On 14 January 2019, GNY lost over 15 million LML tokens on the Cryptopia Limited crypto currency exchange in New Zealand following a hack on the exchange. The tokens were stolen from what was described as a secure server run and managed by Cryptopia. The hack resulted in the crash of the price of LML tokens listed elsewhere, losing over 95% of its market value. The stolen tokens, now in decentralised exchanges in unknown jurisdictions, are beyond recovery.
From the beginning, GNY’s approach was to engage constructively with Cryptopia to understand what had happened, and try recover its significant losses. Those attempts were unsuccessful. GNY had difficulty receiving any information from Cryptopia.
On 11 April 2019 GNY issued proceedings against Cryptopia in the New Zealand High Court.
On 15 May 2019, Cryptopia went into liquidation. David Ruscoe and Malcolm Moore, of Grant Thornton New Zealand, were appointed as liquidators. Our High Court proceeding was automatically stayed. The appointment of liquidators gave us some hope that we could recover at least some of our losses. After all, liquidators are required by law to protect, realise and distribute company assets, or the proceeds of the realisation of the assets, of the company to its creditors (and if anything remains, to the shareholders).
On 10 July 2019, GNY submitted a creditor claim form to the liquidators. On 16 July, the liquidators sought further information about its claim from GNY. GNY provided that information to the liquidators in a detailed letter, with supporting documents, on 25 September 2019. In that letter, GNY set out several issues on which it had sought clarification, and information, from the liquidators about how they intended to conduct the liquidation, and investigate the hack.
After nearly a year, the liquidators have yet to decide GNY’s claim.
On 1 October 2019, the liquidators applied to the High Court for directions as to the legal status of the cryptocurrencies within Cryptopia’s control, and whether the remaining cryptocurrency was held on trust for accountholders or beneficially owned by the company. The High Court released its judgment on 8 April 2020, and concluded that the different cryptocurrencies on the Cryptopia platform were held in separate trusts, with the beneficiaries of each trust the accountholders holding that currency.
Through that period, the liquidators did not respond to GNY’s correspondence on its claim and concerns and questions about the Hack and liquidation.
On 12 May 2020, GNY sought written confirmation from the liquidators that its creditor claim was accepted. GNY sought further written confirmation on 17 June 2020.
Only on 24 June 2020 - nearly a year after GNY’s claim was made, and nine months after GNY had provided the liquidators with the further information sought - did the liquidators respond. That response was brief. GNY considers it does not adequately address its questions and concerns.
As a result, on 21 July 2020 GNY issued a notice to the liquidators under sections 285 and 286 of the Companies Act 1993 alleging that they have failed to comply with one or more of their duties.
In the notice GNY alleges that:
· The liquidators have failed to accept or reject GNY’s claim despite having all the information requested from GNY.
· The liquidators did not accurately describe GNY’s claim to the Court. Nor have they reflected GNY’s claim in their liquidation reports.
· The liquidators have failed to investigate the Hack and how the company’s security systems failed. GNY considers this investigation should be separate from the police investigation underway which seeks to determine criminal liability.
· The liquidators’ recent liquidator report fails to adequately explain the work they have undertaken for their fees. Over the 15 November 2019 to 14 May 2020 period, the liquidators have incurred NZ$955,618 in fees.
GNY is concerned that the total of the liquidators’ fees and other expenses in the liquidation have consumed more than half of the receipts in the liquidation to date. These costs continue to mount at the expense of creditors (like GNY) whose claims have not been accepted or engaged with, in GNY’s view, adequately. The liquidators have paid themselves over NZ$1.7m in this liquidation.
Some accountholders with cryptocurrency now confirmed to be held on trust will not claim their tokens from the exchange. They may not want to or be able to comply with further account verification processes, they may live in jurisdictions which make it illegal to trade cryptocurrency, or the balances may simply be too small. This will result in a surplus of unclaimed tokens in some trusts. Trust law requires the redistribution of those surplus assets to the beneficiaries of those specific cryptocurrency trusts, giving them a windfall. The surplus assets of one trust cannot be used to make whole the beneficiaries of another trust. Our research suggests that even account holders believe this result to be inequitable – they only want their tokens to be returned, not more. We agree. There are also extensive costs and complexities to rebuild the exchange’s entire back end to make this redistribution, some of which tokens belong to projects that no longer exist. Who bears these costs? If these costs come out of company funds, recovery for creditors who do not have funds on trust will be negatively impacted.
GNY was impressed to trade in New Zealand because of its well-established legal system, including its laws and its courts. GNY has no quarrel with the New Zealand High Court, as the Court can only make the best decision it can with the information presented to it.
GNY also has no quarrel with Cryptopia’s account holders. They should get every penny they had returned, and we agree with them that surplus funds and the company’s own funds should be used to make the hacked accountholders whole. As beneficiaries, we believe that the company’s own assets must now be preserved for that purpose.
We have concerns about the liquidators’ handling of this liquidation, and consider the process to have been deeply flawed as set out in the notice. It is for this reason that GNY has issued a notice of failure to comply. As things stand, any final report from Grant Thornton, will almost inevitably give grounds for appeal. The liquidators have 5 business days to respond to GNY’s notice.
Tuesday 21 JULY 2020
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Copy of the Notice Served to Grant Thornton Available for Download Here