In Connelly as Receiver and Manager of “Digital Currency Assets” v NGS Crypto Pty Ltd (No 2) [2024] FCA 697 (28 June 2024), Justice Meagher of the Federal Court of Australia refused an ex parte application by the court-appointed receivers of cryptocurrency assets for judicial advice as to their proposed treatment of those assets.
Background
On 10 April 2024, following an ex parte application by the Australian Securities and Investments Commission (ASIC), Justice Meagher of the Federal Court of Australia granted orders against NGS Crypto Pty Ltd, NGS Digital Pty Ltd, NGS Group Limited and three directors as to asset preservation, asset disclosure, travel restraints and the appointment of receivers to ‘Digital Currency Assets’ held and/or controlled by the NGS companies.[1] The application followed an investigation by ASIC into the companies’ purported business operations in selling blockchain mining investments.[2]
On 11 June 2024, the court-appointed receivers applied for judicial advice as to whether they would be justified in not un-staking Digital Currency Assets in their control, or alternatively, un-staking Digital Currency Assets in their control.[3] Un-staking of cryptocurrency assets is required to trade cryptocurrencies that use a proof-of-stake model. It was submitted by the receivers that un-staking the Digital Currency Assets would diminish the value of the assets.[4]
Acting Chief Justice Collier refused the application for judicial advice on the basis that, while the Court has jurisdiction to provide advice to court-appointed receivers, it was “not for the Court to make the choice of which decision the Receivers should make.”[5] Her Honour noted that, rather than a case where the receivers had concerns that they may lack power, it was a case where the receivers had “a feeling of apprehension or unease about possible business decisions open to them in respect of the relevant Digital Currency Assets.”[6]
The receivers also sought an order that the costs of the application be payable from the Digital Currency Assets. In refusing the receivers’ application, her Honour made no order as to costs.[7]
Present Application
Following the hearing of the above application, on 14 June 2024, the receivers filed a further ex parte interlocutory application for judicial advice as to “whether they would be justified in un-staking the Digital Currency Assets in their control”[8] by applying the proposed approach specified in the affidavit of one of the receivers.
Having reframed the direction sought so that it proposed a singular course of action, rather than two alternatives, the receivers submitted that it would be appropriate for the Court to provide judicial advice in circumstances where the receivers anticipated that the decision to un-stake the Digital Currency Assets would be attacked by the third and fifth defendants as being unreasonable or improper due to the diminished value of the assets if they were un-staked. The third defendant (NGS Group Limited) and the fifth defendant (Mr Mark Ten Caten, sole director of the third defendant) had indicated by correspondence to the receivers that they opposed the un-staking of the Digital Currency Assets.[9]
As for bringing the application ex parte, the receivers submitted that this was justified because (a) there was a risk that the third and fifth defendants, or other unknown parties with access to the private keys, might un-stake the Digital Currency Assets, thereby exposing the receivers to the allegation that they had not secured the assets as required, and (b) the nature of the application, being that the receivers were seeking “private advice about a difficult matter” which would be opposed by the third and fifth defendants, and if given, would not be binding on them in any event.[10]
The receivers sought to vary Collier ACJ’s previous no costs order and submitted that costs, charges and expenses of “this proceeding” should be payable from the Digital Currency Assets regardless of the outcome of the judicial advice application, as the receivers had not acted unreasonably or improperly in bringing these proceedings, such that they should be denied their indemnity.[11]
Decision
In refusing the application for judicial advice, her Honour Justice Meagher was not persuaded that the conclusions of Collier ACJ arose only from the way in which the directions sought were initially formulated (i.e. two propositions put in the alternative). Rather, the primary reason that the receivers’ initial application was refused was that “the Court was being asked to make a commercial decision which should properly be made by the Receivers.” Collier ACJ’s judgment made it clear that the receivers “may potentially be justified in undertaking either course and that they are experts who ‘understand the ramifications of each of their possible decisions in the complex field of cryptocurrency’”. For this reason, her Honour held that the matter had already been determined.[12]
Her Honour further considered that the third and fifth defendants should have been given the opportunity to be heard on the application, particularly weighing up the level of cooperation shown by those parties against the receivers’ complaints about their conduct. The receivers were not seeking judicial advice as to an issue which called for the exercise of legal judgment, but rather with respect to a commercial decision which might be “controversial”.[13] While it is well-established that it is appropriate for a receiver to apply for judicial advice in matters which are likely to be controversial, the receivers did not refer to any authorities where this took place in the absence of the other parties. The only ex parte case referred to involved an application seeking approval of a compromise to enter into a retainer with certain solicitors, a matter which clearly involving the exercise of legal judgment.[14]
Her Honour generally accepted the receivers’ submission as to costs, and held that although ultimately unsuccessful, the receivers acted properly and were therefore entitled to their costs from the Digital Currency Assets. However, her Honour noted that to the extent that the receivers are seeking to vary the no costs order made by Collier ACJ, such a variation would amount to an appeal, which was not appropriate in the circumstances. Instead, the receivers’ costs of, and incidental to, this application were to be payable from the Digital Currency Assets.[15]
Conclusion
This decision is a reminder of the critical responsibility of court-appointed insolvency practitioners (receivers, administrators, liquidators or otherwise) to carefully consider (a) whether a matter arising in the course of an insolvency is a proper matter for an application for judicial advice and (b) whether it is appropriate to bring such an application ex parte in the particular circumstances.
It is important to distinguish between solely commercial matters, which insolvency practitioners as ‘experts’ in their fields are best placed to address, and complex issues which call for the exercise of legal judgment. Although the field of cryptocurrency investments is undoubtedly complex, the fact of complexity alone is not enough to make a matter an appropriate one for judicial advice.
Whilst it is appropriate to seek judicial advice as to matters which are likely to be contentious and while each case will turn on its own facts and circumstances, the potential for opposition to an order or direction sought is unlikely to provide sufficient justification to bring such an application ex parte. Practitioners should be conscious of the high bar for bringing ex parte applications, even where a practitioner is seeking private advice or where the Court’s decision would not be binding on the absent party.
Further, receivers can take some comfort from this decision insofar as it confirms that that, even if an application for judicial advice is ultimately unsuccessful, the costs will likely be recoverable as costs of the receivership, so long as the decision to seek advice is a proper and reasonable one.
[1] For the definition of ‘Digital Currency Assets’ in these proceedings see [3].
[2] Australian Securities and Investments Commission v NGS Crypto Pty Ltd [2024] FCA 373; Australian Securities and Investments Commission v NGS Crypto Pty Ltd (No 2) [2024] FCA 521.
[3] [5].
[4] [16].
[5] [9].
[6] [9].
[7] [6]-[7].
[8] [12].
[9] [16]-[17].
[10] [20]-[21].
[11] [23], [34].
[12] [25].
[13] [28]-[30].
[14] Lewis (liquidator), Re Concrete Supply Pty Ltd (in liq) (2020) 145 ACSR 459; [2020] FCA 841.
[15] [34].
