The English High Court recently confirmed that the novation of customer contracts in connection with the sale of a cryptocurrency exchange business could be inferred even when customers did not provide their explicit consent.
The transaction
Coinfloor sold its business to Coincorner, another cryptocurrency exchange. Coincorner assumed Coinfloor's liabilities under its customer contracts. Coinfloor dutifully informed its customers about the proposed novation "by conduct" of their contracts and the transfer of their funds to Coincorner.
Coinfloor also took a very cautious approach in agreeing and signing off on directions from the Financial Conduct Authority under the relevant anti-money laundering regulations which permit the FCA at the request of a cryptoasset business to impose a new direction on the company to assist with regulatory compliance. The transfer of assets and liabilities took place and Coinfloor entered members' voluntary liquidation.
Seeking court approval
The joint liquidators of Coinfloor needed the novation to work, otherwise they would have been open to potential claims from passive customers that Coinfloor did not sell the assets at the best time. So, they requested a declaration from the court that the novation of the passive customer contracts was effective. Out of around 80,000 customers, by the end of Coinfloor's efforts, only just over 2,000 were said to be passive.
Determining novation by conduct
The court applied the test in Evans v SMG Television, finding that an inference of novation by conduct was necessary to give business efficacy to what actually happened. On the balance of probabilities, the passive customers must have known of the transfer given Coinfloor's numerous attempts at contact with them. They were also advised that the contracts would be automatically novated if they did not reply.
The court further held that, even if novation had not occurred, the passive customers had accepted an implied variation of their respective contracts by keeping their assets on the platform.
The court also noted that the FCA did not approve the relief sought by the joint liquidators but only because it was not required to do so.
[Ed.: I am often asked about "deemed consent".
This case is an example of one response: nothing is being deemed,
rather the court is saying by their conduct the party has or must
have in fact consented to the novation.]
Judgment: Re Coinfloor
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