Cryptocurrency Group Granted Moratoria to Formulate Worldwide Restructuring Plan Centred in Singapore

I. Introduction

The volatility of the cryptocurrency market in 2022 led to the liquidity issues for many cryptocurrency exchanges and brokers, including forcing several high-profile cryptocurrency companies into restructuring or insolvency proceedings.

The Babel Finance group of companies (“BFG”) was no exception.  Faced with creditor claims of over US$1.5 billion worldwide, the cryptocurrency group came up with a novel restructuring plan that is both fairly unique to cryptocurrency companies, and in recent times being adopted in an increasing number of cryptocurrency restructurings.

In Re Babel Holding Ltd and other matters [2023] SGHC 98, the General Division of the Singapore High Court (“Singapore High Court”) considered five applications for scheme moratoriums by BFG. The Singapore High Court also considered further applications for confidentiality orders sealing the identities and other details of BFG’s creditors.

In granting the moratoria and sealing applications above, the Singapore High Court made a number of observations and holdings on: (i) whether group companies could consolidate or pool their assets and liabilities in a scheme of arrangement, effectively overriding the separate legal entity doctrine where companies (even in a group) are treated as having their own separate assets and liabilities distinct from other members of the group, and (ii) when the court should grant confidentiality orders anonymising the names of creditors in a scheme of arrangement.

II.   Background

In June 2022, BFG began its restructuring process, and filed moratorium applications with the Singapore High Court in March 2023 to protect the interest of is creditors and relevant stakeholders, and to give BFG more time to implement the restructuring plan for its estimated US$1.5 billion liabilities worldwide. The moratoria sought by BFG would prohibit actions, proceedings or other enforcement steps by BFG’s creditors and was intended to allow BFG to engage in an innovative restructuring plan involving its assets across multiple jurisdictions.

Key parts of the restructuring plan put before the Singapore High Court in support of the moratorium applications included the following:

• A novel method of recovery involving the conversion of creditor claims to digital tokens issued by BFG, which will be tradable on the secondary market and be backed by fresh investors and a new business model. If these tokens rise in value, creditors could reap significant returns.
• One member of BFG becoming a primary co-obligor of the entire group’s liabilities.
• To make Singapore the centre from which the worldwide restructuring will be run pursuant to the restructuring framework under the Insolvency, Restructuring and Dissolution Act 2018.

After hearing submissions, the Singapore High Court granted the moratoria sought by BFG. In reaching its decision, the Singapore High Court made several observations and holdings that are important for creditors and other stakeholders in future restructurings and schemes.

III.   The Singapore High Court’s discussion of substantive consolidation

First, the Singapore High Court’s ruling indicates that a scheme of arrangement could be proposed based on substantive consolidation, or pooling, of the assets and liabilities of the entire BFG. This is unusual because under Singapore law, companies in a group are generally treated as separate legal entities with their own separate assets and liabilities. The Singapore High Court’s decision suggests that a scheme of arrangement could (in appropriate cases) override this general rule.  In reaching its decision, the court specifically noted Australian authority that substantive consolidation, or pooling, may be conducted pursuant to a scheme of arrangement, citing Dean-Willcocks v Soluble Solutions Hydroponics Pty Ltd (1997) 42 NSWLR 209 in which Young J of the New South Wales Supreme Court held that:

“Assuming it is possible to have consolidation in corporate insolvency, how does one go about it? I will endeavour to answer this question with respect to companies that have gone into liquidation after the appointment of an administrator.

 There seem to me to be four main possibilities. First there is no doubt at all that a scheme of arrangement under s 411 of the Corporations Law could be approved by the creditors and the court. This course is sure, but would involve not inconsiderable costs in calling fresh meetings of creditors and making a two stage application to the court. 

…

Before noting the formal order it may be of use to summarise the basic principles I have covered. These are:

 (1) That where there is to be consolidation of the assets and creditors of a group of companies, normally that result should be obtained by a formal scheme of arrangement under s 411 or some other appropriate section of the Corporations Law.

…”

It is notable that the English courts have also indicated that substantive consolidation may be permitted in appropriate cases.  In Bank of Credit and Commerce International SA (No 3) [1993] BCLC 1490 (“BCCI”) the English Court of Appeal (Civil Division) approved an arrangement to pool the assets of two groups of companies in liquidation by way of the liquidator’s exercise of powers to “make any compromise or arrangement with creditors” under Schedule 4 of the UK Insolvency Act 1986 (similar to section 144(1)(c) of the Singapore Insolvency, Restructuring and Dissolution Act 2018)[1].  At page 1502, the Court of Appeal held:

“As for pooling, the Vice-Chancellor said of the pooling agreements (at 111):

'I am in no doubt that the agreements are so plainly for the benefit of the creditors that I should approve them without further ado. I am satisfied that the affairs of BCCI SA and BCCI Overseas are so hopelessly intertwined that a pooling of their assets, with a distribution enabling the like dividend to be paid to both companies' creditors, is the only sensible way to proceed. It would make no sense to spend vast sums of money and much time in trying to disentangle and unravel.’

