Digital assets have been growing in popularity in recent years, leading to some blurred lines in business operations. In this blog, we’re looking into digital asset treatment in UK company liquidation.
What are digital assets?
Digital assets rose in popularity with Bitcoin. Since then, there have been many other digital assets entering the market, including NFTs and other sources of cryptocurrency. Intellectual property is another example of what could be labelled as a digital asset.
A digital asset is anything that can be traded, held as an investment or used in a business transaction. They are non-tangible, which has previously caused some confusion for business owners.
While intellectual property (such as trademarks, patents, or software rights) is also intangible, it is governed by well-established rules in insolvency and is distinct from cryptoassets like NFTs or cryptocurrencies.
Laws on digital assets
In 2024, the UK Jurisdiction Taskforce (UKJT) issued a Legal Statement on Digital Assets and English Insolvency Law. While not legislation, it provides persuasive guidance on how English courts are likely to treat digital assets during insolvency.
An insolvent company can no longer afford to pay its debts on time, or its assets are worth more than its liabilities.
What does the legal statement say?
The legal statement, produced by the UK Jurisdiction Taskforce, highlights that digital assets should be treated as property.
This means that when a licensed insolvency practitioner begins realising assets, they must also check for any digital assets and realise these correctly.
The legal statement also discusses the Centre of Main Interests (COMI), which generally determines where insolvency proceedings should take place. While the registered office is an important factor, the court will also consider where the company mainly carries on its business and where creditors expect proceedings to occur.
It also highlights important information on fraud related to digital assets and explains how, if fraud is uncovered in financial transactions, the transactions can be reversed, causing issues for the directors. This is known as a transaction defrauding creditors and will not be taken lightly under English Insolvency law.
In a liquidation, it is the insolvency practitioner’s job to ensure that every aspect of the business has been thoroughly investigated. They can require company directors to cooperate and provide any information or access needed to recover digital assets, including private keys or wallet details. Directors are legally obliged to cooperate with the insolvency practitioner under the Insolvency Act 1986.
Why are digital assets treated as property?
Digital assets must be treated as property, as they are not the same as money in the bank. In a liquidation where there is money in the bank, a statutory demand can be issued; however, one cannot be issued against digital assets.
Additionally, these assets cannot be labelled as money, as it creates more issues for companies operating in other countries with foreign currency.
How do liquidators handle digital assets?
With digital assets being labelled as property, they can be realised in the same way as other assets, such as stock, machinery and more.
Similarly with other assets, it is the insolvency practitioner’s duty to try to get the best value for the assets. Once sold, this money can be distributed among secured and unsecured creditors.
It’s also worth noting that liquidators don’t actually have to realise the online asset into cash. They can distribute it as a digital asset too.
Insolvency practitioners have a duty to ensure that all aspects of a company have been assessed, which means identifying any digital assets. In some cases, directors may hide these assets, which is not a good idea. Insolvency practitioners may take the following steps to identify the assets.
- Communicate directly with the cryptocurrency provider
- Investigate company directors and other parties
- Request information directly from other parties regarding crypto exchanges, such as a dedicated crypto specialist
- Assess the company’s books to recover digital assets in insolvency proceedings and assess any financial transactions linked to crypto assets
Once crypto assets have been identified, they must be secured, which could include a freezing order or transferring them. This is all standard practice in insolvency cases, and may also include the liquidator using a cold wallet when they recover online assets.
What if the company has very few assets?
In some instances, there may be none or very few assets to realise, which means company creditors may not actually receive any money. If no wrongdoing is committed, then these company debts may be written off.
Always remember that not all debts can be written off; for example, those with a personal guarantee attached to them. Additionally, if a director is found guilty of wrongdoing, they may face personal liability for some or all of the company’s debts.
You should avoid trying to sell the digital assets before you enter liquidation. If you do sell them, you must ensure that they have been independently valued and that you retain all paperwork relating to the sale. Many bankrupt individuals may believe it’s a good idea to sell assets at an undervalued price, but this can lead to serious consequences with the Insolvency Service.
Even if there are few assets, liquidators must still investigate whether any crypto transactions have occurred, including whether assets were transferred to third parties before insolvency.
I am a business owner with digital assets
Even if your company is not insolvent, it’s good to have an understanding of how digital assets will be handled if your company does enter liquidation in the future, especially with new cryptocurrency and NFTs entering the market.
If your business holds digital assets, these will form part of the liquidation as property.
As a result of the above, you should always keep accurate records of any digital assets. This can help protect you if your business enters liquidation. It also means you can better understand your company’s financial situation, which is really important.
Are you a business director looking for personalised insolvency support? Then you should contact our friendly team. We work closely with directors to identify the most suitable outcomes for you.
Justin Barker
I’m Justin Barker, the Managing Director at 1st Business Rescue. I have over 25 years of experience providing insolvency advice to business owners.
I understand how challenging it can be when dealing with financial difficulties within your business. It’s easy to ignore the problem and hope that it disappears, but this is often the worst thing you can do. Our dedicated team is here to provide honest, valuable advice to help UK directors deal with their personal situations in the most appropriate way.
No case or circumstance is the same, but I can guarantee that I am there to give you the best advice.
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