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Checking in on Quadriga - Update on Two Recent Court Decisions

QuadrigaCX (Quadriga) is an online cryptocurrency exchange that has become a familiar name across two forums unlikely to share things in common: Reddit and Canadian courts. Quadriga Fintech Solutions Corp. (Quadriga Corp), the owner and operator of Quadriga, stopped operating in January 2019 after the death of its founder and Chief Executive Officer, Gerald Cotton, who alone knew the encrypted passwords to gain access to the company's offline cryptocurrency reserves. This has left approximately 115,000 customers faced with the prospect of losing an aggregate CDN 260 million in virtual currency and cash (the Affected Users).

After the shut down, speculation and discussion among affected investors and users of the exchange unraveled on social media platforms such as Reddit and Telegram. Since then, two decisions have been issued by Canadian courts in two jurisdictions.

On October 7, 2019, Ernst & Young Inc., as bankruptcy trustee, served a motion seeking approval of a settlement agreement aimed to support the overall best interests of the Affected Users by transferring a significant amount of assets to the Quadriga estate for distribution to avoid further expenses that would come from the uncertainty of litigation. View the full settlement agreement here.

The Decisions

As of the date of this article, there are two court decisions that relate to Quadriga.

Appointing Representative Legal Counsel for All Users.In Quadriga Fintech Solutions Corp. (Re), 2019; NSSC 65, the Supreme Court of Nova Scotia considered several motions by or on behalf of Affected Users. These motions mainly sought the appointment of a representative creditors committee of users, and the appointment of representative legal counsel on behalf of the Affected Users. As the Court indicated, appointment of representative counsel and stakeholder representative committees are not unusual in complex proceeding under the Companies' Creditors Arrangement Act, RSC 1985, c C-36 (CCAA).

Two primary rationales drive appointments of representative legal counsel: (1) to provide effective, streamlined communication with the numerous stakeholders (i.e., over 100,000 affected Quadriga users in this case) and ensure their interests are brought to the attention of the relevant court and other CCAA participants; and (2) to keep proceeding costs down in order to minimize the depletion of funds that would be returned to stakeholders.

Upon careful review of proposals nominating three legal teams, the Court appointed Miller Thomson/Cox & Palmer as the representative counsel team for all the Affected Users. This decision provides insight into the slate of priorities that a court would consider in the context of a CCAA proceeding involving many stakeholders. These considerations include the privacy of the Affected Users, communication plans to ensure accurate information and advice is being conveyed to Affected Users throughout the proceeding, and any respect, as relevant, that has been shown to the interests of the Affected Users hitherto.

Interpleader Order

Separately, but related to Quadriga, in Canadian Imperial Bank of Commerce v. Costodian Inc. et al, 2018 ONSC 6680, the Ontario Superior Court of Justice granted an interpleader order to a bank that was holding approximately CDN 25.7 million and USD 69,000 in deposits made by individuals and companies for intended transactions relating to Quadriga and Costodian Inc. (Costodian). Custodian and Billerfy Labs Inc. (Billerfy) are both payment processors that facilitated payments to and from Quadriga, the currency exchange. The bank had no success determining to what extent individual depositors, Quadriga, Costodian and Billerfy, and the sole officer and director of Costodian and Billerfy, are entitled to the funds at dispute. Therefore, the bank (successfully) sought relief to pay the funds into court so that the depositors may be put on notice and entitlement