Court rules against Three Arrows liquidators in ownership dispute over DeFiance Capital assets

THE Appellate Division of the High Court of Singapore has dismissed Three Arrows Capital (3AC) and its liquidators’ application for permission to appeal against the Jan 26 court order, which allowed DeFiance Capital’s Arthur Cheong to serve the liquidators in the British Virgin Islands (BVI).

In the latest ruling released last Friday (Apr 12), Appellate Judge Debbie Ong and High Court Judge Valerie Thean said the requirements to ground why the Singapore Court is the appropriate court to handle the Cheong’s civil claim are met.

The claim concerns the beneficial ownership of the assets of 3AC-linked fund DeFiance Capital, or DC assets, which Cheong claims to be a “standalone fund” after he entered into an independent fund arrangement with Three Arrows in 2019.

Following the collapse of US dollar stablecoin Terra, 3AC was put under liquidation on Jun 27, 2022, by a BVI court. The Singapore High Court recognised the liquidation proceedings as a foreign main proceeding upon the liquidators’ application in July 2022.

On Nov 4, 2022, Cheong filed an application for permission to commence proceedings against 3AC in relation to the DC assets. Cheong claims that that DC assets, including contracts for equities or crypto assets entered in 3AC’s name and agreements for future equities and tokens, were held on trust “for the benefit of the DC investors”, including himself.

About 12 hours later on that same day, the liquidators filed an application in the BVI liquidation proceedings seeking orders that the DC assets were beneficially owned by Three Arrows instead.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Culminating orders

Cheong secured Singapore High Court’s approval to serve an originating claim and statement of claim on 3AC’s liquidators in the BVI. The BVI courts also permitted the liquidators to serve Cheong with the BVI parallel proceedings.

The two orders culminated as the liquidators filed a set aside application in the Singapore courts last July, which was dismissed last August.

Meanwhile, the BVI court dismissed a similar set aside application from Cheong last December. The BVI judgment noted that it was the “clearly or distinctly the appropriate forum” at the time when permission was given for service out of jurisdiction.

The BVI court found that by submitting a claim for a loan in the insolvency jurisdiction, Cheong had submitted to the BVI court’s jurisdiction. An application for permission to appeal against that decision is pending.

Relying on the BVI judgment, the liquidators sought permission to appeal the High Court’s decision dismissing their application, arguing Cheong and the DC assets’ investors were bound to BVI-law governed subscription agreements and the transactions had been implemented through a BVI investment structure.

The BVI ruling considered the substantive dispute to be broader than simply the beneficial ownership claim between Cheong and the liquidators, and thought that there was a distinct advantage of continuing the proceedings in the BVI, where all BVI creditors of Three Arrows could participate. It also stated that the cross-border insolvency protocol (CBIP) and the liquidators’ Singapore recognition did not mean that Singapore was the appropriate jurisdiction to settle the beneficial ownership claim.  

Inconsistent rulings

Judge Ong and Judge Thean, however, noted that the CBIP forged between the Singapore and BVI courts under the Judicial Insolvency Network guidelines last November did not have a bearing on Cheong’s civil claim as the agreement “is peculiar to the precise factual matrix of the case” and its interpretation “does not offer a general point of importance” in the context of a court forum decision.

They also examined whether the location of the crypto assets opened a jurisdictional gateway inquiry. While the BVI court looked to the residence of the owner of the crypto assets to determine the asset location, the Singapore court found that the DC assets were situated in Singapore because they were controlled by Singapore resident Cheong or an associated DC Singaporean incorporation, Defiance Ventures.

“The location of a crypto asset was best determined by looking at where it was controlled. In determining the location of the person who controls the crypto assets, the appropriate test is residence rather than domicile since residence is more indicative of the place of control,” said the judges, noting that the BVI court had not concluded that 3AC was the owner of the crypto assets. 

They added that there was also a good arguable case that the claim was founded on a cause of action arising in Singapore, because the “trust arose in substance” in the country.

“The trust arose due to the independent fund arrangement, the agreement and discussions of which took place in Singapore.

“Furthermore, among other things, the initial transfer of crypto assets occurred when Three Arrows was headquartered in Singapore and Three Arrows’ investment manager was then a Singapore company.”

As to whether Singapore was the appropriate forum, the appeal judges disagree with the BVI court that Cheong’s submission of a claim form for a loan in the insolvency jurisdiction amounted to his submission to jurisdiction in the parallel BVI proceeding.

They highlighted under Singapore law: “Submission to jurisdiction may relate to the existence of jurisdiction in that court but another jurisdiction may still be considered the forum conveniens in respect of the exercise of jurisdiction.”

They said the liquidators’ arguments reflected a risk of inconsistent decisions between the Singapore and BVI courts, but that was just one aspect to consider and was not a point of principle.

“In sum, there is no issue of general principle or point of importance that should be adjudicated upon by a higher tribunal...

“The applicants’ true complaint is that the Judge did not rule in their favour,” the judges ruled.

They also rejected further arguments that the lower court judge erred in failing to give sufficient or significant weight to factors of Cheong’s pleased case that the trust was created through a BVI master-feeder fund structure, and of the location of the potential witnesses identified by the respondent.

“It is clear that the Judge took into account the presence of a competing forum, the applicability of BVI law as the governing law and the BVI being the centre of main interests, in holding that Singapore is the more appropriate forum.

“The BVI Judgment accorded a different weight to these factors. However, this reflects a difference of opinion in the manner in which the law should be applied to the facts, and not a prima facie error,” the appeal judges ruled.