Ruscoe v Houchens

[2023] NZHC 3224

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

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

CIV-2023-485-411

[2023] NZHC 3224

IN THE MATTER OF

CRYPTOPIA LIMITED (IN LIQUIDATION)

BETWEEN

AND

AND

DAVID IAN RUSCOE and MALCOLM RUSSELL MOORE

Applicants

RYAN HOUCHENS, GIA THANH PHAN, TRISTEN ROBINSON, JOSHUA DAVID STEVENSON, ANDREW ST JOHN ROSS

First to Fifth Interested Parties

GNY.IO LIMITED

Sixth Interested Party

Hearing:

13 November 2023

Appearances:

S A Barker and B E Marriner for the Applicants

No appearance for the First to Fifth Interested Parties L C Bercovitch for the Sixth Interested Party

P G Watts KC, counsel assisting the Court regarding the interests of account holders

J S Cooper KC and J A R Barrow, counsel assisting the Court regarding the interests of creditors

B P Henry and O K Thomas for Epic Trust Ltd

Judgment:

15 November 2023

JUDGMENT OF PALMER J

(Submissions)

Counsel/Solicitors

J S Cooper KC, Auckland P G Watts KC, Auckland

J A R Barrow, Barrister, Auckland

B P Henry and O K Thomas, Barristers, Auckland Buddle Findlay, Wellington

Chapman Tripp, Auckland Cavell Leitch, Christchurch

RUSCOE v HOUCHENS [2023] NZHC 3224 [15 November 2023]

The parties and interested parties

[1]    On 31 July 2023, the liquidators of Cryptopia Ltd (in liq) (Cryptopia) applied for directions about distribution of the  cryptocurrency assets of the  company.  On   9 August 2023, without objection, I made orders as to service of the application. They involved the liquidators emailing those account holders for whom they had an email address and making available downloadable copies of the proceedings on the Cryptopia website.

[2]    On 1 September 2023, I determined that anyone who opposes the liquidators’ distribution application should be joined and named as respondents. Those who file only a notice of appearance would be named as interested parties. No one applied for joinder. No one filed a notice of opposition. Two notices of appearance were filed,  by the first to fifth, and by the sixth, interested parties.

The hearing

[3]    On 8 November 2023, Mr Henry and Ms Thomas, acting for Epic Trust Ltd (Epic Trust), filed a memorandum and a supporting affidavit by Mr Victor Cattermole, the owner and director of Epic Trust. The memorandum stated that Epic Trust, on behalf of 690 beneficiaries of the trusts in the cryptocurrencies held by Cryptopia, gave notice that it will appear to be heard to seek amendments to the notice to be sent out by the liquidators to account holders. The liquidators opposed Mr Henry and Ms Thomas being heard and filed an affidavit.

[4]    On 13 November 2023, I heard the application by the liquidators. Mr Henry and Ms Thomas sought to appear for Epic Trust. I heard submissions from Mr Henry about why he should be able to make submissions, and from Mr Barker about why Mr Henry should not. I granted leave for the liquidators to file and serve a further updating affidavit and to Epic Trust to file and serve an affidavit in reply. I requested that the affidavit in reply should cover the answers to questions I asked Mr Henry, which he had answered from the bar, about how Epic Trust acquired the email addresses of account holders.

Evidence

[5]    Mr Cattermole and the liquidators have provided several affidavits each, the relevant contents of which I summarise here.

The players

[6]    Mr Cattermole is a director of a Hong Kong company, Classic Focus Ltd (Classic Focus), and “Chairman of the Crown Council” (and, apparently, Prince of the Principality of the Cogito Metaverse). He is associated with an enterprise called “Cryptopia Rescue” which is not  associated  with  Cryptopia  or  the  liquidators.  Mr Cattermole is also the owner and director of Epic Trust, a Montenegro company. Epic Trust manages crypto transactions and acts as trustee to the business dealings of Classic Focus and Cogito Metaverse.

The Epic Trust Ltd offer

[7]    Mr Cattermole’s companies have recently sent a letter to account holders of Cryptopia offering to purchase their entitlements with an account value of less than

€500 in return for 500 COG (a digital coin or token created by Cogito Metaverse). The liquidators say there is no evidence of any audit verifying the asset backing of COG. Mr Cattermole says the liquidators have not understood the COG metaverse and people who invest in alternate currencies do understand the nature of such systems. He denies he is trying to cheat the beneficiaries.

[8]    Classic Focus has said to the liquidators it would hold unclaimed property in “Zerocap”. Zerocap Pty Ltd and Zerocap Fund Services Pty Ltd, have confirmed to the liquidators they have had no dealings with Mr Cattermole, Classic Focus or related entities. Mr Cattermole says that because the Epic Trust offer did not proceed, Zerocap has no role.

Account holders’ responses

[9]    As of 8 am on 14 November 2023, Mr Cattermole’s evidence is that 2,289 account holders have assigned their Cryptopia holdings to Classic Focus/Cogito. He

puts in evidence sale and purchase agreements with Mr Glen Rogers and Mr Josh Stevenson, the fourth interested party. They are not signed.

