Houchens v Ruscoe

[2023] NZHC 2969

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2023-485-431

[2023] NZHC 2969

UNDER

Part 16 of the Companies Act 1993

IN THE MATTER OF

Cryptopia Limited (in liquidation)

BETWEEN

RYAN HOUCHENS

First Applicant

AND

GIA THANH PHAN

Second Applicant

AND

TRISTEN ROBINSON

Third Applicant

AND

JOSHUA DAVID STEVENSON

Fourth Applicant

AND

DAVID IAN RUSCOE AND MALCOLM RUSSELL MOORE

Respondents

Hearing

12 September 2023

Counsel:

E B Moran and C M McCracken for the Applicants

M A Corlett KC and B R McKinnon for the Respondents

Judgment:

24 October 2023

JUDGMENT OF PALMER J

(appointment application)

Counsel/Solicitors

M A Corlett KC, Auckland J S Cooper KC, Auckland P G Watts KC, Auckland Buddle Findlay, Wellington

Buddle Findlay, Christchurch

DLA Piper New Zealand, Wellington

HOUCHENS v RUSCOE AND MOORE [2023] NZHC 2969 [24 October 2023]

What happened?

Liquidation

[1]    My reasons judgment of 6 September 2023 in related proceedings set out the recent history of the liquidation of Cryptopia Ltd (Cryptopia), which ran a cryptocurrency exchange.1 In summary, relevantly:

(a)In May 2019, after a serious hack of its cryptocurrency in January 2019, the shareholders of  Cryptopia  appointed  Mr  David  Ruscoe  and  Mr Malcolm Moore, of Grant Thornton New Zealand Ltd, as liquidators of the company under s 241(2)(a) of the Companies Act 1993.

(b)The liquidation involves complex arrangements regarding around 370 functioning cryptocurrencies owned by some 960,000 holders of accounts with positive balances in around 180 countries.

(c)On 8 April 2020, the High Court determined that each type of cryptocurrency is intangible property held by Cryptopia as trustee for the benefit of all the account holders of that currency.2 Cryptopia itself is a beneficiary of some of those trusts.3 That judgment sets out a more detailed account of the factual background of the liquidation.

(d)The liquidators have developed a portal to enable account holders to receive notification of their account balance. Some 40,000 account holders who have completed identity verification have been invited to accept their account balances, to confirm that Cryptopia’s reconciled database records were correct. Cryptopia’s customer service team has dealt with over 94,000 user queries. There have been over 70 email campaigns to encourage more account holders to participate in the process.

1      Ruscoe v Houchens [2023] NZHC 2490 [Reasons Judgment].

2      Ruscoe v Cryptopia Ltd (in liq) [2020] NZHC 728, [2020] 2 NZLR 809 at [120], [133], [187], and

[196].

3 At [146].

(e)A significant number of account holders have not registered and a large proportion of those who have registered have not completed the identity verification process. A large number of beneficiaries, in number and by percentage value, are not expected to participate in the distribution process.

(f)While the current value of the company’s assets is being kept confidential for commercial reasons, the liquidators advise that the total costs they have incurred to date remain a very low percentage of the value of the total funds under management.

Previous applications

[2]    The liquidators have applied for directions from the Court as to distribution of trust assets. That application will be heard on Monday 13 November 2023, for up to three days.

[3]    On 9 August 2023, on application by the liquidators and by consent, I appointed:

(a)Ms Jenny Cooper KC as representative counsel for unsecured creditors of Cryptopia; and

(b)Mr Peter Watts KC as counsel to assist the Court by providing arguments for and against the liquidators’ preferred approach as to the distribution application and issues arising from that.

[4]    The liquidators also applied application for sale of cryptocurrency to fund the liquidation. The four applicants opposed it, expressing concerns about conduct of the liquidation: whether cryptocurrency will be returned to them, the amount of their balances, the balance acceptance process, the information provided about their holdings, and the management of the trust administration process.4 The liquidators responded to those concerns and expressed their own concerns about the association

4      Reasons Judgment, above n 1, at [10].

of the applicants with Mr Victor Cattermole, a director of Cryptopia Rescue. He has dishonesty convictions and was held in contempt by the High Court in July 2021 in relation to improperly obtaining and retaining confidential Crytopia information.5 On 31 August 2023, counsel for the applicants confirmed that the applicants each have an agreement with Mr Cattermole for him to pay counsel’s fees in connection with this matter.

