News & Insights

Digital assets and insolvency

The UK Jurisdiction Taskforce (UKJT) has issued guidance on how to deal with digital assets under English insolvency law

It’s important to note from the outset that the UKJT “Legal Statement on Digital Assets and English Insolvency Law” is not legally binding. However it provides some helpful guidance on the application of English insolvency law to the murky waters surrounding digital assets.

So what are digital assets? According to the Law Commission the term “digital asset” is extremely wide and will include digital files, records, email accounts, domain names, in-game digital assets, crypto-tokens and non-fungible tokens (NFTs).

The key conclusion drawn by the UKJT is that the Insolvency Act 1986 can properly deal with digital assets and that they are to be considered “property” for the purposes of the legislation. This is the case despite digital assets not yet being capable of being considered money, so a claim to digital assets cannot constitute a statutory demand. The Law Commission recommends that expert guidance is required on this issue for further clarity on which digital assets may properly be capable of being considered “money” in the future.

The fact that digital assets are considered property has a number of implications for insolvency office holders:

  • In a liquidation, the liquidators usual obligations will apply, that they must exercise their powers in good faith and to get the best price reasonably obtainable on the sale of the digital asset, or alternatively distribute them in specie.
  • Digital assets can be subject to transactions at an undervalue, preferences and transactions defrauding creditors and accordingly transactions involving digital assets can be set aside. The investigatory powers generally available to insolvency office-holders are therefore applicable to digital assets.
  • Once appointed, administrators must take all of the insolvent company’s property into their custody or control, which will include digital assets. It follows that digital assets are saleable property of an insolvent company and similarly to liquidators, administrators will have a duty to attain the best price reasonably obtainable for digital assets. This will likely require in depth investigation to ascertain value.

Digital assets are a relatively new phenomenon and as such it is an area of law which is likely to be volatile. However the UKJT guidance is helpful to clarify that current insolvency legislation does properly deal with digital assets, even if further development is required.

If you have any queries about this article or insolvency generally, please contact Ross Brymer or another member of our Corporate Restructuring and Insolvency team.