In the recent case of LMN v Bitflyer Holdings Inc & Ors  EWHC 2954, the High Court of England and Wales made orders directed at a number of cryptocurrency exchanges requiring them to provide information in relation to misappropriated crypto assets.
This decision is the latest in a line of cases which demonstrates the continued willingness of English courts to assist victims of cryptocurrency fraud and that, contrary to the conventional wisdom of regarding the crypto space as being a “Wild West” where anything goes, the long arm of equity remains a powerful tool to hold wrongdoers accountable for their actions.
Although in Australia there remains relatively little legal activity regarding cryptocurrency fraud, these English judgments (and those from other common law jurisdictions such as Singapore) are likely to have a formative effect in developing the law in Australia – especially in the light of the recent collapse of major players in the crypto space such as Voyager, FTX and BlockFi (which will inevitably impact Australian parties).
A recap on Norwich Pharmacal and Bankers Trust orders
Common law courts’ long-expressed disdain of fraudulent conduct means there has always been willingness to grant draconian measures to allow an aggrieved party to locate and recover misappropriated funds, sometimes even at the inconvenience (and potentially, expense) of innocent third parties.
This zeal is best exemplified the Norwich Pharmacal order and the Bankers Trust order – two types of orders that may be granted in the court’s equitable jurisdiction to assist a claimant in facilitating its initiation of proceedings. The fact that these orders can be made ex parte (that is, without prior notice to the respondent(s)) in cases where there would be a risk of irreparable harm were notice to be given) further underlines the court’s willingness to redress fraud.
What is a Norwich Pharmacal order
The House of Lords decision of Norwich Pharmacal Co v Customs and Excise Commissioners  AC 133, from which the order derives its name, concerned an application brought by Norwich Pharmacal Co (Norwich Pharmacal) against HM Customs and Excise to force the disclosure of names of importers who allegedly violated Norwich Pharmacal’s patent. Norwich Pharmacal was unable to identify any of the alleged wrongdoers prior to the order being made.
Notably, the respondent (being HM Customs and Excise) was an entirely innocent third party. Nevertheless, Norwich Pharmacal’s application was granted. Lord Reid stated:
“if through no fault of his own a person gets mixed up in the tortious acts of others so as to facilitate the wrongdoing he may incur no personal liability but he comes under a duty to assist the person who has been wronged by giving him full information and disclosing the identity of the wrongdoers.”
At least in England, the court must be satisfied of three conditions before it will exercise its discretion to grant the order (Orb ARL v Fiddler  EWHC 361 per Popplewell J). These are:
- There must be a ‘wrong’ carried out, or arguably carried out (the wrong could be a crime, tort, breach of contract, equitable wrong or contempt of court). Whether a wrong has occurred need not be conclusively established, but the strength of the argument in this regard will be taken into consideration by the court in exercising its discretion to grant the order;
- Disclosure must be necessary in order for the applicant to initiate proceedings or seek other relief; and
- The party against whom the order is sought must be involved in the wrong (but need not be a wrongdoer) in such a manner other than being a mere witness.
Norwich Pharmacal orders in Australia
The question of whether these rules operate the same way in Australia has expressly been left open by Flick J of the Federal Court in A Nelson & Co Ltd and Another v Martin & Pleasance Pty Ltd (2021) 150 ACSR 314. However, in deciding against the granting of the order, his Honour held that the applicant in that case had failed to establish the second element, which seems to suggest that the three conditions cited above will remain of significant weight in an Australian court’s exercise of discretion.
The Federal Court and State courts have, within their inherent jurisdiction and associated procedural rules, similar jurisdiction to grant orders akin to a Norwich Pharmacal order.
What is a Bankers Trust order
A Bankers Trust order (derived from an English Court of Appeal case, Bankers Trust Co v Shapira  1 WLR 1274), is directed at financial institutions which had received the proceeds of a fraud.
