Big Four Auditor PwC Publishes Crypto Insolvency Guide, Cautions Directors

Big Four audit and consultancy firm PwC Hong Kong has published guidance for financially distressed or insolvent businesses in the crypto sector. The document, released February 2019, tackles the complexities specific to the nascent industry, in particular in regard to asset valuation and multi-jurisdictional operations.

PwC notes that the two parameters used to determine a company’s financial viability — cash flow and balance sheet assessment — may be more difficult to ascertain in the case of crypto assets, whose volatility complicates a clear-cut valuation. The document continues:

“Further, the lack of clarity on the accounting treatment of cryptoassets and as of yet, no broad consensus on taxonomy in the crypto world or how to accurately value cryptoassets, means that ambiguity may arise when evaluating the solvency status of your crypto firm.”

Once a company’s financial standing is in jeopardy, the auditor notes, directors’ duties shift from serving the best interests of their shareholders to those of their creditors, which become paramount. The document outlines the possible loss of management control, civil penalties, and even criminal charges a director risks if they fail to adequately manage insolvency proceedings.

PwC cautions that where relationships between major creditors and directors have broken down, “a disgruntled creditor may take enforcement action to initiate formal insolvency proceedings [...] and to appoint a liquidator.” An externally appointed liquidator has the statutory right to investigate the conduct of directors, opening the possibility of civil — and, more rarely, criminal — actions against them, and exposure to personal liability.

As opposed to this compulsory liquidation, in another scenario a director may retain the ability to initiate the liquidation voluntarily. Where a jurisdiction is relatively debtor-friendly, this may allow for a soft-touch liquidation, PwC states, whereby management preserves control while restructuring and creditor payments are settled.

PwC specifically addresses firms that operate in multiple jurisdictions, which the auditor contends is a common case for the crypto industry. For an insolvency case, the document clarifies that the principle of the Centre of Main Interest is used to establish which jurisdiction’s laws take precedence.

As reported, now-shuttered Canadian crypto exchange QuadrigaCX is currently the focus of legal proceedings and controversies following the death of its CEO in December 2018, which allegedly left the firm unable to access the majority of its crypto assets.

The founder’s widow and de facto co-director has this week asked the court to appoint a chief restructuring officer to take over proceedings, citing her lack of experience with an insolvent company and the unwanted public attention the case has drawn to her personally.