Home > News > Commencement of proceedings against a company in administration and preservation of Bitcoin assets: Chen v Blockchain; Abel & Ors v Blockchain [2022] VSC 92 – 93

Commencement of proceedings against a company in administration and preservation of Bitcoin assets: Chen v Blockchain; Abel & Ors v Blockchain [2022] VSC 92 – 93

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By Alicia Hill, Principal and Harriette Singh, Law Clerk

When a company goes into administration, section 440D of the Corporations Act 2001 (Cth) (the Corporations Act) states that no proceedings can be commenced or proceeded with against that company.

The case of Chen v Blockchain; Abel & Ors v Blockchain [2022] VSC 93 discussed the breadth of section 440D of the Corporations Act 2001 (Cth) and which parties it may apply to when the corporation is one of multiple defendants in a proceeding.

Background

On 22 November 2021, Blockchain Global Ltd (Blockchain) applied for orders against Jin Chen (Mr Chen) and Lance Abel (Mr Abel) that each respective proceeding be stayed pursuant to section 440D of the Corporations Act.

Blockchain had previously gone into administration and two joint and several voluntary administrators, Mr Yeo and Mr Cull (the administrators), were appointed on 16 October 2021.

At that time, Mr Abel had commenced proceedings against Blockchain (the Abel proceeding) and Mr Chen had also commenced proceedings against Blockchain (the Chen proceeding). In both proceedings, Blockchain was one of multiple defendants.

The stay orders filed for against Mr Chen and Mr Abel requested that both proceedings be stayed in their entirety under section 440D Corporations Act. Section 440D Corporations Act provides that:

  • During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except:
    1. with the administrator’s written consent; or
    2. with the leave of the Court and in accordance with such terms (if any) as the Court imposes.

The proceeding against Blockchain specifically could be stayed due to its administration, but the administrators also argued that the proceedings in their entirety should be stayed.

The administrators asserted that the proceedings specifically against Blockchain and those against the other defendants were not split appropriately, so the proceedings against the other defendants should be considered as proceedings against Blockchain.

The effect of this would be that the other defendants would be considered part of the company and the proceedings against them could be stayed under section 440D Corporations Act.

Issues and decisions

Justice Attiwill had to determine whether the proceedings against the other defendants in the Abel proceedings and the Chen proceedings were proceedings against Blockchain under section 440D Corporations Act, and ultimately whether proceedings against all defendants could be stayed.

His Honour ultimately held that the proceedings against the other defendants in both sets of proceedings were not proceedings against Blockchain. This meant that the proceedings against the other defendants in both proceedings were not stayed under section 440D Corporations Act.

His Honour’s reasons for his decision included reference to the plain and unambiguous wording of the provision. Section 440D Corporations Act states that the relevant proceedings are those ‘against the company’ or ‘in relation to any of its property’. It is not expressed in any terms to broaden the scope to proceedings merely involving the company. This means that other defendants in proceedings brought under section 440D Corporations Act cannot fall under the provision.

The Court also referred to past cases where section 440D has been applied to corporate defendants alone,[1] and saw no distinguishing facts to change the outcome in this case. The Court also found no authority which stated that any interrelationship between joint defendants, or even a lack of separation between them, ought to make them be considered as one defendant.

Further issue – protection of Bitcoin seed phrases

The Court also addressed a submission made by Mr Chen for the preservation of Bitcoin seed phrases. The Court considered whether this order was relevant to the cause of action, whether possible destruction of the Bitcoin may vitiate the ultimate determination, and whether such an order could cause prejudice to the parties.

In the Abel proceedings, a freezing order was made on 13 September 2021 regarding Bitcoin owned by Mr Chen and Mr Guo (the second defendant in the Chen proceeding), to prevent them from settling any transactions between them with the Bitcoin.

Mr Chen, the plaintiff in the Chen proceedings and also the fifth defendant in the Abel proceedings, sought relief under rule 37.01(1) of the Supreme Court (General Civil Procedure) Rules 2015 (the Rules).

Rule 37.01(1) of the Rules states that:

  • In any proceeding the Court may make an order for the inspection, detention, custody or preservation of any property, whether or not in the possession, custody or power of a party.

Mr Chen sought either a mandatory injunction or order that himself and Mr Guo provide their unique seed phrases in sealed envelopes to be held in the custody of the Court. Seed phrases are codes which are required to access Bitcoin, and the two unique codes held by Mr Chen and Mr Guo were both needed to access the Bitcoin they owned.

He submitted that this was important to prevent the Court’s jurisdiction being vitiated, frustration occurring in the Chen proceeding and to maintain the freezing order in the Abel proceeding. He also submitted that this action was required as the Bitcoin comprised the subject matter of the Chen proceeding as the Court needed to determine who the Bitcoin should be released to.

The plaintiffs in the Abel proceeding found that Mr Chen’s submissions were favourable.

Mr Guo, however, opposed Mr Chen’s submissions. Mr Guo stated, by way of affidavit, that his seed phrase was being held in a safe place in China which he could not personally access due to travel restrictions, nor verify that it was still secure. He also argued that storing the seed phrases in the same place undermined the security function of the seed phrases, and could change the risk to the Bitcoin when there was currently no immediate threat to it.

The Court had to determine whether it was appropriate to make orders under rule 37.01(1) of the Rules, obligating Mr Chen and Mr Guo to produce their seed phrases in sealed envelopes to the Court to be held in safe custody until the proceedings had concluded.

Orders

The Court held that orders should be made pursuant to rule 37.01(1) of the Rules to preserve the Bitcoin until the issues in dispute were determined.

Justice Attiwill found that there was a real risk the Bitcoin could be destroyed given that Mr Guo could not recall the seed phrase, had only one copy, was concerned that someone could obtain it by force and could give no evidence concerning the location of the seed phrase or its safety.

Finding that the Bitcoin would be destroyed if the seed phrases were lost, His Honour held that the above Court orders would be appropriate.

Additionally, the Court held that having to obtain the seed phrase from an overseas location did not cause prejudice to either party, as access to technology made it easy to obtain the seed phrase and a reasonable time frame was given to obtain it.

Take-aways

Companies entering administration which are involved in proceedings as joint defendants may not be able to stay the entire proceeding under section 440D Corporations Act, as the proceedings against other defendants are not proceedings against the company within the meaning of section 440D. This is regardless of whether the proceedings are split appropriately between each defendant.

Additionally, in making orders under rule 37.01(1) of the Rules, the Court will take into account how easily accessible property is, but will not necessarily consider property being in another country a legitimate obstacle to obtaining it.

 

If you have any queries about any of the matters raised by this case, then please contact Alicia Hill on (03) 8540 0292 or alicia.hill@mst.com.au

 

[1] TW McConnel Pty Ltd as trustee for the McConnel Superannuation Fund v Surfstitch Group Ltd (administrators appointed); Nakali Pty Ltd v Surfstitch Group Ltd (administrators appointed) [2017] NSWSC 1755