[10]   Mr Ruscoe’s evidence is that: 22 of the email addresses of the account holders identified by Mr Cattermole are the Cryptopia no-reply address; one account holder has alleged that the liquidators have breached his privacy by allowing his email address to be obtained by Mr Cattermole’s entities; and one account holder has copied the  liquidators  into  a  complaint  he  has  sent  to  the  Police  about  the  offer.    Mr Cattermole’s evidence is that Epic Trust has accepted the cancellation of the agreement by the last of these. Mr Cattermole estimates the value of the holdings of the accounts associated with the email addresses are USD $9 million. The liquidators estimate it at NZD $81,737.40.

[11]   The terms and conditions between Cryptopia and the account holders prohibit assignment.

Mr Cattermole and the email addresses

[12]   Mr Cattermole has previously been held in contempt by the High Court for failing to return a spreadsheet of Cryptopia account holders’ details, including email addresses.

[13]   Mr Cattermole’s sworn explanation of the email addresses used to make the offers is that Classic Focus and Cogito made a social media campaign to contact beneficiary account holders who registered and accepted the offer. When they registered, they were asked to provide their Cryptopia email address. Mr Cattermole’s evidence is that he has not breached his undertaking because he does not have copies of the spreadsheets (of email addresses) in his power, possession, or control. He says the relevant emails were sent by Cogito after legal advice from Hong Kong lawyers.

[14]   The liquidators have received 64 customer service helpdesk requests regarding the Classic Focus offer confirming they had never signed up for Cryptopia Rescue and many had never heard of it before receiving the offer. Thirty-nine of the email addresses were inactive internal Cryptopia email addresses and could not have been used by any person to respond to an advertisement by anyone. Further offers have

been sent to 15 active Cryptopia email addresses of whom none have signed up to a Cogito mailing list. Mr Ruscoe’s evidence is that the invalid addresses were in the spreadsheet of account holders’ contact information Mr Cattermole retained in breach of the consent orders made by Gendall J in July 2021.

[15]   Mr Ruscoe therefore  wishes  to  exercise  the  right  under  that  order  for  Mr Cattermole to attend for an urgent examination order under oath under s 266 of the Companies Act 1993. And he objects to Mr Cattermole being heard in this proceeding. Mr Cattermole has no objection to being examined under oath and is happy to provide his computer to an independent expert, with suitable undertakings.

Submissions

[16]Mr Barker, for the liquidators, submits:

(a)Mr Cattermole should have applied to be joined to the proceedings and named as a respondent if he wanted to oppose the application. He has done neither and has not sought leave to appear.

(b)Mr Cattermole and Epic Trust do not have standing to appear and do not have a legitimate interest in the proceeding. There is no evidence that they are creditors or account holders of Cryptopia. The liquidators have not received any notice of assignment of account holders’ entitlements and there is no evidence of assignments. The inclusion of the liquidators’ no reply email addresses in Mr Cattermole’s affidavit casts doubt on the veracity of the alleged assignment. Clause 18.2(b) of the Terms and Conditions, that Gendall J held apply to the relationship between account holders and the Cryptopia, prohibits assignment.1

(c)Zerocap’s response to the liquidators’ inquiries suggests the offer letter is misleading and untrue. There is no evidence of asset backing of the COG. Mr Cattermole is offering COGs in exchange for account

1      Ruscoe v Cryptopia Ltd (in liq) [2020] NZHC 728, [2020] 2 NZLR 809 at [27].

holders’ rights. But COGs are useless except in Mr Cattermole’s metaverse. There is no option to withdraw cash. It is not a cryptocurrency. This is a scam.

(d)It is not necessary to hear from Epic Trust because the interests of account holders are being represented by counsel assisting the Court to do so — Mr Watts KC. If any of the account holders wish to appear, they could seek leave to do so.

(e)The liquidators’ overriding concern is that Mr Cattermole was held in contempt of court in July 2021 for a deliberate contumacious failure to return the addresses of account holders that he had obtained improperly. Forty account holders have said they do not know how Epic Trust got their email addresses. The liquidators are concerned about whether  Mr Cattermole has complied with his undertakings. The disclosure of those email addresses may give rise to privacy breaches in the United Kingdom, Montenegro and New Zealand. The explanation for how the email addresses were obtained is at odds with Mr Ruscoe’s evidence.

[17]Mr Henry, for Epic Trust, submits:

(a)The only point of his  submissions  is  about  the  duty  to  account.  Mr Cattermole’s evidence is that the purpose is to ensure the beneficiaries have the appropriate information as to the state of the coins held in the trusts.

(b)At first, at the hearing, Mr Henry tried to argue that Epic Trust does not oppose the application. But, after my questions, he conceded that it does not want the orders made without an additional paragraph being added, so the orders are opposed “in that technical sense”. He had not then formulated that paragraph. But he thought it would basically seek that the trustees must disclose what coins each beneficiary held at the day of the hack, what coins are held by the liquidators, and what coins are available for distribution, so the values can be worked out. After

the hearing, Epic Trust filed a notice of opposition listing the grounds of the opposition (with typos corrected) as:

The directions should:

aDisclose to the beneficiaries full particulars of the Trusts and the number of coins that they are beneficiaries of as at 1 January 2019 (before the hack).

bDisclose to the beneficiaries full particulars of the Trusts and coins that they are beneficiaries of as at 14 May 2019, being the date of appointment of liquidators.

cDisclose to the beneficiaries full particulars of the Trusts and coins that they are beneficiaries of as at the date of the originating application 31 July 2023.