In many ways a Bankers Trust order is very similar to a Norwich Pharmacal order in the sense that they are made against innocent third parties to compel disclosure of information. However, the difference is that while a Norwich Pharmacal order is directed towards discovery of information to identify wrongdoers to facilitate the initiation of legal actions (see the second element of the test above), a Bankers Trust order is aimed at protecting the aggrieved party’s proprietary interest in allowing that party to locate and (hopefully) protect property from being dissipated prior to a legal action. Therefore, the power to compel disclosure of information is not just limited to only finding out the identity of the wrongdoer but may also be used to obtain other vital information in aid of seizing and recovering assets or for a tracing claim.
An aggrieved party who wishes to seek discovery orders against a financial institution would ordinarily apply for both a Norwich Pharmacal order and a Bankers Trust order simultaneously.
At least in England, the authorities indicate that five conditions should be satisfied before the court will exercise its discretion to grant a Bankers Trust order (Kyriakou v Christie Manson & Wood Limited  EWHC 487 (QB) per Warby J). These elements are:
- There must be good grounds to conclude that the assets in connection to which information is sought actually belonged to the claimant;
- There must be a real prospect that the information sought will lead to the location or preservation of those assets;
- The order must, so far as possible, be directed at uncovering the particular assets which are the subject of the tracing claim (ie it must be drafted narrowly);
- The interests of the claimant in obtaining the order must be balanced against the potential detriment suffered by the respondent in complying with the order; and
- The applicant must provide undertakings to pay the respondent’s costs of compliance, to compensate the respondent for damages if loss arises out of the order, and to only use the information obtained for the proper purpose of tracing the assets.
Bankers Trust orders in Australia
In Australia, the authority of a State Supreme Court to grant a Bankers Trust order has been confirmed by the High Court in Breen v Williams (1996) 186 CLR 71. It has also been recognised in Petrochemical Commercial Co International Ltd v Commonwealth Bank of Australia  NSWSC 849 that, at least in New South Wales, the Supreme Court has the power to grant orders akin to a Bankers Trust order under the following statutory provisions:
- s 23 of the Supreme Court Act 1970 (NSW) (power to grant orders to protect the administration of justice);
- Rule 1.4 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) (power to grant discovery prior to the commencement of proceedings); and
- Rule 25.12 of the UCPR (power to make orders ancillary to a freezing order).
Similar to the Norwich Pharmacal jurisdiction earlier described, the Federal Court and other State courts also have similar jurisdiction to grant Bankers Trust orders.
While it is unclear to what extent the test used by the English courts above in the grant of a Bankers Trust order represents the law in Australia, it is highly likely to be of persuasive value in the eyes of an Australian court.
The present case
The applicant, LMN, was a company which operated a cryptocurrency exchange (applicant). It claimed to be a victim of a digital hack which resulted in the transfer of significant sums of money from its systems into the hackers’ accounts. In attempting to locate its lost assets and tracing the lost assets, the applicant sought disclosure from several third-party exchanges (including Binance, currently the largest cryptocurrency exchange in the world) (respondents) for information regarding the identity of the accounts to which the allegedly stolen cryptocurrencies had been transferred and information about what has happened to those cryptocurrencies.
In granting the order sought, Butcher J examined the test for making a Bankers Trust order and held that the elements had been met as follows:
- There is a good arguable case that cryptocurrencies are a form of property, which means that if said cryptocurrency was obtained by fraud, equity would impose a constructive trust on the fraudulent recipient. Although there are arguments that the transfer of cryptocurrency in fact creates a new asset in the hands of the acquirer, the better view appears to be that there has merely been a transfer of property which is capable of being traced.
- Given the nature of the apparent fraud and that of the information sought, which concerned the identity of account holders and the destination of transfers, there was a real prospect that this information would lead to the location or preservation of the misappropriated cryptocurrencies.
- The order sought was drafted sufficiently narrowly such that it provided: (a) the applicant shall only use the information for the purpose of receiving the assets, (b) the applicant is restrained from using the information in pursuing any substantive claims against the respondents, and (c) the applicant will take all reasonable steps to keep the information provided confidential to the maximum extent possible.
