Cryptocurrency and the Insolvency Regime – Singapore Court Grants Scheme of Arrangement between Crypto Company and its Users

I. Introduction

The legitimacy of cryptocurrency has enjoyed increasing recognition amongst users and investors, emerging as a prevalent investment asset and form of payment. However, when it comes to the interaction between cryptocurrency and the various relevant areas of law, the legal frameworks are often observed to be still in the process of finding their footing.

The distinctive nature of cryptocurrency may present a unique challenge when it comes to determining exactly how the existing legal rules and principles apply, and the modifications necessary to accommodate its specific practicalities. One such area of law is that of insolvency and restructuring, which is concerned with issues of fair asset distribution and ensuring equitable processes for creditors. How this applies to cryptocurrency companies, where the management of cryptocurrency assets and the features of the creditor classes may differ from conventional industries, thus raises certain interesting questions.

The Singapore courts recently had occasion to consider these questions in the case of Defi Payments Pte Ltd (HC/OA 378/2023). The applicant company ("Company") was a cryptocurrency company seeking to restructure its debts by way of a scheme of arrangement under section 210 of the Companies Act 1967, which is a court-approved agreement between a company and its stakeholders in relation to the former's debt obligations. Following a successful vote approving the proposed scheme of arrangement ("Scheme") at the creditor meeting, the Singapore High Court ("Court") granted sanction of the Scheme, which has since taken effect. This marked the first scheme of arrangement in Singapore taking place in the crypto space between a cryptocurrency company and its users.

The Company was represented by Rajah & Tann Singapore LLP's Sheila Ng, Deputy Head of Restructuring & Insolvency, together with Benedict Tedjopranoto and Naomi Lim. Hoon Chi Tern, Cynthia Wu and Melvin Chua from Rajah & Tann Singapore LLP's Capital Markets Practice also advised the applicant company in the restructuring process.

In this article, we take a look at some of the issues that may arise in the insolvency and restructuring process when it comes to cryptocurrency and cryptocurrency companies, and how these issues were addressed in the present Scheme process.

II.   Facts

The Company is part of a global group which provides online services relating to cryptocurrencies, including the lending, staking and trading of cryptocurrencies. At the time the Company began exploring restructuring options in Singapore, it had approximately 150,000 account holders and managed cryptocurrency assets valued in the region of US$300 million.

Following financial and liquidity pressures, the Company placed the Scheme before its creditors for a vote. It received strong creditor approval of more than 90% by number and in value (present and voting), far exceeding the statutory threshold. The Scheme was subsequently submitted to Court, whereupon it received the Court's sanction.

The Scheme had unique features, including dual recovery tracks which creditors could elect to participate in, an opportunity to select which cryptocurrency they would prefer to receive distributions under the Scheme in, the nomination of a creditor onto the Company's board of directors as well as the opportunity to bid for an early exit via a Reverse Dutch Auction mechanism.

III.   Issues and Solutions

The restructuring of a cryptocurrency company raises a number of unique issues, both legal and practical, which have to be addressed. Here, we take a look at such issues in the context of the present Scheme, how they may be managed, and how cryptocurrency fits within the scope of the current restructuring framework.

(a) Variations to the scheme process

Under the existing scheme of arrangement framework, certain steps in relation to the filing, inspection and adjudication of proofs of debt must be complied with. As the process was initially contemplated for face-to-face meetings, some of these steps may be impractical in the context of a cryptocurrency company.

For example, each creditor is required to file a proof of debt with the scheme company, which must adjudicate these proofs of debt. The admitted creditors will then vote on the proposed scheme at a meeting of creditors. However, in a case like the present, it would not be practical for every single one of the Company's approximately 150,000 creditors to file a proof of debt, and precluding such creditors from voting on the basis that they had not filed a proof of debt might lead to an unjust outcome.

