August 1, 2021

Insolvency And Crypto Currency

Introduction:

Insolvency is the statutory term that describes the situation of a debtor who cannot pay his /her debts. Two primary types of insolvency exist: cash flow and balance sheet. In the case of cash flow insolvency, the debtor suffers from a lack of financial liquidity which means that debts cannot be paid as due. Most of the individuals experience this type of insolvency before filing for bankruptcy. Insolvency on balance sheets involves having negative net assets, where one’s liabilities exceed their assets. This is the form of insolvency which corporate entities normally describe before filing for bankruptcy. A person is deemed to be insolvent under the Uniform Commercial Code, if he or she stops paying his or her debts or cannot pay his or her debts as they become due. A number of federal laws, including the bankruptcy code, exist to protect insolvent persons or companies. However, a recent trend has focused on individual corporate officers and directors if it is demonstrated that they have deliberately driven a company into the ground, possibly for the purpose of seeking relief from bankruptcy.[1] Cryptocurrency played crucial role in the world at present. There were many acceptance as well as rejections as whole. These cryptocurrencies brought many changes in transferring and dealing with digital money which gave its positive and negative contributions to insolvency too.

Factors Contributing to Insolvency: –

There are many factors which can contribute to the insolvency of a person or company. Hiring a company for inadequate accounting or management of human resources can contribute to insolvency. The accounting manager, for example, may unsuccessfully create and/ or follow the budget of the company, resulting in overspending. Expenses swiftly add up when too much money flows out and enough comes into the business.

Increased cost to vendors can contribute to insolvency. When company has to pay higher prices for goods and services, the company passes the costs on to the consumer. Instead of paying the increased cost, a lot of consumers take their business elsewhere to pay less for a product or service. Losing customers leads to loss of income for paying creditors of the company.

Customer lawsuits or business associates can lead a business into insolvency. The business can end up by paying large amounts of damages and can’t continue operations. As soon as operations cease, so does the income of the company. Lack of revenue results in unpaid bills and creditors applying for money that they owe.

Some businesses become insolvent because their goods or services are not evolving to suit changing needs of consumers. When consumers start doing business with other companies offering large product and service selections, the company will lose profits if it doesn’t adapt to the marketplace. Expenditures exceed income, and bills remain unpaid.[2]

Procedure to Resolve Insolvency in the Code:

Initiation:-

When a default occurs, the debtor or creditor may initiate the resolution process. The process is administered by the insolvency profession. The professional shall provide the creditor with financial information of the debtor from the information utilities and manage the assets of the debtor. This process lasts 180 days; any legal action against the debtor during that period is prohibited.

Decision to resolve insolvency:-

The insolvency professional will form a committee composed of the financial creditors who lent money to the debtor. The creditors committee will decide the future of their outstanding due debt. They may choose to revive the debt they owe by changing the repayment schedule, or by selling the debtor’s assets to repay their debts. In 180 days, if a decision is not taken, the debtor’s assets will go into liquidation.

Liquidation:-

When the debtor goes into liquidation, the liquidation process is administered by insolvency professional. The debtor’s assets shall be distributed in the order of precedence following:-

i) Insolvency resolution costs, including the insolvency professional remuneration

ii) Secured creditors

iii) Unsecured creditors

iv) Dues to government

v) Priority shareholders and

vi) Equity shareholders

Who Facilitates the Resolution Of Insolvencies Under The Code?

Insolvency professionals: It is proposed to create a specialized framework of licensed professionals. These professionals will administer the debtor’s resolution process, manage the debtor’s assets and provide creditors with information to help them make decisions.

Insolvency Professional Agencies: The insolvency professionals are to be registered with professional insolvency agencies. The agencies conduct exams to certify insolvency professionals and enforce a code of conduct for the performance they perform.

Information Utilities: Creditors will report the debt owed to them by the debtor as financial information. These will include debt records, liabilities and defaults.

Adjudicating Authorities: The National Companies Law Tribunal (NCLT) for companies and the Debt Recovery Tribunal (DRT) for individuals shall adjudicate the resolution proceedings. The duties of the authorities will include approval to initiate the resolution process, appoint the insolvency professional and endorse the creditor’s final decision.

Insolvency and Bankruptcy Board: The Board shall regulate insolvency professionals, professional insolvency agencies and information utilities established under the Code. The Board will be composed of representatives from Indian Reserve Bank and the Ministries of Finance, Corporate Affairs and Law.[3]

Cryptocurrency and Insolvency:

The word cryptocurrency playing a major role present world. The cryptocurrencies are the digital or virtual currencies which can transferred without any third party like banks and this has been decentralized globally. This would run through blockchain, tokens and with miners set up with some security algorithms. The bitcoin, one of the cryptocurrency, would only be allowed after the block has been added to the block chain. Blockchain acts as public ledger. The word crypto means that the method of using encryption and decryption to secure communication. Cryptography usually requires computational algorithms such as SHA256 and public key and private key. Public key here is meant for user sharing with others and private key acts as digital signature of the user. Cryptocurrencies are for securing online payments with virtual tokens that are represented by ledger.