- There was a clear benefit to the applicant in obtaining the information sought, and the potential detriment to the respondents could be ameliorated through the undertakings given by the applicant as to expenses and damages and the restrictions inherent in the form of the order.
- The applicant had offered to give the undertakings required in relation to expenses, loss and confidentiality.
Butcher J also observed that because the respondent exchanges were “mixed up” in the fraud (but were not themselves involved in any fraudulent conduct), the relief sought could also be granted under the court’s Norwich Pharmacal jurisdiction. However, the judgment avoided ruling on the broader question of principle regarding whether, given the significant overlap between the two orders, they were in fact one and the same. The question of whether there remains a difference between the two orders will have to be settled in a future case.
Where’s Wally? The problem of finding the correct respondent
An important procedural issue in this case was the difficulty in identifying the correct corporate entity to which an order can be directed, as the business structures of some of the respondent cryptocurrency exchanges were quite opaque, with the exchange “topco” potentially having numerous unknown subsidiaries. The identification of the correct corporate entity was crucial to the effectiveness of the order, as an order compelling information from Company A for information that was in fact held by one of its unidentified subsidiaries (Company B) will be rendered impotent where (1) Company A is unwilling or unable to divulge the identity of Company B or (2) Company A does not have an unfettered legal right to demand such information from Company B due to the doctrine of separate legal personality.
In the present case, this issue was resolved by adding another defendant titled “Persons Unknown”, defined as “the individuals or companies or other entities who own and/or operate [Company A’s exchange] who have been informed about these proceedings and/or this order but not [Company A] itself”. In doing so, the applicant was able to capture relevant respondents to ensure the effectiveness of the orders. This was also particularly important for the purposes of extending the applicant’s various undertakings (particularly those in relation to confidentiality) to encompass all putative respondents.
Making orders directed at “A Person” or “Persons Unknown” is now a well-trodden path in England, and has been used in New Zealand. However, in the Australian context, at the time of drafting this article, we have not found any instance of an Australian court making such an order. This novel and innovative approach could serve as a blueprint for future applications of this kind across all common law jurisdictions, Australia included. This will, of course, be subject to the local jurisdiction’s procedural rules.
This case exemplifies the willingness of the courts to develop and extend its equitable jurisdiction in relation to crypto assets, a space which will undoubtedly see significant increases in legal activity for the foreseeable future, especially where statutory regulations remain in their infancy. Bearing in mind the pace at which the law in this area is developing, practitioners should remain updated with the latest cases and consider more creative approaches when seeking orders aimed at seizing, freezing and recovering assets. Key practical takeaways:
- If any doubt remained, cryptocurrency is ‘property’.
- Orders compelling disclosure of information are likely to be made once a prima facie case of fraud is made out (whether in the Norwich Pharmacal jurisdiction, Bankers Trust jurisdiction or under some equivalent statutory rule). As such, aggrieved parties should not shy away from making these applications – but, careful preparation of the evidence is essential especially if the application is being made ex parte where the applicant has a duty to make full and frank disclosure.
- The speed at which crypto assets can be transferred or converted means that time is of the essence (and delay in seeking the orders, can sometime be held against the applicant). Preparing an application for a freezing order, Norwich Pharmacal order and or Bankers Trust order can be time consuming, so bear this in mind and ensure that your legal team is experienced in this area and has adequate capacity to prepare the application on short notice. Also remember, after obtaining the orders and serving them, there will be a frenetic flurry of work that ensues.
- Generally, courts appear willing to allow the service of these orders out of their home jurisdiction and, in many jurisdictions, recognition and enforcement of such orders is relatively straight-forward.
- In cases where it is unclear which party holds which information, consider adopting the approach of having orders directed at “A Person” or “Persons Unknown”. The definition of such persons should, where possible, be drafted as precisely and narrowly as possible – for example, “any other company(ies) or entit(ies) who own and/or operate the named entities”. This may make the order more effective and, importantly, easier to enforce.