Are Digital Assets a recoverable asset in insolvency?

Published on May 21, 2024 by Gareth Hunt

Part of a series of articles examining the impact of digital assets in a liquidation.

Gareth Hunt, Insolvency Practitioner and Head of Business Recovery at RPG Business Recovery.

All business owners will be alert to the possibility of customers or suppliers becoming insolvent.  Whilst you run all possible checks, the worst may still happen and you are then left hoping to have some recourse, specifically the return of your money and assets.

But what if the directors of the insolvent business or indeed the business itself hold digital assets? Can the value of these digital assets be taken into account in any claims by creditors? Are Digital Assets a recoverable asset in a liquidation?

The answer is potentially yes!

New guidance has just been issued regarding the legal status of Digital Assets and how this applies in insolvency. This clarifies and strengthens still further the position of the Insolvency Practitioner.

The UK Jurisdiction Taskforce (“UKJT”) published its legal statement concerning Digital Assets on 17 April 2024 and concluded 4 main points:

1. Digital Assets are “property” in Insolvency Law

The UKJT confirmed that digital assets are “property” and therefore potentially recoverable as any other property would be in the case of insolvency.

2. Digital Assets are not recognised as “money” or Foreign Currency

English Law does not yet consider digital assets as money, therefore a claim for payment of digital assets cannot be used as the basis of a statutory demand or winding up petition. A debt needs to be outstanding in a recognised currency or relate to an item with a determinable value before a statutory demand or winding up petition can be issued.

The value of digital assets and cryptocurrencies can fluctuate massively in very short periods of time against FIAT currency (that is Government issued currency) and there is currently no legal right to exchange an asset for a specified FIAT currency as such they are not considered to have a determinable value. The value of the digital assets will however still be incorporated into the total value of the debtor’s property.

3. The Centre of Main Interest (“COMI”) applies to Digital Asset Companies

Cryptoassets may be held in crypto exchanges around the world, as can other digital assets, but it has now been established that the jurisdiction for any international assets will be decided by reference to the Centre of Main Interest rules (COMI). This means that instead of the location of the digital asset being important, the whereabouts of the debtor’s main financial / business interests is the only location of interest. This simplifies matters for the Insolvency Practitioner as legal actions can be directed through one jurisdiction.

4. Digital Assets transactions can be subject to Antecedent Rules

This means that the powers of an Insolvency Practitioner to restore antecedent transactions applies even when considering digital assets.

If, for example a director has digital assets with a value of £1m and sells them for £1 in the period leading up to the business’ insolvency, the Insolvency Practitioner could pursue the director for the difference in value.

The complication is however that, unlike cash which is straightforward, the digital assets may experience fluctuations in value so the court will need to be adaptable in order to identify when assets have indeed been incorrectly valued.

This new guidance from the UK Jurisdiction Taskforce has clarified a number of issues relating to dealing with digital assets and cryptocurrencies in insolvency matters, making it more straightforward for Insolvency Practitioners to achieve the best outcome for the creditors.

The team at RPG have many years of experience in dealing with the issues surrounding cryptoassets. You can read here Cryptoassets – RPG Chartered Accountants  about the advice we provide to clients on tax matters relating to cryptoassets and the support we provide to businesses who trade with cryptocurrencies.

This article is for information only. Please take professional advice relating to your own personal circumstances before making any decisions.

Written by Gareth Hunt

Gareth, who joined RPG in March 2021, is a member of the Insolvency Practitioners Association. Gareth has gained significant experience dealing with corporate and personal insolvency together with advisory work including liquidations, CVA’s and administrations from a wide range of industry. He also assists individuals on bankruptcy and IVA’s. Email: ghunt@rpg.co.uk

View all posts by Gareth Hunt
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