Within a crypto currency network, the miners can only confirm transactions by solving a cryptographic puzzle . Here the mining means A process in which transactions for various forms of crypto currency are verified and added to the Blockchain each time when the currency transaction is made the miner is responsible for ensuring the authenticity of the transaction and the information need to be updated the blockchain . Mining creates an allottee which is equally Valent that prevents any individual from easily adding new block chains to their account . This way it will help an individual to protect the blockchain from any misuse by others[4].

Now there was this question arisen whether crypto assets amounts to insolvent assets. There was an absolute yes for the question. Here the insolvency professional who have to look into the value of the assets and the bankruptcy courts before appointing him have to look into the aspect whether asset fall under crypto asset the debtor owning and need to understand it is an volatile market. The insolvency professional will be accessed to the private key so as to look into value of assets debtor holding, otherwise it would not be easy to have control and access to it.

The other important aspect raised regarding the distribution of money whether into cryptocurrency or converting into fiat currency. It is important to look into the impact of large cryptocurrencies while converting as the cryptocurrency would be devalued as it can be transferred very quickly, need to safeguard it. Once it has been in digital wallet of the insolvency professional, a request can be made for exchange cryptocurrency, to sell the cryptocurrency and transfer it to the insolvency professionals bank account. If the cryptocurrency is located overseas, the insolvency professional should refer to provisions under UNCITRAL Model Law to secure and sell the cryptocurrency (if necessary) if in case of overseas.[5]

Case Law: –

M/s Innoventive Industries Ltd. v. ICICI Bank[6]

In this case, for the first time, the Supreme Court explained the paradigm shift in law by virtue of the newly enacted Insolvency and Bankruptcy Code 2016, which consolidates and amends all insolvency and bankruptcy proceedings legislation in India.

In this case, the Court had set out the legislative intent behind the 2016 insolvency and Bankruptcy Code being enacted. In the case, the Court explained the paradigm shift in law in order to provide guidance to the courts and tribunals while dealing with Code cases. The Court stated that the moment the corporate insolvency resolution process is initiated, a moratorium under the Code is announced by the adjudicating authority which cannot proceed with the institution of suits and pending proceedings etc. with which it continues until a resolution plan is approved, as required by the Code. In the interim, a professional Interim Resolution (IRP) is appointed to manage corporate debtor’s affairs.

With reference to the instant case, the Supreme Court noted that by giving effect to the law of the State, the Code’s intended scheme would be directly impeded to that extent by the management of the relief undertaking which, if taken over by the State Government, would directly impede or interfere with the takeover of the management of the corporate body by interim resolution professional.

The S.C held that the appeal cannot be maintained on behalf of the company. In this case the company is the only one appellant. That being so, the present appeal is not maintainable.

Conclusion:

Though cryptocurrencies sprinkling its popularity around the world it is creating lost more problems. With the rising user base and recent upsurge in the value of bitcoin which is one of the most popular virtual currency available there are increasing obstacles such as the need for a legal structure and regulatory authority recognition of the use of wallet transaction proceedings as well as risk associated with virtual currency transactions. It would create trouble if the private key is not given to the insolvency professionals as there would be no control exist to the crypto assets. Due to its volatile nature of the value of cryptocurrency, the valuation would be critical and the value can be drastically fall or rise. The other problem that might arose out of this when the information is not conveyed to the insolvency professional. There are many cryptocurrencies that are untraceable due to their anonymity. Apart from these there exists many problems even they have many securing aspects.

[1] https://www.hg.org/insolvency-law.html, ( last accessed on may,2020; 10:00pm)

[2] https://www.investopedia.com/terms/i/insolvency.asp, ( last accessed on 2nd may,2020; 11:15pm)

[3] https://www.prsindia.org/theprsblog/insolvency-and-bankruptcy-code, (last accessed on 3rd june,2020; 4:00pm)

[4] https://bitcoin.org/en/how-it-works, (last accessed on 5th June 2020; 1:25pm)

[5] https://www.mondaq.com/australia/insolvencybankruptcy/928588/cryptocurrency-and-insolvency-are-coins-property (last accessed on 6th June, 2020; 3:50pm)

[6] 55(IBC)01/2017

Author Details: Sri Yajushya Cherukupalli and Anuhya Venkat Padma (GITAM (deemed to be University)

Instagram

Leave a Reply