I entirely agree. I would reject the submission that there should first be further investigation as to whether pari passu distribution is the correct basis for pooling or not. In the complexities of this case I do not see that further investigation would be likely to be fruitful and the time taken would defeat the time limits of the contribution agreement.”

Other jurisdictions, such as the USA and New Zealand, have express statutory provisions permitting substantive consolidation.  For example, the US Bankruptcy Code at Chapter 11, § 1123[2] provides that:

Ҥ 1123. Contents of plan

 (a) Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall—

 (5) provide adequate means for the plan’s implementation, such as—

(A) retention by the debtor of all or any part of the property of the estate;

(B) transfer of all or any part of the property of the estate to one or more entities, whether organized before or after the confirmation of such plan;

(C) merger or consolidation of the debtor with one or more persons;”

An authoritative summary of the US position is set out in Chapter 11 Reorganisations, Second Edition (2019) at pages 662-663, which also contains a useful description of the factors considered by the US Courts in a substantive consolidation application:

A plan may be implemented by merger or consolidation of the debtor with one or more persons.  If substantive consolidation is planned, the proponent must demonstrate satisfaction of the following criteria:

1. 1.  a practical necessity for consolidation in view of the debtors’ interrelationship;
   2. whether the benefits of consolidation would outweigh harm to creditors; and
   3. whether prejudice would result in the absence of consolidation.

Since substantive consolidation arises in equity, the court has the power to modify substantive consolidation to meet the specific needs of the case. Thus, a bankruptcy court may, in appropriate circumstances, order a less than complete substantive consolidation or place conditions on substantive consolidation’s occurrence…

 [At footnote 3] The degree of interrelationship between debtor entities is generally said to turn upon the following considerations:

1. 1.  assumption by the parent of contractual obligations of its subsidiaries;
   2. sharing of overhead, management, accounting, and other related expenses among different corporate entities;
   3. existence of intercompany guarantees of loans;
   4. shifting of funds from one company to another without observing corporate formalities.

VI.   The Singapore High Court’s decision on sealing / confidentiality orders

The Singapore High Court further granted confidentiality orders anonymising the names of BFG’s creditors. This is significant because several cryptocurrency restructuring or insolvency filings have led to a contagion effect (otherwise also known as a “knock-on” or “spillover” effect). If the names were not anonymised, the market may adversely view customers listed as having significant exposure to the group, thus causing a “run” on those cryptocurrency players and/or investors by their own creditors. The Singapore High Court’s confidentiality orders should help to mitigate or prevent a contagion effect in BFG’s restructuring filing.

V.   Singapore’s broader approach to crypto-currencies and digital assets

Zooming out and looking at the larger context, this welcome decision could also be characterised as being part of a broader “crypto-friendly” trend in Singapore court decisions that has been gathering traction for some time. Some examples of relevant cases include the following:

• Over the recent few years, the Singapore courts have gone from merely suggesting that cryptocurrencies may amount to property (B2C2 Ltd v Quoine Pte Ltd [2019] 4 SLR 17 at [142]), to finding that cryptocurrencies did fulfil the four requirements to be classified as property as set out in Ainsworth (e.g. CLM v CLN [2022] SGHC 46 at [46], ByBit Fintech Ltd v Ho Kai Xin and others [2023] SGHC 199).
• In Rio Christofle v Tan Chun Cheun Malcolm [2023] SGHC 66 at [53] to [59], the Singapore High Court expressly clarified that section 5 of the Payment Services Act 2019 does not explicitly or impliedly prohibit contracts relating to the sale and purchase of cryptocurrency.
• Recently in Re Genesis Asia Pacific Pte Ltd and other matters [2023] SGHC 240, the Singapore High Court granted orders recognising and giving assistance to the Genesis Group’s respective proceedings under Chapter 11 of the United States Bankruptcy Code 11 USC (US) (1978), including moratorium orders in support of the Chapter 11 plan that the Genesis Group wishes to pursue.

Parties dealing with cryptocurrencies and players in the emerging blockchain space may therefore remain cautiously optimistic that the Singapore courts are likely to take a pragmatic and commercially-oriented approach in applying well-established legal principles to the novel facts presented by the increasing use and adoption of cryptocurrencies, and in supporting restructurings – even novel restructurings – of cryptocurrency companies in Singapore and worldwide.

 

REFERENCES

[1] At 1493.

[2] See further Section 271 of the New Zealand Companies Act 1993.

 

AUTHOR INFORMATION:

Alexander Yeo is a Partner at Allen & Gledhill LLP, where his areas of practice include corporate, commercial and insolvency disputes and arbitrations.

Email: alexander.yeo@allenandgledhill.com