A cryptocurrency exchange has entered Companies’ Creditors Arrangement Act (CCAA) proceedings in Canada after its director died suddenly in India, leaving at least 92,000 customers unable to withdraw over C$260 million (US$197.12 million) worth of cash and cryptocurrency.
At a hearing in the Supreme Court of Nova Scotia on 5 February, Justice Michael Woods appointed Ernst & Young as monitor to oversee proceedings brought by cryptocurrency platform QuadrigaCX and two of its parent companies.
The court also ordered a stay of all claims against the companies until 7 March.
EY’s pre-filing report says Quadriga has been experiencing a “liquidity crisis” and has not been able to satisfy withdrawal requests from its users. It has also been unable to locate a “significant amount” of cryptocurrency following the death of its founder Gerald Cotton in December.
In an affidavit filed at the court last month, Cotton’s widow Jennifer Robertson revealed that the laptop her husband had used to carry out the company’s business is encrypted and no one has been able to find the password or recovery key.
Robertson has hired a security expert to try and hack into the computer and access about C$190 million (US$143.17 million) of currency that was placed into cold storage – an offline location used to secure coins – before Cotton’s death.
In a separate application, Bennett Jones partners Jim Patterson and Raj Sahni have asked the court to establish an official committee of affected users and to appoint them as representative counsel with local firm McInnes Cooper.
Stikeman Elliot partner Elizabeth Pillon and associate Lee Nicholson are providing counsel to EY.
“Significant liquidity issues”
In the monitor’s pre-filing report, EY restructuring partner George Kinsman lists factors that have contributed to the instability and solvency concerns Quadriga is facing.
First, the platform’s cash management system did not have a centralised corporate bank account but instead used third party processors, and this contributed to uncertainty and a lack of control over cash.
The report says that last year the Canadian Imperial Bank of Commerce froze about C$25.7 million (US$19.37 million) of funds in a third-party processor’s account, which resulted in significant delays for users receiving funds from Quadriga.
Kinsman also noted that Cotton was the sole director of the company and it did not have the proper governance to manage the business after he died last year.
To try and address this problem, an application was brought to the Supreme Court last month to permit an expedited shareholder meeting to appoint Robertson and two others as directors of the companies.
But the major issue facing the company is the cryptocurrency seemingly locked away in Quadriga’s cold storage.
Kinsman says that that after undertaking searches, Quadriga employees were “unable to access the cold wallets and/or discovered that the cold wallets contained minimal cryptocurrency units”.
He says the missing coins are valued at C$190 million, and even if the funds frozen by the CIBC and other monies from third party processors were repaid, Quadriga would still be unable to satisfy its obligations to users.
With an inability to access those funds held by third party processors or to locate missing coins, Quadriga is insolvent on a balance sheet and going-concern basis, the monitor said.
Quadriga owes approximately 92,000 users in excess of C$260 million in cash and cryptocurrencies. The monitor said CCAA protection was required to place a stay on any potential claims by these affected users.
“The current status quo is untenable and the issues facing Quadriga need to be addressed as a part of a collective process supervised by the court with the participation of all stakeholders,” the report says.
“The CCAA provides a vehicle of stability and transparency to address the unique situation facing both the applicants and their stakeholders”.
In a filing at court on 5 February, Patterson and Sahni had a higher estimation than EY for the number of affected users. They referred to Robertson’s affidavit, which said there were approximately 115,000.
A hearing to decide Bennet Jones’ motion to establish an official committee of affected users is set to take place on 14 February.
Cotton died in a hospital in Jaipur on 9 December after suffering from a cardiac arrest brought on through complications from Crohn’s disease, according to the Times of India. He was 30 years old.
In the Supreme Court of Nova Scotia
In the matter of: Companies Creditors Arrangement Act; and in the matter of: A plan of compromise or arrangement of Quadriga Fintech Solutions Corp., Whiteside Capital Corporation and 0984750 B.C. Ltd
• Justice Michael Woods
Counsel to Quadriga
• Stewart McKelvey
Partners Maurice Chiasson QC, Sara Scott and Richard Niedermayer in Nova Scotia
Restructuring partner George Kinsman in Nova Scotia
Counsel to EY
• Stikeman Elliot
Partner Elizabeth Pillon and associate Lee Nicholson in Toronto.
Proposed counsel to the affected users
• Bennett Jones
Partners Jim Patterson and Raj Sahni with associate Danish Afroz in Toronto
• McInnes Cooper
Partner Ben Durnford and counsel John Stringer in Nova Scotia