Restructuring: the legal treatment of cryptocurrencies

If a company becomes insolvent and owns digital assets, the question arises whether a creditor can deposit their credit, for example in bitcoin (BTC). This problem arises at different levels during the reorganization or liquidation process.

About the so-called ” claw back

The period of claw back aims to prevent a debtor company from dispersing its assets in order to organize its insolvency or unduly favor certain creditors.
It elapses between the date of the cash insolvency and the date of issue of the order to open the insolvency procedure.
The judicial bodies in charge of the reorganization or judicial liquidation procedure may request the annulment of some suspicious acts which occurred during this period.

Therefore, the question that arises is whether the transactions that were made in cryptocurrencies during the claw back can be questioned.

Pursuant to article L.632-1 of the Commercial Code, payments of debts payable by any means other than cash, commercial paper, wire transfers, transfer slips are considered void. or any other means of payment commonly accepted in business dealings when they occur during the payback period. Since cryptocurrencies are not ” means of payment commonly accepted in business relationships », Payments made in cryptocurrencies during this period of claw back would be disputed.

On the so-called “observation” period.

As soon as a safeguard or receivership procedure is opened, the activity of the debtor company continues in the so-called “observation” period. This is useful to allow a detailed assessment of the financial situation and the necessary restructuring measures to be implemented.

When the company is subject to this procedure, two hypotheses are possible: The global or partial transfer of the company and / or the isolated transfer of the various assets held by the company, including its cryptocurrencies.

In the event of a global or partial sale, buyers will have to offer a purchase price to the competent court taking into account the value of the digital assets held.

Finally, in the event of an isolated transfer of the debtor company’s assets, the bankruptcy judge can authorize the sale of the crypto-assets at a public auction, or organize private sales at the price and conditions previously determined by him.

On the so-called digital asset recovery period

Between the payment made and the time the digital assets were returned to the seller following the reversal of the disputed transaction, the value of these assets may have fluctuated significantly.
Under the current state of French law, cryptocurrency conversions into cash cannot be contested during the payback period. However, the manager assumes his legal responsibility in case he sells cryptocurrencies at a particularly low price. As soon as the manager increases the liabilities of the company, already struggling with a complex financial situation, bad management can be attributed to him, which would entail compensation for damage (Article 1240 of the civil code).

The challenge of determining the competent jurisdiction

Despite the decentralized nature of cryptocurrencies, it is necessary to determine the physical location of a cryptocurrency. Such an assessment is a sine qua non condition for establishing which forum is the right of the restructuring operation.

Several options are possible, namely the location of the exchange used by the debtor, the location of the digital wallet or even the location of the blockchain itself.

It may happen that the majority of assets held by a company are made up of cryptocurrencies, which would further influence the determination of the jurisdiction of the bankruptcy trustee. The concept of a center of main interests, which allows for the establishment of jurisdiction, may not be applicable due to the cross-border nature of assets, platforms, wallets and software.

The example of MtGox

The Japanese company MtGox is a good example of the difficulty of integrating cryptocurrencies and their fluctuation in restructuring procedures.

MtGox was one of the first bitcoin (BTC) exchanges and operated from 2009 until its bankruptcy in 2014. The bankruptcy procedure was opened following a cyber attack whose theft of bitcoin (BTC) affected around 750,000 customers and almost all of the bitcoins (BTC) owned by the company. The loss was estimated at around 7% of all bitcoin (BTC) available on that date. However, the price of Bitcoin (BTC) has risen significantly, and due to the new value of Bitcoin (BTC), MtGox has finally become solvent during the bankruptcy process. The trustee, however, has decided to value bitcoin (BTC) at the 2014 market price, in accordance with Japanese regulations.

During 2018, in an attempt to convert MtGox’s assets into fiat currency and then redistribute them to creditors, the trustee stole bitcoin (BTC) for a total sum of approximately $ 360 million. A new difficulty then appeared: This massive sale led to a drop in the price of bitcoin (BTC). On Tuesday, November 16, 2021, a letter to former MtGox users announced the rehabilitation plan.

Uncertainty about this asset class therefore constitutes legal uncertainty for companies facing restructuring, as the current state of the legislative arsenal does not specifically concern cryptocurrencies. To address this challenge, regulators are faced with two options: to control or even centralize digital assets, particularly through the creation of a digital currency directly linked to a central bank, or to adopt a more open legal and regulatory framework. that recognizes the stable coinsbecause it is indexed to a currency.

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Thomas Poirier

I am sure that blockchain and cryptocurrencies are the future and I want to spread this idea to everyone because the more people believe in cryptocurrencies, the sooner the future will come.

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