Canadian Cryptocurrency platform QuadrigaCX to be placed in bankruptcy?

Interested parties attend Nova Scotia Supreme Court as Canada's largest cryptocurrency exchange seeks creditor protection in the wake of the sudden death of its founder and chief executive in December and missing cryptocurrency worth roughly $190-million, in Halifax on Tuesday, Feb. 5, 2019. Embattled cryptocurrency exchange Quadriga has received a reprieve from its bankruptcy protection deadline as the search for nearly $200 million in missing virtual currency continues. THE CANADIAN PRESS/Andrew Vaughan

HALIFAX: The court-ordered monitor picking over the remains of the shuttered QuadrigaCX cryptocurrency platform says the insolvent operation should be placed in bankruptcy.

Ernst and Young says it has concluded there is only a remote possibility the Vancouver-based company will emerge from creditor protection under the Companies’ Creditors Arrangement Act and restructure.

Cryptocurrency exchange Quadriga seeks creditor protection after founder's death

The professional services firm says its ongoing investigation to recover $260 million in cash and cryptocurrency owed to 115,000 users could be handled more efficiently under the Bankruptcy and Insolvency Act.

“(The transition) will streamline the administration of the proceedings, reduce the level of professional involvement and provide enhanced investigative powers,” Ernst and Young said in its report, released Monday.

The exchange was shut down Jan. 28, more than a month after its lone director _ 30-year-old Gerald Cotten of Fall River, N.S. _ died suddenly while travelling in Jaipur, India.

Soon after his death was announced, court documents revealed he was the only QuadrigaCX employee who knew the encrypted pass codes needed to access $190 million in missing Bitcoins and other cryptocurrency locked in offline digital wallets.

Quadriga Fintech Solutions Corp. and its related companies were granted protection from creditors on Feb. 5.

According to the documents, another $70 million in cash is owed to users, much of which was tied up in bank drafts held by third-party payment processors.

In its latest report, Ernst and Young said it determined during its investigation that Cotten was mixing his personal and corporate finances, and it appeared that Quadriga funds may have been used to buy assets “held outside the corporate entity.”

As a result, the monitor has obtained a so-called asset preservation order, which applies to all assets held by his widow, Jennifer Robertson, and the Cotten Estate, including some of Robertson’s trusts and businesses.

The order would prohibit Robertson from selling, removing or transferring any assets. However, it also allows for the payment of living expenses, as well as property, maintenance and legal expenses.

Meanwhile, Ernst and Young says a recently appointed chief restructuring officer, Peter Wedlake, and the lawyers representing the creditors support the transition to bankruptcy proceedings, which would include transforming the monitor into a trustee.

“The monitor is not aware of any stakeholder objecting to the proposed transition,” Ernst and Young said in its monitor’s report _ its fourth since insolvency proceedings began.

“The trustee will have additional investigatory powers without further relief from the court that will be of assistance in the ongoing investigation of the business and affairs of (Quadriga), including the right to compel production of documents and seek examination of relevant parties under oath.”

More importantly, the transition to bankruptcy, if granted by the Nova Scotia Supreme Court, would lift a court-ordered stay of proceedings.

That means creditors would be allowed to file lawsuits against QuadrigaCX and its affiliates, and the platform itself could be sold.

The report says QuadrigaCX has no employees and recently let go most of its contractors.

Last month, the Halifax-based law firm Stewart McKelvey, which represented QuadrigaCX, withdrew from the proceedings. But the firm continues to represent Cotten’s estate and Robertson.