The official Twitter profile of Cryptopia today posted updates on the lawsuit related to the failure of the exchange.
Judge Gendall has issued a ruling, in which he defines the cryptocurrencies as “property” for all intents and purposes, in accordance with the definition of the New Zealand Companies Act of 1993. In addition, he stated that the tokens owned by the exchange at the time of closing are the property of the account holders, and are not assets of the company.
“Today, 8 April 2020, Justice Gendall delivered his judgement finding firstly, cryptocurrencies are “property” within the definition outlined in s2 of the Companies Act 1993 and secondly, that account holders’ cryptocurrency were held on multiple trusts, separated by individual crypto-asset type. This means that the cryptocurrencies are beneficially owned by the account holders and are not assets of the company”.
This constitutes a real turning point, not only for the case of Cryptopia’s bankruptcy but also for possible future cases.
In fact, in other similar instances occurring worldwide, tokens held on exchange wallets at the time of bankruptcy have always been used as corporate assets to pay off creditors.
In the case of Cryptopia, however, apparently this will not happen, because if the tokens are not deemed to be owned by the exchange, but by the users, they will probably be returned to them and not used to repay the company’s debts.
In general, money held by a company on behalf of a third party is considered to be a property of the company itself and therefore, in the event of bankruptcy, is not returned to the third party on whose behalf it was held, but used precisely to repay the company’s debts.
This case changes the rules, establishing instead that, in New Zealand, the users’ cryptocurrencies held by exchanges on their own wallets are actually owned by the users, and therefore cannot be used to repay the debts of the failed exchange.
Chapter S 284(1)(A) of the New Zealand Companies Act 1993 addresses precisely the categorization and distribution of corporate assets in the event of bankruptcy.
Under Section S 2, the cryptocurrencies held by the exchange’s liquidators are recognized as “property” for all intents and purposes.
Furthermore, according to the judge, the liquidators are holding these cryptocurrencies on behalf of the account holders, i.e. the users, and not on behalf of the bankrupt company.
The case is not yet over, but after this judgment, it would be fair to expect that the remaining tokens will be returned to the users.