U.K. High Court Grants First Third-Party Debt Order for ICO Fraud Case

Two plaintiffs were granted three key injunctions against a fraudulent Scottish entity misusing funds contributed as part of an initial coin offering (ICO).

The U.K. High Court has granted the first third-party debt order in a case involving cryptocurrencies and fraud connected with an initial coin offering. A third-party debt order effectively is a means of intercepting a payment due from a third party to the judgment debtor but redirected to be paid by the third party directly to the judgment creditor to satisfy the judgment debt, according to Lexis Nexis.

Background to the case

The plaintiffs, Ion Science Limited, a company registered in England and Wales, and sole shareholder Duncan Johns, claimed to be victims of an initial coin offering scam, in which they were asked to invest large sums of money in cryptocurrency products which were understood to be genuine and to make commission payments for the profits from these investments. The plaintiffs looked to recoup the misused 64.35 bitcoin, which had ended up in cryptocurrency accounts on Binance and Kraken, two prominent cryptocurrency exchanges.

This is the latest ruling regarding the status of crypto assets in England, following an earlier ruling that crypto-assets can be regarded as property.

Court rules against “Mirriam Corp”

Initially, the plaintiffs applied for a proprietary injunction, a worldwide freezing order, and an ancillary disclosure order against the “Persons Unknown” who had deceived them. As in a recent case in Singapore, the court had first to determine the limits of its jurisdiction against “persons unknown,” using a three-limb test: “whether there was a serious issue to be tried as to merits;” “whether there was a good arguable case falling within one of the gateways under CPR PD 6B;” and whether England was the correct place for the dispute to be heard.

The court determined that it did have jurisdictional authority over the unknown persons, and granted the proprietary injunction against the unknown persons. According to Mills & Reeve, “Proprietary injunctions are a useful tool where a claimant believes that they are the rightful owners of certain property that the defendant holds.  A proprietary injunction must specify the particular property in question.  The applicant must establish that it has an arguable case that the assets are its property.”

It also granted a worldwide freezing order, determining that the defendant’s modus operandi of using aliases and fake documents, as well as its presence on a regulator’s warning list, were sufficient grounds for the order. According to Stevens & Bolton, a “freezing order, is a type of prohibitory injunction ordered by a court, obtained by one party (the applicant) against another (the respondent) to restrain the respondent from unjustifiably disposing of, or otherwise dealing with, their own assets.” The freezing order aims to preserve the respondent’s (or defendant’s) assets so that the applicant can pay any legal fees of the plaintiff, should the plaintiff win the case.

The plaintiffs also filed a disclosure order against Kraken and Binance, which would compel crypto exchanges to release the names of the account holders where fraudulent funds were transferred. Kraken later informed the plaintiffs that the account used to execute the ICO fraud was opened under the name “Mirriam Corp LP (“Mirriam Corp”), a Scottish entity and that the account held cryptocurrency and fiat money.

The plaintiffs claimed against the Scottish entity to recover the misappropriated funds, but the company did not respond, prompting the plaintiffs to seek a third-party order to enforce their judgment debt. The High Court granted the plaintiff’s application, marking the first such ruling for the cryptocurrency industry.

The granting of a request to freeze assets recently happened in Singapore, where an American entrepreneur petitioned the courts to freeze crypto assets to prevent the defendants from liquidating them, and to force two crypto exchanges to release the transaction history of the unknown persons in the case.

These rulings come at a time when Ukrainians have called for the freezing of assets of Russian citizens and clears the pathway for legal procedures to achieve this.