On April 17, 2024, the UK Jurisdiction Taskforce (UKJT) released a landmark “Legal Statement on Digital Assets and English Insolvency Law.” The statement clarifies how digital assets, such as cryptocurrencies and NFTs, are treated in insolvency cases. If you’re a business owner, here’s a short guide to help you understand what this means.
What are Digital Assets?
Digital assets include cryptocurrencies like Bitcoin, NFTs (Non-Fungible Tokens), and digital securities. They’re essentially digital forms of value that can be traded, held as investments, or used in business transactions.
Key Points of the Legal Statement
Digital Assets Are Property
Digital assets are considered property under the Insolvency Act 1986. This means that in bankruptcy or liquidation, digital assets will be included in the estate and managed like other assets.
Jurisdiction for Insolvency Proceedings
The “Centre of Main Interest” (COMI) determines the jurisdiction where insolvency proceedings should occur. Typically, it’s where your business manages its primary operations or has its registered office.
Treatment of Digital Assets
- Not Classified as Money: Digital assets aren’t legally classified as money, so statutory demands can’t be served for debts involving them.
- Foreign Currency Conversion: They also don’t count as foreign currency, meaning they won’t be automatically converted to pounds sterling during insolvency proceedings.
Recovery and Liquidation
- Asset Recovery: If digital assets are held in trust, they can be recovered for the estate.
- Liquidation Challenges: The volatile nature of cryptocurrencies makes it tricky to get the best price when selling. Liquidators must act in good faith and sell the assets for the best possible value.
- Liquidators can also distribute digital assets directly instead of converting them to cash.
Undoing Fraudulent Transactions
If transactions involving digital assets have been made to defraud creditors or are undervalued, they can be reversed. Even though blockchain transactions can’t be reversed directly, courts can order the recipient to transfer equivalent assets back.
Information Disclosure
Liquidators can require relevant parties to disclose private keys and provide information about the digital assets.
What Does This Mean for Business Owners
Insolvency Planning: If your business holds digital assets, understand that they will be included in any insolvency estate.
Record Keeping: Keep accurate records of digital assets, especially if they’re held in trust or mixed with other assets.
Asset Security: Ensure that private keys and wallets are secure, as insolvency practitioners can require their disclosure.
The Legal Statement provides clarity on how digital assets are managed in insolvency. It assures business owners that existing laws are adaptable and offers practical guidance for handling digital assets during insolvency proceedings. Understanding these guidelines is crucial for business owners as digital assets become more mainstream.
If your business is facing financial challenges, our team can provide tailored advice encompassing bankruptcy, liquidation, and restructuring. Get in touch today.
