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.
A bedrock principle underlying chapter 11 of the Bankruptcy Code is that creditors, shareholders, and other stakeholders should be provided with adequate information to make an informed decision to either accept or reject a chapter 11 plan. For this reason, the Bankruptcy Code provides that any "solicitation" of votes for or against a plan must be preceded or accompanied by stakeholders' receipt of a "disclosure statement" approved by the bankruptcy court explaining the background of the case as well as the key provisions of the chapter 11 plan.
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
In Short
The Situation: The U.S. Supreme Court considered whether § 363(m) of the Bankruptcy Code, which limits a party's ability to undo an asset transfer made to a good-faith purchaser in a bankruptcy case, is jurisdictional.
The ability of a bankruptcy trustee or chapter 11 debtor-in-possession ("DIP") to assume, assume and assign, or reject executory contracts and unexpired leases is an important tool designed to promote a "fresh start" for debtors and to maximize the value of the bankruptcy estate for the benefit of all stakeholders. However, the Bankruptcy Code establishes strict requirements for the assumption or assignment of contracts and leases.
Can directors or shareholders be required to contribute to the liquidation estate?
What liability can directors or other officers attract in respect of an insolvent company?
What categories of transaction can be avoided or set aside?
Who is responsible for seeking orders to set aside such transactions?
This Q&A on avoidance transactions is part of a series on restructuring and corporate recovery jurisdiction in the British Virgin Islands.(1)