Richie Lai et Al v Bermuda Monetary Authority and Minister of Finance

• Jurisdiction: Bermuda
• Court: Supreme Court (Bermuda)
• Judge: Martin, J.
• Judgment Date: 14 May 2025
• Year: 2025
• Docket Number: 2024: No. 288

Richie Lai Et Al

and

Bermuda Monetary Authority and Minister of Finance

Martin, J.

2024: No. 288

Supreme Court

Appearances:

Kyle Masters and Siobhan Boys of Carey Olsen Bermuda Limited for the Plaintiffs.

Ben Adamson and Conor Doyle of Conyers Dill & Pearman Limited for the Bermuda Monetary Authority.

Shakira Dill-Francois Solicitor General and Lauren Sadler-Best of the Attorney General's Chambers for the Minister of Finance.

INTRODUCTION

Martin, J.

1 This judgment relates to an application made for relief under section 15 of the Schedule to the Bermuda Constitution Order 1968 (“the Constitution”) by way of an Originating Summons issued by the ultimate beneficial owners and former directors of Bittrex Global (Bermuda) Ltd (referred to as “Bittrex” or “the Company”) which is a Bermuda as “DABA”) to carry on business from Bermuda as a digital asset business. exempted company licensed under the Digital Asset Business Act, 2018

2 The Originating Summons seeks (i) an Order declaring that certain provisions of DABA are unconstitutional and ought to be struck down because the provisions do not afford “persons adversely affected” by a Decision Notice issued by the Bermuda Monetary Authority (the “BMA”) an opportunity to challenge it or to appeal from it and accordingly those provisions fail to provide those persons the right to a fair trial guaranteed by section 6 (8) of the Constitution and (ii) a separate declaration that the Decision Notice dated 18 July 2024 (the “Decision Notice”) that was issued by the BMA to Bittrex is unlawful and is liable to be set aside on the grounds that the procedure followed by the BMA did not afford the ultimate beneficial owners and the former directors of Bittrex the opportunity to challenge the BMA's conclusions and thereby also failed to comply with the requirements of section 6 (8) of the Constitution.

3 The first to third plaintiffs are the ultimate beneficial owners (the “UBOs”) of the shares in Bittrex1. The fourth to sixth plaintiffs are the former directors of Bittrex (“the former directors”). The first and second defendants are the BMA and the Minister of Finance, respectively.

SUMMARY AND DISPOSITION

4 For the reasons more fully explained in this judgment, the Court has refused the application and has declined to grant the relief sought. This is primarily on the grounds that the Decision Notice was issued to Bittrex, which has a separate corporate identity and existence from its shareholders and its former directors.

5 Bittrex was afforded the right to respond to the Warning Notice before the Decision Notice was issued to it and has exercised its right of appeal to a Tribunal under DABA in respect of the subsequent Decision Notice which imposed a substantial civil penalty on it inter alia for breaches of the DABA Code of Conduct to which it was subject. Accordingly, no complaint can be made under section 15 of the Constitution that the party legally affected by the Decision Notice has not had an opportunity to challenge the Warning Notice, nor that it has not been given a right of appeal from the Decision Notice.

6 The legal interests of the UBOs have not been infringed because they have no legal interest in the assets of Bittrex under ordinary principles of company law, and so no civil right of theirs has been affected by either the Warning Notice or the Decision Notice. The UBOs cannot, in law, complain that they have not had a fair hearing in respect of a Decision Notice that was issued to the Company. Nor can they complain that their financial interests have been affected by the imposition of a penalty which has the effect of reducing the Company's assets.

7 The former directors likewise cannot complain that any civil right of theirs has been engaged by the BMA's conclusion that Bittrex was in breach of the DABA Code of Conduct, even though a number of the breaches cited by the BMA as being serious involved failures by the board and senior management to ensure that Bittrex complied with the Code.

8 The former directors were the legal agents of the corporate entity, and while they had the responsibility to manage the Company's affairs, the former directors were not personally subject to the Decision Notice, and their legal or civil rights have not been affected by it. Therefore, they have no legal basis on which to assert that they have either the right to be heard in respect of the Decision Notice or to exercise an appeal from the Decision Notice independently from the Company. No constitutional right of the former directors to “due process” in relation to the Decision Notice has been breached.

