Cryptocurrency related Situs Issues: An analysis of Cheong Jun Yoong v. 3AC

Cryptocurrency related Situs Issues: An analysis of Cheong Jun Yoong v. 3AC

By Kartikey MahajanBhavya Chengappa and Aayushi Singh (Khaitan and Co)

The General Division of the High Court of Singapore (SGHC) in Cheong Jun Yoong v Three Arrows Capital Ltd and others [2024] SGHC 21 recently ruled on the situs of a crypto-asset based on the residency (rather than domicile) of the person controlling the crypto-asset's private key. This is an important ruling on (i) the nexus of Singapore to the dispute and (ii) the element of control of the crypto-asset’s private key.

A. Background

The claimant, Cheong Jun Yong (Cheong), managed a portfolio of assets in Three Arrows Capital Ltd, the first defendant (3AC). Cheong said that the asset portfolio he oversaw was a stand-alone fund under the name “DeFiance Capital” (DC Fund / DC Assets), held in trust by 3AC for him and other investors (DC Investors). 3AC was an investment fund established in the British Virgin Islands (BVI) and engaged in the trading and dealing in digital assets including cryptocurrencies.

Cheong started an independent and standalone fund on the 3AC group platform in accordance with an arrangement (Independent Fund Arrangement) that was agreed with the 3AC founders in 2019 and 2020. Cheong claimed that in accordance with this agreement, he and the other DC Investors paid with a combination of fiat currencies and cryptocurrencies including about USDT 22.3 million for their subscriptions to specific shares in Three Arrows Fund Ltd (the offshore feeder fund of 3AC) and partnership interests in Three Arrows Fund LP (the onshore feeder fund of 3AC).

The DC Assets included the previously indicated combination of fiat and crypto currency, in addition to other assets that these were utilized to purchase (such as simple agreements for future tokens (SAFTs) and simple agreements for future equities (SAFEs). In October 2021, 3AC and Fireblocks Ltd. signed a license agreement that gave 3AC access to the platform to create a workspace (DC FB Workspace) that Cheong could only use to store the cryptocurrency tokens that were a part of the DC Assets. Cheong incorporated in DeFiance Capital Pte Ltd (DCPL) and DeFiance Ventures Pte Ltd (DVPL) in Singapore. 3AC transferred all its rights and interests in DC FB Workspace and all the DC Assets in sub-accounts to DCPL. DCPL subsequently commenced operations as the investment manager of a separate new fund that Cheong established and later novated the DC FB Workspace to DVPL.

In 2022, 3AC was placed under liquidation. The liquidators applied to the SGHC seeking recognition of the BVI liquidation proceedings in Singapore as a “foreign main proceeding” under the UNCITRAL Model Law on Cross Border Insolvency, and consequently also under the Insolvency, Restructuring and Dissolution Act 2018. The SGHC granted an order of recognition. The SGHC also stayed the ‘commencement and continuation of individual proceedings concerning the property, rights, obligations, or liabilities’ of 3AC. Shortly after, Cheong sought leave of the court to commence proceedings against 3AC in connection with the DC Assets. 

Cheong then moved to set aside the BVI court order that allowed the Liquidators to serve the parallel BVI proceedings on Cheong in Singapore. The judgment in the BVI reserved at the time of the SGHC’s ruling in Cheong v. 3AC. Cheong claimed in Singapore that 3AC was a trustee over the DC Assets under the Independent Fund Arrangement, as well as the trustee over some assets. 

B. Sufficient nexus to Singapore

 Order 8, rule 1(1) of the Rules of Court 2021 states that an originating process can be served outside of Singapore with the Court's approval ‘if the Court has jurisdiction or is the appropriate court to hear the action’. Paragraph 63(2) of the Supreme Court Practice Directions 2021 (SCPD 2021) requires the claimant to prove that the Singapore Court “is the appropriate court to hear the action” by demonstrating that (i) a good arguable case exists of sufficient nexus to Singapore; (ii) Singapore is the forum conveniens; and (iii) there is a serious question to be tried on merits.    

To prove a sufficient nexus Cheong had to demonstrate that:

 i. Relief was being sought against a company ordinarily resident or conducting business in Singapore

3AC had operated and traded in Singapore until it was liquidated. However, the Defendants contended that 3AC resided in BVI, citing the Singapore Court's approval of BVI liquidation proceedings. They further alleged that 3AC's business in Singapore terminated upon liquidation. 

The SGHC therefore addressed the novel problem of when to assess a company's residency during liquidation, because, as Cheong observed, there appeared to be no earlier recorded ruling suggesting when the relevant time is to investigate a corporation's residency during liquidation. According to Cheong, a bankrupt corporation's residency should be determined “by reference to when it was alive and flourishing.” The court rejected Cheong's claim, emphasising its territorial authority, and requiring proof of residency or business in Singapore at the time of application. Citing the relevant English decision of Chellaram and another v Chellaram and others (No 2) [2002] 3 All ER 17 and its commentary, the court decided that Cheong's claim, filed after liquidation, lacked evidence of 3AC's ongoing business or administration in Singapore. As a result, Cheong could not rely on Singapore's jurisdiction for residency or business. The SGHC concluded that the ground based on the Company’s residency or carrying on of its business was not satisfied.

ii. The claim involved property situated in Singapore

Cheong submitted that there was a good arguable case for the principle that the presumptive owner of crypto assets would be whoever controlled the wallet linked to the crypto asset and that the situs of a crypto asset would be where its owner was resident. Therefore, the DC Fund’s crypto assets were situated in Singapore since DVPL (and by extension, the claimant) controlled the private key to the assets. Both DVPL and Cheong being resident in Singapore.

