What’s the case about?
Whether orders made by the Federal Court appointing receivers and preserving assets, in respect of businesses operating in blockchain mining, should be rescinded or set aside.
Background
The judgment of Justice Collier in Australian Securities and Investments Commission v NGS Crypto Pty Ltd (No 3) [2024] FCA 822 considers an application made by two defendants (Applicants) to set aside or vary orders made by Justice Meagher earlier this year, which orders had subsequently been varied by Justice Derrington.
The proceedings came before the Federal Court earlier this year, when ASIC urgently sought orders ex parte against six defendants. On 10 April 2024, Meagher J made interim receiver and asset preservation orders, as well as other related orders (Australian Securities and Investments Commission v NGS Crypto Pty Ltd [2024] FCA 373).
Meagher J summarised the relevant operations of the parties as follows ([2024] FCA 373 at [6]):
It appears that the first, second and third defendants together operate businesses claiming to sell blockchain mining investments. To the extent that that is the business, it seems Group operates the asset mining in Batam Indonesia, Crypto is an authorised reseller of blockchain mining products in Australia and Digital appears to provide staff for Crypto, as well as paying for two premises at the Gold Coast, Queensland and otherwise paying for the day-to-day costs of the businesses. Digital is the only defendant company with bank accounts in Australia.
The third defendant, NGS Group Ltd (NGS Group, a Hong Kong company) and the fifth defendant, Mr Ten Caten (an Indonesian resident), sought orders rescinding or discharging the Orders made on 10 April 2024, as varied on 30 April 2024 by Derrington J. The relief sought included the rescinding and discharging of the freezing orders and the cessation of the appointment of receivers. In the alternative, the Applicants sought orders varying the existing orders.
The evidence relied upon by the Applicants included that:
- the orders had adverse commercial consequences on NGS Group, because it had been unable to generate any new investments or continue to operate;
- the orders prevented NGS Group from un-staking various cryptocurrencies and as a result, the relevant crypto assets were at risk of loss, dissipation in value and slashing;
- the orders prevented NGS Group from being able to deal with funds of offshore customers and continue operating and trading internationally.
Her Honour considered that the Applicants’ arguments fell into two categories:
- whether ASIC made proper candid disclosure of key issues and evidence to the Court before Meagher J; and
- whether the Court went beyond its powers under section 19 of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) in making the existing orders.
Duty of Candour and Adducement of Evidence by ASIC
Firstly, the Applicants argued that there was insufficient evidence put before the Court indicating the immediacy of the dissipation of funds. The Court noted that Meagher J was required to find only that there was a risk of dissipation of funds, rather than a conclusive finding. As evidence was provided of dispersion of funds and commingling of funds, it was open to Meagher J to find that there was a risk of dissipation, as ASIC alleged.
Secondly, the Applicants argued that the use of pejorative language by counsel for ASIC at the hearing before Meagher J provided negative “colour” to the facts alleged by ASIC, which was detrimental to the defendants. The Court found that this issue was immaterial and that in all likelihood Meagher J would have disregarded such language.
Thirdly, the Applicants argued that ASIC failed to put alternative constructions of the meaning and effect of the relevant crypto mining agreements before Meagher J. The Court noted that the mining agreements were included in the evidence before Meagher J and her Honour was at liberty to construe such agreements as she considered appropriate.
Fourthly, the Applicants argued that ASIC failed to put to Meagher J the explanation of the defendants’ business model by the fourth defendant, Mr Mendham. The Court noted that, as was clear from Meagher J’s judgment, Mr Mendham attended an examination pursuant to section 19 of the Australian Securities and Investments Commission Act 2001 (Cth)(ASIC Act) and Meagher J had regard to the transcript of that examination, including Mr Mendham’s evidence.
Fifthly, the Applicants argued that ASIC did not inform the Court as to whether the fifth defendant was a “relevant person” for the purposes of section 1323 of the Corporations Act 2001 (Cth) (Corporations Act). However, the Court noted that the transcript of the hearing before Meagher J showed that submissions were made by ASIC that the fifth defendant was “the central figure of the operation”.
Sixthly, the Applicants argued that ASIC failed to provide adequate evidentiary justification to the Court that the matter required an urgent ex parte hearing and determination. The Court was of the view that Meagher J was at liberty to decide this issue for herself and plainly thought the matter required that attention.