9 The alleged civil right to a reputation has not been infringed in relation to the UBOs or the former directors by reason of the matters set out in the Decision Notice because (a) the BMA is not an adjudicating authority for the purposes of section 6 (8) of the Constitution (b) the BMA did not determine their respective civil rights to a good reputation (or any other civil right) and (c) the matters set out in the Decision Notice do not direct any particular criticism for Bittrex's failures at any individual director.

BACKGROUND SUMMARY

10 Bittrex was incorporated and registered as an exempted company in Bermuda and was granted a Class F license under section 12 of DABA on 30 September 2020. In essence, Bittrex carried on business as a digital asset and digital-asset derivative exchange, as well as providing “custodial wallet” services.

11 Following its commencement of operations in March 2021, Bittrex was subject to on-site inspections by the BMA regarding its compliance with anti-money laundering procedures. Following a second on-site inspection in December 2022, in May 2023, an inspection report was provided by the BMA to the board and management of Bittrex, identifying a number of breaches of the BMA's Digital Asset Business Code of Practice and the Digital Asset Business (Client Disclosure) Rules 2018 (the “DABA Rules”) as well as DABA and the BMA's Code of Conduct issued in respect of DABA-licensed entities (the “DABA Code of Conduct”).

12 In September 2023, the BMA appointed an independent Investigator under section 61 of DABA to conduct an investigation, which was completed in November 2023. The Inspector's report raised further concerns relating to the Company's operations and its liquidity, and the robustness of its custodial arrangements.

13 The specific details of the various matters raised by the BMA are not relevant to the issues raised in these proceedings and are subject to a pending appeal by the joint liquidators of Bittrex to a Tribunal appointed under DABA. Until Bittrex's appeal has been determined by the Tribunal, in the Court's view, it would be inappropriate (and unnecessary) to go into any more detail about the specific criticisms that were made at this stage than is required to explain the Court's reasoning for its decision in this case.

14 In November 2023, Bittrex informed the BMA that it intended to cease operations and place itself into a solvent liquidation proceeding. On 15 March 2024, the Court appointed joint provisional liquidators on the application of Bittrex, which then entered formal liquidation on 28 March 2024.

15 On 20 March 2024 (after the appointment of the joint provisional liquidators but before the winding up Order), the BMA served a Warning Notice on Bittrex under section 40 (1) of DABA, identifying a number of issues which represented breaches of the DABA Code of Conduct and the DABA Rules and indicating that the BMA was satisfied that it was appropriate to impose a substantial civil penalty on Bittrex in respect of those breaches.

16 The Schedule to the Warning Notice set out the grounds on which the BMA had reached its conclusions. These grounds referred to a failure to establish and maintain a sound corporate governance framework which provides for appropriate oversight and protects the interests of clients. It was noted that the responsibility for prudent governance and oversight lies with the board and senior management. A number of specific criticisms were made, which were attributed to the failure of the board to ensure compliance with the requirements laid out in the DABA Rules and DABA Code of Conduct.

17 Pursuant to the provisions of section 53 of DABA, the joint provisional liquidators of Bittrex were invited to make representations to the BMA in response to the various matters that had been raised in the Warning Notice.

18 A detailed response to the Warning Notice was compiled by the joint provisional liquidators, with input from the former directors, and on 16 May 2024, a comprehensive submission of detailed representations was made to the BMA on behalf of Bittrex.

19 On 18 July 2024, the BMA issued a Decision Notice under section 40 (2) of DABA, which stated that the BMA had taken into account the representations made and considered that it was nonetheless appropriate to impose the civil penalty that had been indicated in the Warning Notice. The BMA also indicated in the Warning Notice that it intended to publish a public censure under section 41 of DABA.

20 The BMA's decision letter gave notice of the right of appeal available to Bittrex under section 48 of DABA, and as already stated, Bittrex has exercised its right of appeal to an appeal Tribunal. No publication of the censure is permitted until the conclusion of that appeal.

21 Although some concerns were expressed about its liquidity, it should be noted that Bittrex is solvent on a balance sheet basis and the liquidation is therefore expected to be conducted on the footing that all creditor claims will be met in full out of the assets of the Company which are under the control of the (now) joint liquidators.

THE PRESENT APPLICATION

22 The UBOs and the former directors wish to make their own independent representations in respect of the Decision Notice because they say...