Ruscoe v Houchens

[2023] NZHC 2490

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

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

CIV-2023-485-375

[2023] NZHC 2490

UNDER

Part 16 of the Companies Act 1993

IN THE MATTER OF

Cryptopia Limited (in liquidation)

BETWEEN

DAVID IAN RUSCOE AND MALCOLM RUSSELL MOORE

Applicants

AND

RYAN HOUCHENS

First Respondent

AND

GIA THANH PHAN

Second Respondent

AND

TRISTEN ROBINSON

Third Respondent

AND

JOSHUA DAVID STEVENSON

Fourth Respondent

Teleconference:

9 August 2023

Counsel:

S A Barker and B E Marriner for the Applicants

E B Moran and C M McCracken for the Respondents

Judgment:

6 September 2023

JUDGMENT OF PALMER J

(Reasons for decision on sale application)

Solicitors

Buddle Findlay, Wellington

DLA Piper New Zealand, Wellington

RUSCOE v HOUCHENS [2023] NZHC 2490 [6 September 2023]

What happened?

Cryptopia

[1]    Cryptopia Ltd (Cryptopia) is a company that ran a cryptocurrency exchange. In January 2019, there was a serious hack of Cryptopia’s cryptocurrency and the loss of some $30 million of its cryptocurrency holdings.1 In May 2019, the shareholders of Cryptopia appointed Mr David Ruscoe and Mr Malcolm Moore as liquidators of the company under s 241(2)(a) of the Companies Act 1993. Mr Ruscoe and Mr Moore are chartered accountants, partners in the firm Grant Thornton New Zealand Ltd, and licenced insolvency practitioners. 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.

[2]    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 The High Court’s judgment sets out a more detailed account of the factual background of the liquidation.

Realisation of cryptocurrency to fund liquidation costs

[3]    Since appointment, the liquidators have, among other things, developed a portal to enable account holders to receive notification of their account balance. 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.

[4]    The liquidators advise that some 90 per cent of the total current value of all holdings held on trust by Cryptopia are in Bitcoin (BTC) and Dogecoin (DOGE).

1      All $ amounts referred to in the judgment are New Zealand dollars.

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

[196].

3 At [146].

approximately 24 per cent of Cryptopia’s BTC holdings and 34 per cent of its DOGE holdings have been claimed by account holders. 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. Accordingly, it appears at present that there is a real prospect that Cryptopia will be left with a substantial surplus of BTC and DOGE after all claims have been paid out.

[5]    The liquidators have previously made three unopposed applications to the Court to approve the sale of cryptocurrencies to fund the costs of the liquidation:

(a)On 29 May 2019, Gendall J permitted the liquidators to convert up to 344 BTC in the Cryptopia company account to fiat currency, to fund ongoing costs of the protection, preservation, recovery, management and administration of any cryptocurrency held by the company.

(b)On 19 February 2021, Gendall J permitted the liquidators to convert an additional 80 BTC for the same purpose.

(c)On 16 February 2022, Gendall J permitted the liquidators to convert DOGE into fiat currency to generate up to $5 million for the same purpose.

[6]    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. A large number of beneficiaries, in number and by percentage value, are also not expected to participate in the distribution process, including because they may not wish to, or may be unable to, provide evidence of their identity.

The application

[7]    On 4 July 2023, the liquidators made a fourth application to realise cryptocurrency to fund liquidation work. The liquidators’ evidence is that it has taken longer than expected to complete the tasks for which they had previously obtained an order to realise cryptocurrency because:

(a)Re-keying and reconciling all coins to ensure security across Cryptopia’s holdings to enable distribution has been a highly complex and technical process which required engagement of international cybersecurity and cryptocurrency experts and took longer than initially estimated. Distribution cannot proceed until this step is completed.

(b)The liquidators have investigated several options for distribution to beneficiaries, including converting all cryptocurrencies held by Cryptopia into one stablecoin cryptocurrency (pegged to an asset such as the US dollar). But the cost of pursuing that approach meant it was not worth pursuing.

