Interesting Enforcement Challenge
The High Court has granted the first third-party debt order in relation to cryptocurrency in an application involving allegations of fraud related to a cryptocurrency initial coin offering (ICO). A third party debt order is a method of enforcement of a money judgment which allows recovery of sums owed to a judgment debtor that are in the hands of a third party (formerly known as garnishee orders): Ion Science Ltd v Persons Unknown (unreported, 28 January 2022).
This decision is the latest in a series of significant rulings from the English courts in relation to the status of cryptoassets. The ruling in this application follows an earlier interim order in the same case (discussed in our previous blog post) which indicated (among other things) that cryptoassets can be treated as property, with their lex situs at the place where the person or company who owned the coin or token is domiciled.
The High Court has also recently refused to allow security for costs to be paid in cryptocurrency as that would not result in protection equal to a payment into court or first class guarantee (as discussed here).
The present decision confirms that cryptoassets may be capable of being traced and enforced against, similar to other classes of property under English law.
Also significant in this context are recent comments made by the Master of the Rolls, Sir Geoffrey Vos, in a speech on 24 February, 2022, which emphasised the importance of the UK and its courts being at the vanguard of blockchain and crypto technologies. In the speech, he suggested that it has now been made clear that cryptoassets are properly to be regarded as property in English law. He noted that litigation involving cryptoassets and smart contracts is increasing significantly but cases are proving complex because of the difficulty of applying historic analogue rules to the digital environment.
In the context of crypto fraud, a key issue raised by the Master of the Rolls is that there are no national barriers and it can be difficult to trace unlawfully obtained cryptoassets. A sub-committee of the Civil Procedure Rules Committee is looking at amending or expanding the grounds on which proceedings can be served out of the jurisdiction in this context, so as to remove an obstacle that has impeded many sets of proceedings aimed at tracing the proceeds of crypto fraud.
The background to the case is described in more detail in our previous post here. The claimants claimed that they had been victims of an ICO fraud, by which they had been induced by unknown persons to invest significant sums in what they understood to be real cryptocurrency products, and to make commission payments for purported profits from those investments. The claimants sought to recover the misappropriated sums, which (based on expert evidence) had ended up in certain accounts held by the Binance and Kraken Cryptocurrency Exchanges (“Cryptocurrency Exchanges”). The claims were based in deceit, unlawful means conspiracy and by way of an equitable proprietary claim.
The claimants successfully applied for a proprietary injunction, a worldwide freezing order and an ancillary disclosure order against the Persons Unknown who had committed the fraud; and disclosure orders pursuant to the Bankers Trust jurisdiction and/or CPR 25.1(g) against the Cryptocurrency Exchanges (the “Disclosure Orders”).
Having put into effect the Disclosure Orders, Payward Ltd. (a subsidiary of the Kraken Exchange) (“Payward”) informed the claimants that the now-frozen account that was used to execute the fraud was held by Mirriam Corp LP (“Mirriam Corp”), a Scottish entity. The disclosure revealed that the account contained both cryptocurrency and cash.
The claimants subsequently claimed against Mirriam Corp seeking to recover the misappropriated sums. Mirriam Corp failed to respond that claim. The claimants sought a third-party debt order to enforce their judgment debt.
The High Court granted the application.
The court’s power to make a third party debt order over a judgment debtor’s property is contained in CPR 72. It involves a two-step process (an application for an interim third party debt order and a subsequent application for a final third party debt order). It is necessary for the third party and the debt to be within the jurisdiction (unless the law of the place of the debt would recognise payment pursuant to an English court order as discharging the debt).
On 5 October, 2021, the claimants secured an interim third-party debt order against Payward based on the debt it owed to Mirriam Corp as its customer. Following Mirriam Corp’s failure to respond and the absence of any objections from Payward, the debt order was made final. Master Cook said he was satisfied that the debt was outstanding to the judgment creditor (the claimants), that there was a debt payable from the third party (Payward) to the defendants (Mirriam Corp), and that in those circumstances the claimants were entitled to have the interim order made final.