[5]    On 10 August 2023, I granted the application for sale of cryptocurrency to fund the liquidation was successful.6 I provided the reasons for that decision on 6 September 2023.7

This application

[6]This judgment deals with an application by the applicants the Court:

(a)appoint Mr Kim Francis of Lindsay & Francis (or another suitable appointee) as:

(i)a special trust adviser; and

(ii)an independent representative to represent the interests of account holders/beneficiaries of Cryptopia in proceeding CIV- 2023-485-411 and any subsequent proceeding brought in relation to the liquidation of Cryptopia and realisation of trust assets;

(b)authorise the adviser/representative to represent the interests of accountholders/beneficiaries in relation to the liquidation proceedings, the liquidation, the management of trusts, and other related matters, including to:

5 At [11].

6      Ruscoe v Houchens [2023] NZHC 2143 [Results Judgment].

7      Reasons Judgment, above n 1.

(i)provide an ongoing supervisory function in relation to the liquidators’ actions and the overarching interests of account holders;

(ii)communicate directly with account holders (and their representatives) if the independent representative reasonably considers it to be necessary to discharge their functions (including to obtain instructions); and

(iii)provide advice that may assist the Court, including the respondent’s compliance with their fiduciary obligations to accountholders;

(c)grant the representative rights to appear and be hard at any hearing that may impact account holders;

(d)directing the respondents to meet the independent representative’s reasonable costs and expenses; and

(e)requiring the respondents to:

(i)consult with counsel for the applicants in relation to the independent representative’s appointment and instructions;

(ii)disclose communications with the independent representative to account holders on request;

(iii)promptly provide the independent representative with information that reasonably considers to be necessary to fulfil their role as representative;

(iv)keep the independent representative reasonably informed of any proposed actions in relation to their trustee duties and the assets of account holders;

(v)give the representative at least 10 working days’ advance notice of any proposed application to seek directions/orders that may impact account holders; and

(vi)promptly serve the representative with any documents the respondents file that may impact account holders; and

(f)such further orders that the Court thinks just.

[7]    The application is supported by affidavits by the fourth applicant, Mr Josh Stevenson and by Mr Andrew Ross and by Mr Tristen Robinson in reply. The liquidators’ notice of opposition is supported by an affidavit of Mr Ruscoe.

[8]    On 28 August 2023, I declined a request by the applicants to require service of the application on all account holders.8 Service was not required and would not be an efficient or just means of dealing with the application. The interests of the account holders could be represented by the liquidators who have engaged senior counsel. To mitigate any perception of conflict of interest, I appointed Mr Watts to assist the Court also by making submissions in the independent interests of account holders in relation to the application.

[9]    In the course of pursuing this application, the applicants also sought leave to file two further affidavits to complete the information before the Court. The liquidators oppose their admission as being late and unnecessary. In his affidavit dated 5 September 2023, Mr Flanagan-Connors provides exchanges of lawyers’ letters and emails between counsel. They add nothing material to what is already before the Court and I do not admit the affidavit as evidence. In his reply affidavit dated 6 September 2023, Mr Stevenson enlarges on his concerns and reply to Mr Ruscoe’s affidavit. Because it is potentially relevant, is provided as reply evidence following up an initial affidavit given by Mr Stevenson, and does not prejudice the liquidators, I admit this affidavit.

8      Houchens v Ruscoe HC Wellington CIV-2023-485-411, 28 August 2023 (Minute of Palmer J).

Relevant law

[10]   Rule 4.27(b) of the High Court Rules 2016 (the Rules) empowers the Court, on application by a party, to “appoint a counsel who agrees to represent … unrepresented persons”.

[11]   Section 74 of the Trusts Act 2019 (the Act) empowers the Court, on application of a beneficiary, to appoint a special trust adviser who:

(a)may advise the trustee on any matter relating to the trust; but

(b)is not a trustee of the trust and does not have the powers or duties of a trustee.

[12]Section 75 provides:

75       Reliance on special trust adviser’s advice

(1)If there is a special trust adviser, a trustee—

(a)may consult the special trust adviser on any matter relating to the trust; and

(b)is not required to follow the special trust adviser’s advice; and

(c)is not liable in a proceeding brought by or on behalf of a beneficiary for an act or omission the trustee makes as a result of following the special trust adviser’s advice unless the act or omission involves the trustee’s dishonesty, wilful misconduct, or gross negligence (see section 44, which relates to the court’s consideration of gross negligence).

(2)A special trust adviser’s disagreement with or objection to a proposed action to be taken by a trustee in respect of trust property does not affect a person dealing with the trustee in the matter.