Reference was also made to Tulip Trading Ltd (a Seychelles firm) v Van Der Laan and Others [2022] 2 All ER (Comm) 624. In that instance, the claimant claimed to have a significant quantity of digital currency assets and that its private keys had been taken because of a computer breach. The defendants contested the ruling granting authorization to serve outside of the jurisdiction. The English High Court overturned the judgment granting power to serve outside of the jurisdiction on the grounds that the claimant had not proved a substantial issue for trial on the merits. However, the Court of Appeal in Tulip Trading Ltd held that there was an arguable case that the plaintiff was domiciled in that jurisdiction and that the digital assets were in the jurisdiction and the issue of controlling the digital property did not arise in this case because the plaintiff's possession was not contested. Although the decision of the High Court was overturned by the English Court of Appeal, there was no dispute on appeal that there was a good arguable case that the plaintiff was domiciled in that jurisdiction and the property was within the jurisdiction.

Based on ByBit Fintech Ltd v Ho Kai Xin [2023] SGHC 199, the High Court ruled that the residence of the person who holds the private key should be recognised as the situs of the crypto-asset associated with that private key. Based on the evidence, the High Court determined that DeFiance Ventures Pte Ltd and Mr Cheong controlled the assets' private key and were both Singapore residents.

iii. And the claim was founded on a cause of action arising in Singapore

 In Karaha Bodas Co LLC v Pertamina Energy Trading Ltd and another [2005] 2 SLR(R) 568 it was stated that “the cause of action arose where in substance the trust in favour of the claimant arose.”  The claimant submitted that in substance the trust over the DC Assets arose in Singapore because the trust came to be formed in Singapore. The claimant argued that the trusts emerged because of the Independent Fund Arrangement. The negotiations over the Independent Fund Arrangement took held in Singapore. The Independent Fund Arrangement was agreed upon in Singapore. The DC Sub-Accounts were established, cryptocurrencies and fiat currencies were initially transferred to them, and Class Defiance Shares and Class Defiance Interests were issued when the Company was headquartered and operating in Singapore. In addition, TACPL (the business's investment manager at the time) is a Singaporean business, and both the Company and TACPL share directors. The master-feeder fund structure required that the claimant and DC Investors transfer their cryptocurrencies and fiat currencies to the feeder funds, in exchange for which the feeder funds issued Class Defiance Shares/Interests, and the feeder funds use the cryptocurrencies and fiat currencies to subscribe for shares in the master-fund, i.e., the Company. In my opinion, the formalities of the fund structure did not modify my finding that, in essence, there was a strong argument that the trust formed in Singapore.

C. Singapore is the forum conveniens 

To meet the criterion for Singapore to be the forum conveniens, the claimant must show that it is the more suitable forum on balance. Singapore is considered the most relevant forum if it has a significant relationship to the conflicts at hand. The claimant must demonstrate that Singapore is the most suited forum, not just one of several comparable options and the court prioritizes quality of the connecting factors. SGHC held that Singapore was the more appropriate forum as the applicability of the law of British Virgin Islands was not sufficient to outweigh the factors in favour of Singapore being the more appropriate forum.

 As demonstrated in Oro Negro Drilling Pte Ltd and others v Integradora de Servicios Petroleros, the question about whether on balance, Singapore is the more appropriate forum for the action only arises for determination if the court is first satisfied that there is at least another available forum. Singapore would be the more appropriate forum if it has the most real and substantial connection with the disputes raised. 

D. A serious question to be tried on merits

Evidence showed that the confidence deficit needed to be seriously considered. The plaintiff had sole control over the management of the DC Fund. Although the plaintiff managed the DC Fund as an employee of TACPL/TRPL, his employment with TACPL/TRPL was necessary only because the DC Fund was not a legal entity. More importantly, the plaintiff managed the DC Fund to the exclusion of other officers, agents, or employees of 3AC Group. In contrast, the plaintiff, TAC Ltd, manages the assets in a separately managed account (which had no trust) under the authority confirmed by Mr Su Zhu or Mr Kyle Livingston.  

E. Other factors taken into consideration by the SGHC 

The SGHC also factored into its decision that most of the relevant witnesses to were in Singapore. In addition to convenience and cost, the compellability of these witnesses to give evidence in the BVI was a significant factor since the main disputes revolve around questions of fact. Particularly so when there was no indication that the key relevant witnesses would be compellable to give evidence in the BVI. 

The SGHC also opined that the fact that the transactions were implemented through a BVI investment structure pursuant subscription agreements which were governed by BVI law, was a ‘neutral factor’. The applicability of BVI law therefore was not sufficient to outweigh the factors in favour of Singapore being the more appropriate forum. 

Further that given the early stages of the parallel BVI proceedings, they were also not a significant factor for consideration in the present scenario.