Between a rock and a crypto space: Federal Court will not make commercial decisions for receivers

The meteoric rise of digital currency assets, also known as cryptocurrency, has inevitably led to an increase in litigation in the cryptocurrency arena. Given the often valuable assets at stake and the potential for huge losses, it will come as no surprise that claims will be made against any independent party (such as an insolvency practitioner or trustee) who makes an unfavourable commercial decision regarding those assets.

It only follows that independent parties in control of large cryptocurrency assets would want to seek the Court's approval when making potentially risky financial and commercial decisions in an attempt to exclude liability. However, recent decisions of the Federal Court have brought into sharp focus the Court's long-standing strict limits on providing authority and judicial advice concerning the making of commercial decisions.

The Court cannot give advice as to the lesser of two evils in commercial decision-making

On 11 June 2024, Collier ACJ handed down judgment in the matter of Connelly as Receiver and Manager of "Digital Currency Assets" v NGS Crypto Pty Ltd [2024] FCA 618. Court-appointed receivers and managers of Digital Currency Assets made an urgent ex-parte application under r 14.23 of the Federal Court Rules 2001 (Cth), which allows a receiver to apply to the court for "authority to do any act or thing in a proceeding in the receiver's name or in the name of another party".

The receivers sought judicial advice to the effect that they would be justified in either:

• not un-staking Digital Currency Assets; or
• alternatively, un-staking those assets by applying a certain approach,

amidst ongoing litigation and before a related interlocutory application was heard.

Despite submissions from the receivers that the Court had previously recognised the principle that the Court should give advice where it is needed to protect liquidators and administrators from claims that they have acted unreasonably by entering into particular transactions and that the receivers were faced with two very risky decisions putting them “between a rock and a hard place”, ultimately the application for judicial advice was refused. The Court was not prepared to make such a commercial decision on behalf of the receivers.

In declining to provide judicial advice, Justice Collier noted that the Receivers are experts in their field, who plainly understand the ramifications of each of their possible decisions in the complex field of cryptocurrency investments and have a feeling of apprehension or unease about possible business decisions open to them in respect of the relevant Digital Currency Assets. It is not for the Court to make the choice of which decision the Receivers should make (ie. to not un-stake or to un-stake), nor is it to alleviate potential anxiety and apprehension associated with making the choice.

It is not the Court's responsibility to protect receivers and managers from being liable for damages

Days after the first judgment was handed down, the receivers filed a further urgent ex-parte application on the basis that their original application was framed in a manner that was too binary (Connelly as Receiver and Manager of "Digital Currency Assets" v NGS Crypto Pty Ltd (No 2) [2024] FCA 697). This time, the receivers merely sought the Court's advice as to whether they were justified in the taking of one particular course, being the un-staking of the Digital Currency Assets over which they had control.

The Receivers reiterated the general notion that it is “traditional and orthodox” to provide judicial advice in circumstances where, in doing so, the Court has the power protect court-appointed receivers or managers from liability arising out of the taking of one commercial path over the other.

Justice Meagher found it appropriate to refuse to give judicial advice on substantially the same grounds as the first judgment. In giving reasons for her decision, Her Honour was not convinced that the conclusions reached in the first judgment were merely due to the binary expression of the application, reiterating the content with approval.

Her Honour also noted that as the choice to un-stake the digital currency assets or not was controversial, it was likely inappropriate to hear the application ex parte.

Think twice before applying to the Federal Court for advice

Given the recent decisions of the Federal Court in this area, it would be prudent for receivers and managers (or other independent parties), when faced with a potentially risky commercial or financial business decision, to consider whether the issue also calls for the resolution of a legal issue, in which case the Court is more likely to provide advice to resolve that legal issue. It is clear that the Federal Court will not use the power to grant authority under r 14.23 of the Rules lightly, simply to lessen the burden or anxiety a receiver or manager might feel when engaging in tricky business dealings. This is especially so in a case where the receivers or managers are experts in their field and should understand the ramifications of their own business dealings.