Submissions

[13]Ms Moran, for the applicants, submits:

(a)There is a clear legal basis for the proposed appointment(s), reinforced by the Court’s inherent equitable jurisdiction and role in supervising trusts:

(i)Rule 4.27 of the Rules provides jurisdiction for appointing the representative counsel, which is wholly conventional. The critical criteria for appointment are met here: the unrepresented person’s interests are affected; representation is necessary for determining the issues before the Court; and there is an alignment in the interests of the person to be represented. To the extent there are differences between beneficiaries, they are not an answer to the application or the absence of any representation of them.

(ii)Section 74(2) of the Act provides extremely broad jurisdiction for appointment of the special trust adviser and s 75 is not connected with the power of appointment. The Court has considered whether to appoint such an adviser in only three cases before, which are of limited relevance here. The merits of the appointment must be assessed in the particular circumstances of the trusts. Appointment would be a pragmatic means of resolving the applicants’ concerns to safeguard the administration of the trusts rather than waiting for a breach of trust allegation.

(b)The appointments sought are necessary because of questions about how the trustee duties have been engaged with. Although this is not a claim of breach of trust, serious issues in the liquidation and distribution impact on the interests of account holders as a class. There is currently no one to advance them. Many of the beneficiaries have modest holdings and information asymmetries make it difficult for them to access relevant information. Conflicts between account holders would not be intractable. There is no principled basis on which unsecured creditors should have representation but account holders should not. It would inundate the Court if the beneficiaries were all to be represented individually. The applicants essentially want a go-between, like counsel assisting the Court, to receive queries from individual account

holders, obtain information from the liquidators and put information before the Court.

[14]   I have also received written submissions regarding the application from “gny.io Limited” which is incorporated in Jersey. It is said to be the developer of Lisk Machine Learning tokens and to be another Cryptopia account holder and creditor. It supports the application but acknowledges it is not a party to the application, was not served with it, does not seek to formally intervene in the application, and its counsel did not appear. That being so I simply note its efforts.

[15]Mr Corlett KC, for the liquidators, submits:

(a)There is no legal basis for the application. Rule 4.27 does not apply to proceedings that do not yet exist and the directions sought go well beyond what is contemplated for representative counsel or a special trust adviser. The language of ss 74 and 75 of the Act is permissive. There is no authority for the appointment of a special trust adviser (or their predecessor, an advisory trustee) with a supervisory function.

(b)There is no practical need for the appointments because account holders already have sufficient protection. The appointments of Ms Cooper and Mr Watts assist the Court and Mr Watts’ arguments are likely to centre around account holders’ interests. Different account holders will be impacted differently by the distribution orders sought and it will not be possible to categorise their conflicting interests into classes for the purpose of representation. The Act provides a statutory framework for the provision of trust information to beneficiaries. Beneficiaries can apply for the Court to review any act, omission or decision of a trustee. The liquidators are licensed insolvency practitioners, governed and monitored by professional bodies and subject to the supervision of the Court. Further supervision is unnecessary.

(c)There is no evidential basis for the appointment(s). Despite pleading breaches of trust against a reputable firm, the applicants do not point to

any substantiated concerns about a breach of trust and no proceedings have been commenced. The application is something of a fishing expedition. The scope of the appointment, with wide-ranging, unprecedented, open-ended powers, is practically unworkable and would likely require constant clarification and supervision by the Court. The application would impose a cost burden on all account holders for the sake of the complaints of four account holders.

[16]   Mr Watts is not aware of any precedent for appointment of an independent representative to represent beneficiaries in relation to trustees, because beneficiaries have standing. So it would be novel, but it might not be radical given the number of beneficiaries here. The main concern in practice appears to be access to the portal but if that concern is big enough for someone they can apply to the Court for orders. He agrees with Mr Corlett that there will be conflicts between account holders and submits, for that reason, it would only make sense to appoint a representative counsel to represent holders of accounts below a certain sum. He does not agree that r 4.27 of the Rules or s 74 of the Act provide jurisdiction for an appointment that enables the direction of the trustees. He notes the power to create liquidation committees in s 314 of the Companies Act and submits there may be some equitable jurisdiction to appoint the equivalent of a liquidation committee where there is a large class of account holders with small sums at stake. But he is not sure whether the time for that might have passed, given that distribution is close. He notes the power of receivers to administer a trust under s 138 of the Act but does not consider that is warranted here.

Should the Court make an appointment?

