassets; (b) clients, creditors and employees; (c) the debtors’ operations; and (d) dealings with third parties (Statement, para 37-44). The ability to determine jurisdiction accurately ensures proper coordination with international counterparts, facilitates effective insolvency proceedings and is crucial for Cayman Islands practitioners dealing with cross-border insolvency cases.
Importance of UK Task Force legal statements
The UKJT Legal Statements have significant authoritative weight, and have been cited with approval in court decisions. For instance, the principles outlined in the 2019 Legal Statement on Cryptoassets and Smart Contracts were referenced in the landmark English case of AA v Persons Unknown[12], and both the 2019 statement and AA v Persons Unknown were cited in the BVI judgment of In Smith v Torque Group Holdings, referred to previously listed at footnote 4. Such citations underscore the practical relevance and judicial endorsement of these statements, making them a reliable guide for legal practitioners dealing with digital assets in insolvency contexts.
Conclusion
The UKJT Legal Statement on Digital Assets and English Insolvency Law provides crucial insights and guidance for insolvency practitioners in the Cayman Islands. By affirming the classification of digital assets as property and addressing the practical challenges of handling these assets in insolvency, the Statement equips practitioners with the knowledge to navigate complex legal landscapes effectively. As digital assets continue to grow in significance, such persuasive guidance ensures robust legal frameworks and equitable outcomes for all stakeholders involved in insolvency proceedings.
For further information, please contact:
Alan Bercow, Partner, Appleby
abercow@applebyglobal.com
[1] LawtechUK is a UK Ministry of Justice-backed initiative dedicated to driving digital transformation in the UK legal sector.
[2] The full Statement can be downloaded from bit.ly/UKTF_statement (case sensitive / underscore in UKTF_statement).
[3] For brevity, this article uses English law to refer to the law of England and Wales, reflecting the Statement’s own approach (Statement, p49, note 2).
[4] For example, In Smith v Torque Group Holdings Limited (in liquidation) BVIHC (COM) 0031 of 2021, www.eccourts.org/judgment/philip-smith-v-torque-group-holdings-limited-et-al.
[5] For example, in Tulip Trading Ltd v Bitcoin Association for BSV [2023] EWCA Civ 83; [2023] 4 WLR 16 at [24].
[6] For example, in ByBit Fintech Limited v Xin & Ors [2023] SGHC 199 at [36], the Singapore High Court held that the holder of a crypto asset has “in principle an incorporeal right of property recognisable by the common law as a thing in action and so enforceable in court”. Note also that the Singapore Rules of Court 2021 have been updated to expressly include “cryptocurrency or other digital currency” as “moveable property” capable of being the subject matter of an enforcement order.
[7] For example, in Shair.com Global Digital Services Ltd v Arnold, 2018 BCSC 1512 at [24], the Supreme Court of British Columbia held that cryptocurrency and related wallet information were “digital assets” in the context of an application for a Mareva injunction and preservation order. However, note that in Cicada 137 LLC v Andean Medjedovic, 2021 ONSC 8581 at [6], the Supreme Court of Ontario made no finding as to the nature of digital assets as property and left it open for the law to “determine in due course whether the digital tokens are a specie of property”.
[8] For example, in Ruscoe v Cryptopia Ltd (in Liquidation) [2020] NZHC 728.
[9] Re Gatecoin Limited (In Liquidation) [2023] HKCFI 914.
[10] E.g. see: Professor Robert Stevens, Professor of Law at the University of Oxford, “Crypto is Not Property” (2023) 139 LQR 615; Watts, Peter G., and Kelvin FK Low. “The Case for Cryptoassets as Property.” Law at the Cutting Edge (Hart) (2022); and Low, Kelvin FK. “Cryptoassets and the Renaissance of the Tertium Quid?.” (2023).
[11] Re Zipmex Pte Ltd and other matters [2022] SGHC 196, www.elitigation.sg/gd/s/2022_SGHC_196.
[12] AA v Persons Unknown [2019] EWHC 3556 (Comm) is a landmark English case concerning the legal status of cryptocurrencies and the measures that can be taken to trace and recover them. The court referred to the UKJT Legal Statement at paras 39, 56-58, 59 and 61, and adopted its reasoning that cryptocurrencies like Bitcoin have the attributes of property and are capable of being subject to proprietary claims. The court also went on to find that (a) the test for a proprietary injunction was satisfied – there was a serious issue to be tried regarding the constructive trust claim and the balance of convenience favoured granting the injunction; and (b) there were appropriate gateways for service out of jurisdiction, including that it was an interim proprietary remedy. (As background, the case arose from a ransomware attack on a Canadian insurance company, which was forced to pay a ransom in Bitcoin to regain access to its systems. The insurance company, through its claims adjuster AA, sought relief from the English courts to trace and recover the Bitcoin. The court had to determine whether Bitcoin could be considered property under English law and what equitable remedies were available to trace and recover the cryptocurrency. The court held that Bitcoin and other cryptocurrencies could be considered property under English law. This was significant as it allowed the application of proprietary remedies, such as a proprietary injunction, which was crucial for tracing and recovering the stolen Bitcoin. The court granted a proprietary injunction, freezing the Bitcoin held in the specified wallet and prohibiting its transfer.
