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The Hong Kong Court has handed down a significant decision in proceedings arising from the alleged theft of approximately HK$112 million in cryptocurrencies. The ruling provides important guidance on the use of ex parte injunctions and disclosure orders in the context of digital wallets and cryptocurrency exchange platforms.
Herbert Smith Freehills Kramer's Rachael Shek, Jody Luk, and Tiger Chan represented Binance, successfully obtaining the discharge of a proprietary injunction against Binance.
Background
The Plaintiff claimed to have suffered the theft of substantial cryptocurrencies from several wallets. After tracing the stolen assets to various addresses, including a Binance hot wallet, the Plaintiff sought proprietary and worldwide Mareva injunctions, as well as disclosure orders, against unknown defendants and Binance.
The Plaintiff initially obtained ex parte injunctions, but Binance challenged the orders, arguing that the Plaintiff had failed to make full and frank disclosure and that there was no justification for proceeding without notice. This decision concerns only the proprietary injunction, as the Plaintiff agreed to discharge the Mareva injunction prior to the hearing.
Issues
The Court was asked to determine:
- whether the Plaintiff had abused the ex parte procedure and failed in its duty of full and frank disclosure;
- whether the proprietary injunction against the Binance hot wallet should be continued or set aside; and
- whether disclosure should be ordered against Binance to assist the Plaintiff in tracing the stolen assets.
Decision
The Court found that the Plaintiff had abused the ex parte procedure, noting the absence of urgency and secrecy in relation to Binance. The Plaintiff failed to make full and frank disclosure, in particular omitting key pre-action correspondence with Binance which included its explanation that the hot wallet was a pooled wallet not associated with any single user and could not be frozen in the manner sought. The Plaintiff also omitted the potential defences available to Binance, such as the defence of bona fide purchaser for value without notice. The Court emphasized that ex parte applications are exceptional and require strict compliance with disclosure obligations and the fact that cryptocurrency disputes are novel do not justify a lesser standard.
As a result, the proprietary injunction against the Binance hot wallet was discharged. The Court declined to re-grant the injunction on the basis that the Plaintiff had not provided a satisfactory explanation for the non-disclosure, and had not demonstrated the ability to meet an undertaking as to damages, especially as an individual based outside Hong Kong with no evidence of local assets.
Notably, the Court referred to and approved the English decision in Jahangir Piroozzadeh v Persons Unknown [2023] EWHC 1024 (Ch), where Herbert Smith Freehills Kramer in London also represented Binance and successfully set aside an ex parte injunction (see our blog post here).
The Court did grant disclosure sought by the Plaintiff under the Bankers Trust jurisdiction, requiring Binance to use best endeavours to provide information to assist the Plaintiff in tracing the stolen assets. The order was made subject to the Plaintiff's undertaking to indemnify Binance in respect of its costs of complying with the disclosure order.
Comment
This decision reinforces the Hong Kong Court's strict approach to ex parte relief, particularly in the context of crypto-asset tracing and recovery. Applicants must ensure full and frank disclosure of all material facts, including pre-action correspondence and the operational realities of crypto exchanges. The judgment also highlights the Court's willingness to grant targeted disclosure orders to assist victims of digital asset theft, while safeguarding the legitimate interests of exchange platforms.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