[17]   In granting the application for the sale of cryptocurrency to fund the liquidation, I noted that the (now) applicants had expressed generalised indications of concern about actions of the liquidators. 9

The generalised indications of concern by the respondents about actions by the liquidators do not amount to proof of a breach of trust. If the respondents are really concerned about an alleged breach of trust, they should file an application accordingly, supported by evidence.

9      Reasons Judgment, above n 1, at [20].

[18]No such application has been filed.

[19]   The evidence supporting the application here constitutes further similar generalised concerns:

(a)Mr Stevenson has been unable to set up an account, has questions about the liquidation, is worried about reviewing their spending, and is concerned that someone who has not been chosen by the liquidators will actively represent account holders.

(b)Mr Ross does not understand how the funds for the liquidation have been spent, is worried the value of his savings will be reduced and is not happy with the liquidators also being trustees.

(c)Mr Robinson details his difficulties in completing the Cryptopia Claims Portal process, due to the requirement to remember specific account information.

[20]   None of this points to evidence of anything approaching a breach of trust. It is a continuation of generalised expressions of concern which may or may not have any substance to them. In hearing this application, I asked Ms Moran what an independent representative could do that she, as counsel for the applicants, could not. The answer was that an independent representative could require information from the liquidators. All this suggests that this application is not based on an existing problem with the liquidation but is intended to be a means to find a problem. It is a fishing expedition, as Mr Corlett submits. There is insufficient evidential basis of a practical problem to make the sort of appointments sought, even if the Court could do so. And the powers sought for the appointees to exercise are not necessary in order for the Court to consider the distribution application.

[21]   Furthermore, I do not consider the appointments sought would be an effective means of protecting the interests of account holders.  As Mr Corlett submits,  and  Mr Ruscoe’s evidence details, there are overlapping groups of account holders with diverse interests. There are 72 trusts for each of the cryptocurrencies owned by

Cryptopia. One account holder can have interests in several different trusts. Different account holders have interests of different amounts and proportions in different trusts. The cost allocation model proposed in the liquidators’ application for distribution means account holders will pay costs in respect of each cryptocurrency trust of which they are a beneficiary. Account holders will have different interests in the timing of distribution depending on what stage in the claims process their claim is at. I am not satisfied a representative counsel or special trust adviser would be able to reconcile these interests. Given the uncertainty about the proposed powers to require consultation and information provision, Mr Ruscoe considers the proposal is likely to be practically unworkable without recourse to the Court should differences arise between the liquidators and an independent representative. That would seem inevitable.

[22]   The liquidators are licensed insolvency practitioners from a reputable firm of chartered accountants and subject to scrutiny and monitoring by professional bodies. I accept Mr Corlett’s submission that appointment of counsel to assist the Court,    Mr Watts, is a more effective means of protecting the interests of account holders than that proposed in the application. The applicants noted Mr Watts was eminently qualified for the role and did not oppose his appointment. I am confident in his independence from the liquidators. In assisting the Court he will be able to identify and provide independent advice to the Court about issues with the distribution application in the interests of account holders. Ms Cooper can represent the interests of unsecured creditors. If an account holder has a significant issue they wish to pursue, they are able to apply to the Court to appear and be heard.

[23]   In any case, I do not consider the identified Rules or sections of the Act provide the Court with the jurisdiction to make the appointments sought. Supervising or subjecting trustees to requirements is not part of a representative counsel’s role under r 4.27 of the Rules.

[24]   Nor does the permissive language of s 74 of the Act empower the Court to confer upon a special trust adviser the extraordinary powers that are sought to supervise the liquidators, or to require the liquidators to consult them or provide them with information, all at the expense of account holders. Section 75(1)(b) and (2)

explicitly provide that a trustee is not required to follow advice of a special trust adviser and their objection does not affect a person dealing with the trustee. The Law Commission report leading to these provisions recommended that “advisory trustees” be renamed “special trust advisers” to avoid confusion over their role.10 As the new name implies, special trust advisers can be consulted by trustees but are advisory. They are not real trustees themselves, and trust property “remains vested in the trustee who retains sole management and administration of the trust”.11

[25]   If there were any jurisdiction to make the orders sought, it would be found in the Court’s inherent equitable jurisdiction. But for such a jurisdiction to be exercised there must be a problem of fairness affecting the interests of account holders which they could not reasonably be expected to address through their own efforts or representation. No such problem has been identified.

Result

[26]   The application to appoint a representative counsel or special trust adviser is dismissed. Costs follow the event.

Palmer J

10     Law Commission Review of the Law of Trusts: A Trusts Act for New Zealand (NZLC R130, 2013) at 36.

11     At [9.9].