Dissecting the Singapore High Court’s Ruling Classifying Cryptocurrency as Debt

In the recent case of Aaron Loh Cheng Lee and Another v. Hodlnaut Pte Ltd [2023] SGHC 323, the Singapore High Court expanded the definition of ‘debt’ under the Insolvency, Restructuring, and Dissolution Act 2018 (IRDA) to include liabilities accrued in the form of cryptocurrency to creditors, leading to the winding up of Hodlnaut Pte Ltd under section 125(1)(e) of the IRDA.

Background to the dispute

Hodlnaut Pte Ltd (Hodlnaut), a Singapore-based financial provider, allows individual investors to earn interest on their cryptocurrency deposits. In 2022, Hodlnaut suffered significant losses due to the collapse of the Terra ecosystem. In response, Hodlnaut imposed a halt on the creditors from the withdrawal of their cryptocurrency citing ‘difficult market conditions’. 

Later, an application was made for the winding up of Hodlnaut on the basis that it was cash insolvent and the company entered into interim judicial management to explore the possibility of any restructuring. The directors of Hodlnaut opposed the application contending that the cryptocurrency funds held from various creditors could not be counted as ‘debts’ under section 125 of the IRDA.

The interim judicial managers of Hodlnaut sought winding up of Hodlnaut on the basis that the conditions for winding up under the law had been met, ie. not only did Hodlnaut default in repaying its obligations, it also defaulted in its obligations to pay back cryptocurrency deposits to its creditors.

In response, the directors argued that the definition of ‘debt’, as contemplated under the IRDA only includes liabilities arising out of fiat money or actual money. Further, Hodlnaut has already imposed a halt on withdrawal of cryptocurrency, and the obligation to pay the cryptocurrency creditors had not materialised. While accepting that the IRDA considers contingent and prospective liabilities in determining a company’s inability to pay its debts, the directors contended that cryptocurrency, being a non-money claim, has to be excluded for this assessment.

Cryptocurrency is ‘debt’

The Court held that assessing whether a company is insolvent requires considering its holistic position, including both liquidated claims and potential non-monetary claims which may ultimately be payable in money. To determine whether a company may be deemed insolvent, it should be deemed to be unable to pay its debts under section  125(2)(a) of the IRDA despite having been served a statutory demand. Alternatively, the company should be deemed to be unable to pay its debts under section 125(2)(c) of the IRDA as the company was cash flow insolvent and balance sheet insolvent. Adopting a broader interpretation, the Court ruled that debts are not confined to obligations that are quantified solely in terms of value in currency and noted that an actual quantification of assets is necessary before an assessment of cash flow insolvency (wherein the company is unable to pay its debts as they fall due). It noted that even though the valuation of assets is contingent on the evidence before the court, the cryptocurrency is akin to any other kind of asset such as wine, tulips or Bored Apes, and should be treated as such within the context of insolvency proceedings.

The Court rejected the directors’ submission and held that a halt on withdrawal of cryptocurrency neither extinguishes the liability nor postpones its accrual for purposes of assessing cash flow insolvency. Interestingly, the Court did not reject the possibility that an appropriately drafted clause may effectively bar anyone holding an account subject to a withdrawal halt from pursuing a winding up of a company. However, it clarified that in this case, the provision for withdrawal halt did not have such effect. The Court also rejected the possibility that any increase in cryptocurrency prices would improve the company’s financial health, citing substantial net liabilities.

Singapore has also, citing Lord Wilberforce’s definition of property in National Provincial Bank v Ainsworth [1965] 1 AC 1175, considered crypto assets as property because they are “definable, identifiable by third parties, capable in their nature of assumption by third parties, and having some degree of permanence”. (Janesh s/o Rajkumar v Unknown Person  [2022] SGHC 264) Whether a similar argument may be stretched for assessing cryptocurrency as debt is a rather pivotal question.

The Court, clarifying its understanding of cryptocurrency as ‘debt’ under the IRDA, held that it did not imply that cryptocurrency can be treated as ‘money’ in the general sense. Rather, it found that cryptocurrency is not even close to being considered as a daily medium of exchange in any major commercial jurisdiction, let alone Singapore. This stems from the Court’s three-limbed understanding: (a) 'indebted[ness]' under section 125(2)(a), IRDA must involve fiat currency; (b) cryptocurrency is not included in the definition of 'money' under section 2 of the Payment Services Act 2019; and (c) cash debts are not treated as 'movable property' under Order 22 rule 1 of the Rules of Court 2021. Thus, it follows that 'debts' within the meaning of section 125(2)(c) can only refer to fiat money. 

Importantly, the ruling underlined the ‘broad scope’ of the cash flow insolvency test in evaluating a company’s financial position as set out in Sun Electric Power Pte. Ltd. v. RCMA Asia Pte. Ltd [2021] SGCA 60. According to the judge, this broad test involves a thorough consideration of whether a company’s current assets surpass its current liabilities, ensuring that all debts can be met within a 12-month timeframe. The directors’ reliance on section 125(2)(a) of the IRDA was equated to a statutory demand under section 123(1)(a) of the Insolvency Act 1986 in the United Kingdom. The Court rejected this, noting that section 125(2)(a) involves measuring indebtedness against a specific amount of money on a particular claim, contrasting with the more comprehensive evaluation under section 125(2)(c) of the IRDA.

The decision deviated from the Algorand Foundation Ltd v. Three Arrows Capital Pte Ltd (HC/CWU 246/2022) (Algorand) position which relied on a different insolvency test based on a written demand under section 125(2)(a). In Algorand, the winding-up petition failed as the demand for cryptocurrency failed to constitute a demand for a specific sum of money under section 125(2)(a).  The judge clarified that this did not establish the necessity for obtaining a judgment for liquidated damages before assessing cash flow insolvency. Further, the amount of money on a specific claim standard for ‘indebtedness’ cannot be reconciled with the broader test under section 125(2)(c). This decision was distinguished from implying that cryptocurrency should be regarded as money in the conventional sense while highlighting the absence of acceptance of cryptocurrency as a daily medium of exchange.

Looking Towards the Future

The Singapore High Court clarifies that in the assessment of whether a company is insolvent, liabilities to repay cryptocurrencies are to be considered. By departing from Algorand, it clarifies that creditors can commence insolvency proceedings under section 125(2)(a) without obtaining a court judgment for a liquidated sum of money denominated in fiat currency first.

It offers a compelling rationale for determination of cryptocurrency as debt under insolvency law, specifically in light of increasing use of cryptocurrency like Bitcoins as synthetic commodity money. While traditionally there have been multiple instances of companies holding assets in the form of cash reserves, gold or even art, with the increasing use of virtual currencies, it is only logical to expand legal interpretation to include newer forms of currencies under the insolvency regime.

Kartikey Mahajan is a Partner at Khaitan and Co., Singapore.

Satjit Singh Chhabra is an Associate at Khaitan and Co. New Delhi.

Aayushi Singh is an Associate at Khaitan and Co., New Delhi.