On 10 November 2023, the Singapore High Court ruled in Loh Cheng Lee Aaron and another v. Hodlnaut Pte. Ltd. (Zhu Juntao and others, non-parties) that cryptocurrency debts owed by a company constitutes liabilities under the cash flow insolvency test of the Insolvency, Restructuring and Dissolution Act 2018 (IRDA).
In connection with the winding-up application made against Hodlnaut Pte. Ltd. (Hodlnaut), Hodlnaut’s directors argued that in determining whether Hodlnaut is able to pay its debts, its cryptocurrency debts not be considered as debts under the IRDA because debts must involve fiat currency and cryptocurrency is not “money” under the Payment Services Act 2019.
The court ruled that in the cash flow insolvency test, the court considers whether a company’s current assets exceed its current liabilities such that all debts can be met as and well they fall due within a 12-month timeframe. In the application of this test, the court looks at the overall financial status of the company considering both liquidated and non-liquidated assets and liabilities, including claims which may ultimately be payable in money.
Moreover, the court ruled that even assuming the term “debts” in the insolvency test under section 125(2)(c) of the IRDA refer to liabilities in money or money’s worth, that does not mean that the debts will only be deemed to arise once they have been actually quantified in monetary terms after court proceedings (e.g., as damages due to a claimant in a judgment). A court can assess the valuation of assets, including cryptocurrency, during a winding-up application.
The court then differentiated this case from Algorand Foundation Ltd v. Three Arrows Capital Pte Ltd. In that case, the claim of insolvency was based on section 125(2)(a) of the IRDA, which provides that a company would be considered insolvent if it fails to pay a debt exceeding S$15,000 for 3 weeks after a written demand was served on it. Because the claimant’s demand in that case was for cryptocurrency and not for its equivalent in fiat currency, the application for insolvency failed.
At any rate, the court reiterated that its ruling should not be interpreted to mean that cryptocurrency is money in the general sense.
Persons with cryptocurrency exposure should be aware of this ruling and its implications on their financial standing. Given the relatively high volatility of cryptocurrency values, an increased use of cryptocurrency in business may lead to an increased risk of insolvency.
OrionW regularly advises clients on FinTech matters. For more information about the regulation of cryptocurrency-related services, or if you have questions about this article, please contact us at fintech@orionw.com.
Disclaimer: This article is for general information only and does not constitute legal advice.