(c)Overseas proceedings to locate and recover hacked assets have progressed more slowly than anticipated.

[8]    The liquidators estimate another $5 million will allow them to apply to the High Court for distribution of the cryptocurrency assets and continue ongoing operations for another 12 months. The liquidators estimate an average monthly expenditure of approximately $350,000, including on:

(a)administration of the claims portal, including payment of annual licence fees;

(b)seeking directions from the Court as to distribution of trust assets, including legal advice;

(c)building the software required for secure and efficient distribution of trust assets to account holders;

(d)carrying out the distributions;

(e)training and maintaining a customer support team to provide technical assistance to account holders with any issues in the distribution process;

(f)implementing a disputes process; and

(g)seeking recovery of the stolen trust assets that resulted in the Company's liquidation.

[9]The application was for the Court to make orders:

(a)Permitting the liquidators as trustees to convert into fiat currency the necessary quantity of BTC and/or DOGE held on trust by Cryptopia to generate approximately $5 million to meet the reasonable costs and expenses of, and incidental to, the protection, preservation, management and distribution of trust assets.

(b)Permitting the liquidators to pay, from the realisation of BTC and/or DOGE, their reasonable costs and expenses of, and incidental to, the protection, preservation, management and distribution of the trust assets.

(c)That the sealed orders in this proceeding be served on beneficiaries by making downloadable copies available via the Cryptopia website, Cryptopia account in X (formerly known as Twitter), and beneficiary email addresses (if provided).

(d)That any beneficiary of Cryptopia is granted leave to apply to the Court within 10 working days of such service referred to in (c) above to modify or discharge these orders on appropriate notice being given to the applicants.

(e)That leave is reserved for the applicants to apply further in respect of any ancillary orders.

(f)That the applicants’ solicitor-client costs of this application be an expense incurred by the applicants in carrying out their duties as trustees.

[10]   This application was opposed by the four respondents, who are account holders in Cryptopia. Their opposition was supported by affidavits in which they express concerns that:

(a)their cryptocurrencies may not be returned to them;

(b)their balances are lower than expected;

(c)they are required to go through a balance acceptance process and accept a disclaimer to receive information about their account balances;

(d)they have been provided with insufficient information by the liquidators about their holdings; and

(e)the liquidators may have mismanaged the trust administration process.

[11]Mr Ruscoe provided evidence in reply:

(a)He explains that the liquidators’ proposals for distribution will properly address many of the respondents’ concerns, including a Court- sanctioned review process for disputes about balances.

(b)He says the costs and length of administration of the liquidation to date are not out of step with comparable liquidations of large exchange collapses, such as those regarding Halifax Investment Services Pty Ltd and BBY Ltd.

(c)He responds in detail to the concerns of each of the respondents.

(d)He also notes that the respondents appear to be members of Cryptopia Rescue, of which Mr Victor Cattermole is a director, and their legal fees are being paid by  Mr  Cattermole.  Mr  Ruscoe’s  evidence  is  that Mr Cattermole has dishonesty convictions and was held in contempt by the High Court in July 2021 in relation to improperly obtaining and retaining confidential Cryptopia information.

[12]   I heard argument on 9 August 2023. By then, the liquidators’ position was that the application was urgent because they expected to run out of cash shortly. On 10 August 2023, I granted the application for directions for the realisation of cryptocurrency dated 4 July 2023, as sought.4 This judgment provides my reasons.

Law

[13]There is no difference between the parties about the relevant law:

(a)Section 81(2) of the Trusts Act 2019 provides that a trustee may be reimbursed from the trust property when acting reasonably on behalf of the trust, as governed by the rules of common law and equity relating to trusts. This confirms the previous position at equity.5

(b)Regarding liquidators as trustees, in Re Newsmakers International Ltd (in liq), McGechan J stated:6

Essentially, it has been recognised that when a liquidator is forced to carry out work in relation to assets held on trust, for the benefit of the beneficiaries concerned, the Court has an inherent jurisdiction to allow reasonable costs against those assets. There is an underlying and obvious equity. [Those] who [save] trust assets for the benefit of beneficiaries, properly can ask those beneficiaries to meet [their] proper expenses. It has been made clear that [the] jurisdiction does not extend to general expenses of the winding up: the activity concerned must relate to trust assets in direct fashion.

