Novation of customer contracts and the proprietary rights of cryptocurrency exchange users
Kunal Gadhvi, Serena Eddy and Alice Court of Irwin Mitchell’s London Restructuring and Insolvency Team assisted Jeremy Karr and Simon Killick of Begbies Traynor Group, the joint liquidators of Coinfloor Limited (in members' voluntary liquidation) (“the Company”), in Re Coinfloor Ltd (in members' voluntary liquidation) [2024] EWHC 2767 (Ch).
This case involved an application by the liquidators seeking, primarily, a declaration that the novation of customer contracts was effective, alternatively a declaration that “passive customers” have no proprietary rights or entitlements to Company assets.
The case provides important insight for the restructuring and insolvency industry into the sale and management of digital assets and customer contract novation of a cryptocurrency exchange, where there are “passive customers” who fail to acknowledge the novation.
Case Overview
The Company, a cryptocurrency exchange, agreed to sell its assets and business to Coincorner Limited (“Coincorner”) on 29 September 2021.
As part of the sale, Coincorner assumed all liabilities arising under the contracts with the Company’s 79,098 customers.
The Company was obliged to inform its customers about the novation of their contracts making it clear that “by conduct”, the contracts would be novated and their funds transferred to Coincorner.
For the novation to be effective, all parties involved—the Company, Coincorner, and the customers had to agree to the novation.
For completeness and pursuant to regulation 74C(6) of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, the FCA was engaged and on 4 November 2021, the assets and liabilities of the Company were transferred to Coincorner for consideration of £100,000 and a revenue share.
The Company was subsequently placed into members voluntary liquidation on 6 June 2022.
A number of customers engaged, consenting to the novation, with some closing their accounts. By 16 July 2024, 2,200 passive customers (i.e. those who had not positively engaged) remained.
The Court confirmed that the novation of the customer contracts by the Company was effective following the test put by Lightman J in Evans v SMG Television [2003] EWHC 1423 (Ch.). The Court also confirmed that, if necessary and in the alternative, there had been an implied variation to the terms and conditions that there was a deemed consent to the novation.
Implications of the Case
The case usefully sheds light on customer rights and contract novation within the cryptocurrency exchange industry. The Court's decision to address the proprietary rights of passive customers provides helpful guidance for future scenarios involving digital asset transfers and liquidations, clarifying the legal standing of customers who do not actively consent to contract novation, a common situation with asset sales involving cryptocurrency and insolvency.
Read the full judgment here.
Alice Court at Irwin Mitchell said:
"This is a really interesting and valuable decision in the crypto space – the evidence in support of the application was significant, comprising 3 witness statements and almost 500 pages of exhibits! This result would not have been possible without the support, diligence and perseverance of Jeremy Karr and the Begbies Traynor team, alongside our brilliant counsel, Helen Pugh.”