Overall, the Court was satisfied that ASIC discharged their duty of candour in respect of the orders they had earlier sought.
Jurisdictional Basis
AISC sought substantive relief pursuant to sections 1101B, 1323 and 1324 of the Corporations Act or sections 19, 21, 23 , 37AF and 37AG of the Federal Court Act, that the defendants had contravened sections 911A(1) and 911A(5B) of the Corporations Act by carrying on a financial services business “in this jurisdiction” without holding an Australian financial services licence.
After stating the relevant statutory provisions, the Court considered the arguments raised by the Applicants in respect of this issue.
Firstly, the Applicants submitted that ASIC failed to draw the Court’s attention to the limitation in section 1101B(1) of the Corporations Act that the Court should only make a relevant order if satisfied that that order would not unfairly prejudice any person. In respect of this argument, the Court was of the view that:
In the present case at [42] her Honour noted the submission that the orders sought were intrusive, however her Honour at [51] accepted the submissions of ASIC that the case was one where there was a great risk of dissipation of assets, where there was a difficulty in tracing assets, and that there were a large number of investors with large amounts of money involved and commingled (including superannuation monies). While the third and fifth defendants submitted that no arguments were put to her Honour concerning prejudice to non- Australian clients of the defendants, I am satisfied that, to the extent possible, her Honour was cognisant of prejudice which would be occasioned to defendants and their clients by the orders made on 10 April 2024 but was satisfied that the prejudice would not be unfair in circumstances where there was an apparent risk of dissipation of assets by the defendants.
Secondly, the Applicants argued that there was no attempt by ASIC to draw the Court’s attention to the limitation of the meaning of “property” in the Corporations Act and whether cryptocurrencies constituted “property” under Australian law.
The Court was satisfied that, at an interlocutory level, the definitions of financial service, financial product, financial investment and property in the Corporations Act are sufficiently broad to encompass cryptocurrency assets in appropriate circumstances, and the orders made by Meagher J (as subsequently varied). In doing so, the Court referred to a recent paper published by Jackman J entitled “Is cryptocurrency property?”. In particular, the Court referred to the following matters in Jackman J’s paper:
- cryptocurrency was in effect assumed to be property in the two cases which might have analysed that issue, being Commissioner of the Australian Federal Police v Bigatton [2020] NSWSC 245 and Chen v Blockchain Global Limited (2022) 66 VR 30; and
- the analysis of Gendall J in Ruscoe v Cryptopia Limited (in liq) [2020] 2 NZLR 809, where the Court held that the cryptocurrencies in question were a species of intangible personal property which were without question capable of being the subject matter of a trust, and not simply a form of information.
Thirdly, the Applicants argued that the Court lacked power to make the orders because the defendants were not carrying on business “in this jurisdiction” for the purposes of sections 1041G and 1041H of the Corporations Act and s 12DA of the ASIC Act. The Court noted that it was not in dispute that there were Australian investors as well as foreign investors in the businesses conducted by the defendants. The Court was satisfied at the present interlocutory stage that the Court had the power to make the existing orders on the basis that the defendants were carrying on business in the jurisdiction.
Conclusion
As a result, the Court was not satisfied that orders should be made for rescission or discharge of the existing orders. The judgment noted that in light of that part of the application being unsuccessful, it was appropriate that the Court hear the parties in respect of the balance of the application as soon as possible.
Take Aways
While the judgment was delivered on an interlocutory basis, from a cryptocurrency perspective the decision is of interest because the question whether cryptocurrencies were “property” under the Corporations Act was in issue.
The Court was of the view that the definitions of financial service, financial product, financial investment and property in the Corporations Act are sufficiently broad to encompass cryptocurrency assets “in appropriate circumstances”. Those appropriate circumstances were not expressly identified in the judgment.
The Court gave particular attention to the decision of Gendall J in Ruscoe v Cryptopia Limited (in liq). Although the judgment provides some guidance as to the Court’s view on the “property” issue, the issue was not the subject of detailed reasoning (given it was an interlocutory judgment) and it remains to be considered by the Federal Court on a final basis.
Where can I find the case? [2024] FCA 822
Proof of Case 