(c)Some 2,289 account holders have now applied to Epic Trust to take up its offer. When asked to explain how there could be a valid assignment of account holders’ entitlements when the terms and conditions do not permit assignment, Mr Henry submitted the terms and conditions do not still apply in law.

Should Epic Trust Ltd be permitted to appear and make submissions?

[18]   Rule 7.24 of the High Court Rules 2016 requires that a notice of opposition be filed and served by someone wishing to oppose an application. But failure to do so has no formal legal effect and, in its inherent jurisdiction, the High Court can decide to hear submissions even if that step is not taken.2

[19]   Epic Trust’s behaviour in these proceedings to date has been disruptive and unsatisfactory. The hearing on 13 November 2023 was set down as a backup fixture on 1 September 2023. Mr Cattermole would presumably have known that, since he was reported to the Court to be funding the earlier efforts of the first to fifth applicants in these proceedings. Yet his company, Epic Trust, represented by Mr Henry, did not

2      See Mihinui v Attorney-General for the Ministry of Education [2017] NZHC 654 at [10] and [12]– [13]; Jessica Gorman and others McGechan on Procedure (online looseleaf ed, Thomson Reuters) at [HR7.24.03]; and, in a different legislative context, see for example Ngāi Takoto Iwi [2023] NZHC 301 at [19].

follow the correct procedure by filing and serving a notice of appearance or an application to be joined, or a notice of opposition before the hearing.

[20]   Instead, Epic Trust filed and served a memorandum and an affidavit which did not disclose exactly what Epic Trust would be seeking. This has necessarily caused a flurry of affidavits between the liquidators and Epic Trust. The Court, the liquidators, the counsel assisting the court, and the other account holders or creditors who could have sought to appear have been prejudiced in considering or responding to the submissions and whatever Epic Trust was seeking. Accordingly, on 14 November 2023, I declined to hear Epic Trust on the liquidators’ application on 15 November 2023. It would simply not be fair to all those involved.

[21]   The evidence provided to date by the liquidators raises doubts about whether Epic Trust really has an interest in the proceedings. There is a lack of evidence about assignment of account holders’ entitlements. The two sale and purchase agreements exhibited to Mr Cattermole’s affidavits are not signed. There is a legal issue about whether any such assignment would be valid in law.

[22]   After the hearing, on 14 November 2023, Epic Trust filed and served an application to be joined to the proceedings as a respondent and a notice of opposition to the liquidators’ application with supporting affidavits, as it should have in the first place. In addition, Mr Ruscoe has foreshadowed in his evidence an intention to apply for orders that Mr Cattermole be examined under oath about whether Mr Cattermole has breached his undertaking regarding the use of account holders’ email addresses. Mr Cattermole is willing to be examined. The Court will deal with these applications in the ordinary way according to the due processes of the Court.

[23]   The liquidators should apply to examine Mr Cattermole and that will be considered along with the application for joinder. If joinder is granted, Epic Trust’s opposition to the liquidators’ application will be heard as an application to amend any orders made as a result of the liquidators’ application for directions.

Directions

[24]I make the following directions:

(a)By 5 pm Monday 20 November 2023, the liquidators will file and serve:

(i)any notice of opposition to Epic Trust’s application for joinder, with supporting affidavit(s); and

(ii)any application to examine Mr Cattermole, with supporting affidavit(s).

(b)By 5 pm Monday 27 November 2023, Epic Trust will file and serve:

(i)any affidavits strictly in reply to the liquidators’ opposition to the application for joinder;

(ii)its written submissions of up to 10 pages in relation to the application for joinder; and

(iii)any notice of opposition (if Mr Cattermole’s position changes) to the application to examine Mr Cattermole, with supporting affidavit(s).

(c)By 5 pm Monday 4 December 2023, the liquidators will file and serve:

(i)any affidavits strictly in reply to any opposition to the examination of Mr Cattermole;

(ii)their written submissions of up to 10 pages in relation to the application for joinder; and

(iii)their written submissions of up to 10 pages in relation to the application to examine Mr Cattermole, if it is opposed.

(d)                 By 4 pm Friday 8 December 2023:

(i)Epic Trust will file and serve written submissions of up to 10 pages in relation to the application to examine Mr Cattermole, if it is opposed;

(ii)counsel assisting the Court and any interested parties will file and serve any written submissions of up to 10 pages in relation to either application.

(e)The Registry will set down a hearing of the applications to examine Mr Cattermole and the application for joinder, for up to one day, before me   in   the   Wellington   High   Court,   in   the    week    of Monday 11 December 2023.

(f)I reserve leave for any party or counsel assisting the Court to apply for any further directions they consider necessary.

Palmer J