Cryptopia lost $30m in cryptocurrency holdings due to a serious hack in 2019
In a recent decision, the High Court approved an application to convert cryptocurrency holdings to generate approximately $5m to meet Cryptopia's ongoing liquidation costs and expenses.
Cryptopia Ltd. is a cryptocurrency exchange company that faced a severe setback when it lost approximately $30m in cryptocurrency holdings due to a serious hack in early 2019. Following this incident, shareholders appointed chartered accountants David Ruscoe and Malcolm Moore as liquidators under the Companies Act 1993. They undertook the complex task of managing the liquidation process, involving over 960,000 account holders with cryptocurrency holdings in approximately 370 different cryptocurrencies across 180 countries.
In 2020, the High Court determined that each type of cryptocurrency is intangible property held by Cryptopia as a trustee for the benefit of all the account holders of that currency. Cryptopia itself is a beneficiary of some of those trusts.
The liquidators have been actively working to notify account holders about their balances. They have processed claims for approximately 24 percent of Cryptopia's Bitcoin (BTC) holdings and 34 percent of its Dogecoin (DOGE) holdings. However, many account holders have not registered or completed the identity verification process. This led to concerns about a potential surplus of BTC and DOGE once all claims have been paid out.
The liquidators made three unopposed applications to the court to approve the sale of cryptocurrencies to fund the liquidation costs. In Ruscoe v Houchens [2023] NZHC 2490, the liquidators made a fourth application to realise cryptocurrency to fund liquidation work. The liquidators argued that it had taken longer than expected to complete the tasks for which they had previously obtained an order to realise cryptocurrency. They estimated that an additional $5m would enable them to continue their operations for another 12 months.
Four account holders in Cryptopia opposed the liquidators' application. They argued that the liquidators may have mismanaged the trust administration process. In response, the liquidators contended that the costs and length of administration of the liquidation to date were not out of step with comparable liquidations of large exchange collapses.
Ultimately, the High Court decided to grant the liquidators' application. The court noted that, when a liquidator is forced to carry out work concerning assets held on trust for the benefit of the beneficiaries concerned, the court has an inherent jurisdiction to allow reasonable costs against those assets.
The liquidators argued that the sale application was a straightforward and ordinary exercise of a trustee's right to indemnity under s. 81 of the Trusts Act. Alternatively, they contended that the court could exercise its inherent jurisdiction to award remuneration and payment of expenses for the liquidator.
The court pointed out that the respondents did not identify any good reason why the court should decline the liquidators' application. The court ruled that it was in the interests of the beneficiary account holders to progress the distribution of assets to them, not to hold it up.
The court also noted that the liquidators provided evidence of how the funding would be expended, and they regularly reported to account holders and creditors.
The court also acknowledged that the liquidators had maintained separate accounts for costs associated with the liquidation of Cryptopia and the administration of cryptocurrencies on behalf of account holders. Accordingly, the court granted the liquidators' application for cryptocurrency realisation.
