In many of the recent insolvencies of digital asset companies, liquidators have been appointed over companies in which digital assets have been fraudulently transferred from wallets controlled by an insolvent company into other unidentified wallets in foreign jurisdictions.
The anonymity of cryptoassets causes serious difficulties for insolvency practitioners in identifying the third parties who received funds and the location of the digital wallets.
Domestic Procedures
On 28 March 2024, the BVI Court granted the Joint Liquidators of Three Arrows Capital Ltd (in liquidation) ("3AC") sanction to make an interim distribution of up to US$100 million of 3AC's assets to its creditors in BVIHC(COM)2022/0119 Russell Crumpler and Christopher Farmer (as Joint Liquidators of Three Arrows Capital Ltd (in Liquidation)) v Three Arrows Capital Ltd (in Liquidation).
Our analysis of a recent court judgment in the ongoing liquidation of the high profile crypto-asset hedge fund Three Arrows Capital is by Nicholas Brookes and Romauld Johnson, part of Ogier's BVI team representing the joint liquidators.
Read our update on crypto insolvency issues from Three Arrows, which illustrates implications of the judgment including
Federal appellate courts have traditionally applied a "person aggrieved" standard to determine whether a party has standing to appeal a bankruptcy court order or judgment. However, this standard, which requires a direct, adverse, and financial impact on a potential appellant, is derived from a precursor to the Bankruptcy Code and does not appear in the existing statute.
The court-fashioned doctrine of "equitable mootness" has frequently been applied to bar appeals of bankruptcy court orders under circumstances where reversal or modification of an order could jeopardize, for example, the implementation of a negotiated chapter 11 plan or related agreements and upset the expectations of third parties who have relied on the order.
On June 6, 2023, the U.S. Bankruptcy Court for the Southern District of Texas confirmed the chapter 11 plan of bedding manufacturer Serta Simmons Bedding, LLC and its affiliates (collectively, "Serta"). In confirming Serta's plan, the court held that a 2020 "uptier," or "position enhancement," transaction (the "2020 Transaction") whereby Serta issued new debt secured by a priming lien on its assets and purchased its existing debt from participating lenders at a discount with a portion of the proceeds did not violate the terms of Serta's 2016 credit agreement.
Section 546(e) of the Bankruptcy Code's "safe harbor" preventing avoidance in bankruptcy of certain securities, commodity, or forward-contract payments has long been a magnet for controversy. Several noteworthy court rulings have been issued in bankruptcy cases addressing the application of the provision, including application to financial institutions, its preemptive scope, and its application to non-publicly traded securities.
Bankruptcy trustees and chapter 11 debtors-in-possession ("DIPs") frequently seek to avoid fraudulent transfers and obligations under section 544(b) of the Bankruptcy Code and state fraudulent transfer or other applicable nonbankruptcy laws because the statutory "look-back" period for avoidance under many nonbankruptcy laws exceeds the two-year period governing avoidance actions under section 548.