Obligation To Pay Cryptocurrency May Count As Debts In Determining Insolvency, Singapore High Court Rules

• Published date: 09 January 2024
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Technology, Financial Restructuring, Corporate and Company Law, Insolvency/Bankruptcy, Fin Tech
• Law Firm: WongPartnership LLP
• Author: Lionel Leo and Stephanie Yeo

In Loh Cheng Lee Aaron and another v Hodlnaut Pte Ltd (Zhu Juntao and others, non-parties) [2023] SGHC 323, the General Division of the High Court of Singapore (High Court) clarified that a company's obligation to pay cryptocurrency to its creditors may, for the purposes of determining whether the company is insolvent, count as "debts" within the meaning of section 125(1)(e) read with section 125(2)(c) (Section 125(2)(c)) of the Insolvency, Restructuring and Dissolution Act 2018.

This update takes a look at the High Court's decision.

Our Partners Lionel Leo and Stephanie Yeo, Counsel Adnaan Noor, Senior Associates Eden Li and Andrew Pflug and Associates T Abirami and Toh Yong Xiang acted for the successful claimants before the High Court.

Background

The dispute arose from an application to wind up the defendant, Hodlnaut Pte Ltd (Company). The Company had operated a platform where users (Users) could deposit cryptocurrencies and earn interest on them. Accordingly, a substantial portion of its assets comprised cryptocurrencies and it correspondingly owed the Users substantial obligations to repay cryptocurrencies.

It was in this context that the High Court had to determine the novel issue of whether cryptocurrencies owed by the Company to its creditors were to be treated as debts in assessing whether the Company was unable to pay its debts such that it should be wound up. The High Court answered the question in the affirmative.

The claimants, who were the interim judicial managers of the Company (Claimants), argued that the Company was cash flow insolvent when its current assets (including its cryptocurrency holdings) were measured against its current liabilities (including its liabilities to repay cryptocurrencies). The Claimants also argued that the Company should be wound up as the restructuring proposal that had been belatedly put forth by the directors of the Company (Directors) was doomed to fail as it did not have the support of the Company's major creditors.

The Directors contended that the cryptocurrencies owed by the Company to its creditors were not "debts" within the meaning of Section 125(2)(c) because, among other things, "debts" refers only to liabilities denominated in fiat or actual money. They submitted that the Company was not insolvent as it could pay its debts denominated in fiat. Further, the Directors argued that the liability to repay the Users their cryptocurrencies had not yet arisen because the Company had imposed a halt on...