The Insolvency, Restructuring and Dissolution Act 2018 gives the courts in Singapore a wide discretion in approving the manner in which the scheme process is to be conducted. To address the above issues, the Court allowed the following variations to procedure:

• The Company deemed that a proof of debt had been filed with reference to the account balances of each creditor.
• A single independent assessor was appointed to adjudicate all disputes relating to the adjudication and inspection of proofs of debt.
• The scheme meeting was to be held by way of two distinct stages: (i) an online meeting stage where the Company presented the key terms of the Scheme and fielded questions; and (ii) a voting stage, where creditors could submit an electronic vote. The total valid votes cast would form the total universe of creditors "present and voting".

(b) Obtaining the court's sanction

The following principles apply in determining whether a scheme should be sanctioned by the court (see The Oriental Insurance Co Ltd v Reliance National Asia Re Pte Ltd [2008] 3 SLR(R) 121): (i) the applicable statutory provisions must be complied with; (ii) those who attended the creditor's meeting are fairly representative of the class of creditors and that there is no coercion of the minority; and (iii) the scheme is one which an intelligent and honest man of business would reasonably approve.

The question then arises as to how this applies to a cryptocurrency company, which is likely to have a large number of creditors, a majority of which may be passive or less-interested and may not vote on the scheme. This was so in the present case, where this silent majority held the bulk of the debt.

Here, the Court adopted a practical approach in granting sanction to the Scheme, highlighting that there is no minimum quorum for a vote, and that what is essential is that information is disseminated and the opportunity to vote is duly given. Even though certain creditors may be more vocal in their objection, unless there is something unfair about the process, or the scheme is not reasonable commerciality, the vote is binding on all.

(c) Creditor management

The creditor base of a cryptocurrency company may potentially run up to the hundreds of thousands located across the globe, and is often unrepresented. The interest level of creditors and the value of their claims may also vary greatly. These factors present a slew of challenges when it comes to creditor management, which is essential for obtaining creditor approval for a scheme.

In the present restructuring, the following avenues and measures were taken to ensure that creditor feedback was received and addressed:

• Updates on key developments and documents would be circulated by email, website, and Telegram group. Centralised platforms such as a dedicated website and FAQ page were used to answer commonly held queries and concerns.
• Informal polls and online live-streamed townhalls were used to get feedback and engagement on relevant matters.
• Third-party professionals were engaged to design a bespoke, access-restricted website for participation in the scheme process.

(d) Committee of creditors

The Court suggested the formation of an informal committee of creditors ("COC") to serve as a sounding board to the Company and its advisors so as to constantly get a view of creditors' sentiments and feedback. In the course of the implementing the COC in the present case, it was noted that it is important to set expectations clearly (e.g. that the COC is a consultative rather than decision-making body), and that it is important to have diverse representation within the COC.

IV.   Concluding Remarks

While the nature of cryptocurrency raises specific challenges in the restructuring and insolvency process, the Court's decision to sanction the Scheme in the present matter, and its approach to the various issues along the way, demonstrates the flexibility of the existing framework to accommodate the novel features of cryptocurrency companies.

Nonetheless, the matter also shows how cryptocurrency and other digital assets may not fit comfortably within the default structure of existing restructuring and insolvency processes. It thus remains to be seen whether the relevant legislation and regulations may need to be updated to keep pace with the changing business landscape.

AUTHOR INFORMATION:

Sheila Ng is Partner and Deputy Head of Restructuring & Insolvency Practice at Rajah & Tann Singapore LLP.
Email: sheila.ng@rajahtann.com

Rajesh Sreenivasan is Partner and Head of Technology, Media & Telecommunications Practice at Rajah & Tann Singapore LLP.
Email: rajesh@rajahtann.com

Steve Tan (Adjunct Professor) is Partner and Deputy Head of Technology, Media & Telecommunications Practice at Rajah & Tann Singapore LLP.
Email: steve.tan@rajahtann.com

Benjamin Cheong is Partner and Deputy Head of Technology, Media & Telecommunications Practice at Rajah & Tann Singapore LLP.
Email: benjamin.cheong@rajahtann.com

Lionel Tan is a Partner in the Technology, Media & Telecommunications Practice at Rajah & Tann Singapore LLP.
Email: lionel.tan@rajahtann.com