High Court uses new gateway to make information order against overseas defendants

In LMN v Bitflyer & Ors a victim of crypto-fraud was granted disclosure orders against six overseas cryptocurrency exchanges by the English High Court. This is the first reported case of the successful use of the new disclosure gateway which expanded the English courts' jurisdiction and made it easier to secure information orders against non-parties based overseas. 

The decision confirms the effectiveness of the new jurisdictional gateway in enabling fraud victims to secure the information they need to track and recover their cryptoassets. It further highlights the pragmatic approach the English courts are taking towards claims involving crypto-fraud, a particularly welcome development given recent statistics revealing that crypto-fraud has risen by a third in the twelve months to September 2022. 

Background

The claimant (referred to as LMN to retain anonymity) is a cryptocurrency exchange operating in England and Wales. Hackers had gained access to its systems and fraudulently misappropriated substantial amounts of various cryptocurrencies. LMN hired an expert, Cipher Trace, to trace the misappropriated cryptocurrencies. Cipher Trace identified 26 'exchange addresses', owned and operated by the six defendant exchanges. However, no further progress could be made in identifying the hackers without co-operation from those exchanges. LMN therefore sought information orders against them (known as Bankers Trust orders).

Historically, information orders have been difficult to secure against overseas defendants due to jurisdictional issues. However, a new jurisdiction gateway was introduced on 1 October 2022 which expanded the courts' jurisdiction to cover information orders against non-parties for disclosure regarding the true identity of a defendant/potential defendant and/or what has become of claimant's property. In other words, it provided the courts with the power to order overseas crypto exchanges to provide key information relating to the identity of the fraudsters and the whereabouts of the misappropriated cryptoassets. LMN relied on the new gateway in its application to serve out of the jurisdiction. 

The decision

There were two hearings, both held in private, to determine whether to grant the information orders sought, whether to permit service out of the jurisdiction and whether to allow service via alternative means (email). 

In addition to looking at the new gateway, Mr Justice Butcher also made some interesting observations on the merits of some of the case law relating to crypto claims in deciding the 'serious issue to be tried' aspect of the service out application. 

'A serious issue to be tried'

In applying to serve out of the jurisdiction, it was necessary for LMN to have a 'good arguable case' that there is a serious issue to be tried in proceedings against the fraudsters. In analysing the merits of the claim, Butcher J noted and affirmed a number of recent key findings relating to cryptocurrencies. This included the acknowledgement that cryptocurrency may be viewed as legal property (following AA v Persons Unknown and the guidance of the UK Jurisdictional Taskforce in its 'Legal Statement on Cryptoassets and Smart Contracts') as part of Butcher J's analysis relating to whether a constructive trust might have arisen. This analysis further builds on the recent development in Jones v Persons Unknown that a constructive trust may be imposed between an exchange and a victim of crypto-fraud.

The court went on to consider the necessary requirements to be fulfilled under Bankers Trust Orders and Norwich Pharmacal Orders (a third-party information order similar to a Bankers Trust Order which may be ordered against those 'mixed up' in wrongdoing) and was satisfied that there was a good arguable case under the jurisdiction of both types of order.

Application of the new disclosure gateway 

For the purposes of establishing LMN's claim to serve out of the jurisdiction, Butcher J applied the new disclosure gateway under Practice Direction 6B, paragraph 3.1(25). By way of reminder, the new gateway reads as follows:

"3.1 The claimant may serve a claim form out of the jurisdiction with the permission of the court under rule 6.36 where –…

(25) A claim or application is made for disclosure in order to obtain information—

(a) regarding:

(i) the true identity of a defendant or a potential defendant; and/or

(ii) what has become of the property of a claimant or applicant; and

(b) the claim or application is made for the purpose of proceedings already commenced or which, subject to the content of the information received, are intended to be commenced either by service in England and Wales or pursuant to CPR rule 6.32, 6.33 or 6.36"

Butcher J considered that the information sought by LMN fell squarely within sub-paragraphs (a)(i) and (ii). Sub-paragraph (b) had also been satisfied as LMN had stated that if the information obtained revealed a potential cause of action against defendants, it would commence proceedings against them in England, and seek to serve such proceedings out of the jurisdiction against any overseas defendants. The court considered that there was a good arguable case that this would be possible on the basis of the potential applicability of the 'gateways' in Practice Direction 6B paragraph 3.1(11) and/or (15).

Permission to serve by alternative means

LMN also applied for permission to serve by alternative means. The Court acknowledged that special or exceptional circumstances were required for such an application be successful, but was satisfied that such circumstances existed, given the 'nature of the claim' and the need for steps to be taken as soon as possible 'before the scent [went] colder'. It seems therefore that urgency in instances of crypto-fraud will help to persuade the court that special or exceptional circumstances exist, for the purpose of granting applications.

Concluding remarks

The fact that this is the first time the English Courts have used the new jurisdictional gateway renders the case significant in itself. However, the judgment is notable for other reasons too, such as its affirmation of numerous rulings relating to crypto in recent years and its pragmatic approach towards such claims. 

However, there remains the significant issue of enforcement of disclosure orders served out of the jurisdiction. Although the legal representatives for the two defendants present at the second hearing stated that their respective clients would comply with an order if made, a question remains around what could be done in practice if any or all of the defendants refused to comply with it.

Authors: James Levy and Max De Tommaso