Submissions

[14]   Mr Barker, for the liquidators, submits that the sale application is a straightforward and ordinary exercise of a trustee’s right to indemnity under s 81 of the Trusts Act. Alternatively, the Court may exercise its inherent jurisdiction to award remuneration and payment of expenses for the liquidator. Mr Barker submits the respondents’ concerns are immaterial to the application or easily remedied by them

4      Ruscoe v Houchens [2023] NZHC 2143.

5      Butterfield v Public Trust [2017] NZCA 367, [2017] NZAR 1439, [2017] NZCCLR 27 at [21]– [22].

6      Re Newsmaker International Ltd (in liq) HC Napier M153/86, 24 February 1994 at 6.

and many can be addressed by the pending liquidators’ application for directions as to distribution.

[15]   Ms Moran submits that the fundamental issue is whether the liquidators have correctly understood and engaged with their duties to account holders as trustees seeking to realise trust assets. She identifies in particular the duties to act for no reward and not to profit, and to provide trust information and to account to beneficiaries for the amounts realised to date. The liquidators appear to be realising trust assets and apply them to expenses relating exclusively to the liquidation of the company in breach of their duty as trustees. A granular break down between the two categories of expenses which are currently intermingled is required.7 She submits reliance on s 81 of the Trusts Act is inconsistent with the liquidators not accepting they are trustees. The Court’s inherent jurisdiction does not extend to the expenditure of trust assets. If granted, the orders sought will reduce the value of the respondents’ assets and thereby prejudice the respondents. It would be premature to determine the sale application without seeing a detailed accounting of the expenditure to date and hearing from an independent representatives of account holders.

Reasons

[16]   The liquidators properly accept that Cryptopia is a trustee which owes duties and acts through its human agents, who are now the liquidators. The Court has jurisdiction under s 81 of the Trusts Act or its inherent jurisdiction to make the orders sought. I consider that the respondents did not identify any good reason why the Court should decline the liquidators’ application. It is in the interests of the beneficiary account holders to progress the distribution of assets to them, not to hold it up.

[17]   The liquidators have provided evidence as to how the funding will be expended, as summarised above. The liquidators have regularly reported to account holders and to creditors, with nine formal reports and 15 additional updates so far.

[18]   In relation to intermingling, Ms Moran pointed to the first page of Appendix A of the Liquidators’ Ninth Report as not distinguishing between trust and company

7      Re Secureland Mortgage Investments Ltd (No 2) (1988) 4 NZCLC 64,266 (HC).

assets. However, in his affidavit of 31 July 2023, Mr Ruscoe makes clear that the liquidators “… have always prepared separate accounts of the costs we have incurred in associated with the liquidation of Cryptopia and the costs we have incurred in administration of the Cryptocurrencies on behalf of the account holders”.8 Relying on the break-down of costs in Appendix A of the Ninth Report, he identifies $737,622 as the cost of steps taken in the liquidation of Cryptopia and $21,357,561 as the cost of steps taken in administration of the trusts and not in the liquidation of Cryptopia.9 Rather than the liquidators spending trust assets on company liquidation, his figures suggest that $6,828,709 will need to be reimbursed by the trust to the company.10

[19]   Ms Moran’s point about the need for an independent representative of account holders will be dealt with by the Court considering a separate application about that.

[20]   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. The four respondents’ concerns are not sufficiently substantiated to amount to good reason to put prevent the liquidators progressing distribution to some 800,000 beneficiaries.

Result

[21]   As stated in my judgment of 10 August 2023, I granted the application for directions for the realisation of cryptocurrency dated 4 July 2023, as sought.

Palmer J

8 Affidavit of David Ruscoe, dated 31 July 2023 (CIV-2023-485-411), at [111].

9      At [113]–[114].

10 At [118].