MANTRA DAO INC. AND ANOTHER v. JOHN PATRICK MULLIN AND OTHERS

HCA 749/2022

[2024] HKCFI 2099

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 749 OF 2022

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REASONS FOR DECISION

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1.  This is the Plaintiffs’ injunction summons dated 29 August 2022 as amended on 17 February 2023 (“the Summons”). In the substantive hearing on 25 April 2023, I made an order, inter alia, requiring the 1^st to 4^th Defendants to provide: (i) the Plaintiffs with the financial spreadsheets of the MANTRA DAO project (“the Project”) in a certain format from 1 January 2021 onwards; (ii) no more than 3 of the Plaintiffs’ legal and financial advisers with the supporting documents for each of the entries in the said financial spreadsheets subject to written undertakings given by them not to disclose the said documents to the Plaintiffs or any other parties without the order of the court. I now give my reasons.

Background of the dispute and the present application

2.  The present action is a dispute as to the true ownership, management and control of the Project, a “decentralised autonomous organisation” (“DAO”) finance platform project in the cryptocurrency industry. The Project involves the use of novel “blockchain” and “cryptoasset” technologies for the purpose of carrying out “Decentralised Finance” activities.

3.  The Plaintiffs claim that the Project belongs to, and should ultimately be controlled and managed by, the Plaintiffs. The Plaintiffs initially conceived and set up the Project, including conceiving the idea of a DAO project, designing its main components, locating and securing the initial investors and purchasing its website and email domain names.

4.  The 2^nd Plaintiff (“RioDeFi”) is a company incorporated in Malaysia in November 2019 specialising in blockchain technology.  RioDeFi’s shareholders and directors include Ng Kian Ming (“Calvin”), James Alan Anderson (“James”) and Stéphane Laurent (“Stephane”).  Since its incorporation, RioDeFi has founded and established various blockchain projects, and developed its own technologies and products. According to the Plaintiffs, it had always been the intention that the different projects in the RioDeFi ecosystem could complement each other and be integrated as one group with a spectrum of different services and products, with the view that eventually all the projects will leverage off each other and form a unique and holistic offering in the market. RioDeFi’s business model is that various subsidiaries and associated entities would be set up and operated by RioDeFi’s employees as assigned by RioDeFi to those entities or projects from time to time.

5.  The Project was conceived in May 2020 by Calvin, James, Stephane and other RioDeFi personnel.  According to the Plaintiffs, it was first proposed by Calvin as an attempt to capture the trend of cryptocurrency staking (a way of earning dividends or rewards for holding cryptocurrencies over time).  Meanwhile, it was also envisaged that a new visionary protocol for a multi-chain framework allowing different decentralised applications would go live in May 2020 (Polkadot protocol), and RioDeFi took the view that it could have a tremendous first-mover advantage if the Project could be built and operate on the Polkadot protocol.

6.  The Plaintiffs claim that, as the Project developed, the Plaintiffs delegated the day-to-day management to RioDeFi’s employees, namely the 1^st Defendant (“John”) and the 2^nd Defendant (“Will”), and their team in around August 2020, on the basis of and in reliance upon: (i) John and Will’s employment duties to the Plaintiff; and (ii) the mutual agreement that John and Will would regularly report to RioDeFi’s management on the assets, financials and operations of the Project (“the Management Agreement”).  John and Will’s respective employment relationships with RioDeFi are recorded in two written employment contracts dated 28 March 2020 (“the Employment Agreements”).

7.  However, since around January 2021, reporting from John and Will on the Project became more and more infrequent, contrary to John and Will’s duties.  According to the Plaintiffs, John and Will, together with the other Defendants, began treating the Project as their own.  The Plaintiffs now have no visibility at all as to the management decisions made by the Defendants or how the Project’s assets are being deployed.  Further, the Plaintiffs claim that the Defendants have “misappropriated” the Project and its business and assets from the Plaintiffs.  Of particular relevance, it is alleged that the 1^st to 4^th Defendants had misappropriated assets from a cryptocurrency account (known as “the Hex Account”) allegedly belonging to the 1^st Plaintiff (“MDI”) by making various “unaccounted-for” withdrawals from the Hex Account (“the Hex Account Withdrawals”).

8.  On the other hand, it is the Defendants’ case that the Project should not be owned or controlled by the Plaintiffs at all. In short, the Defendants claim that:

(i)    A DAO is an organisation where the ultimate decision-making power lies with the holders of digital tokens, known as “OM Tokens” in the present case, operating through computer codes which exist on a blockchain.

(ii)   The operation of the Project is governed by the Governance Agreement which was reflected in the terms of the White Paper which was circulated to potential purchasers of the OM Tokens to form the basis of their purchase, including:

(a)  The Project was not intended to be owned by any single individuals or entities.

(b)  The decision making over the assets of the Project was supposed to lie ultimately with the OM Token holders who would exercise their voting rights through smart contracts on the blockchain infrastructure of the Project.

(c)  As the Project, which is a DAO, lacks its own legal personality, a Seychelles incorporated foundation (“the Foundation”) and MDI were legal entities incorporated specifically for holding assets for the benefit of the OM Token holders and were not meant to be the beneficial owners.

(d)  The Foundation was to be governed by members of its Council (“the Councillors”) who were granted such authority to act on behalf of the Project and the OM Token holders as conferred pursuant to the White Paper or by the OM Token holders through the exercise of their voting rights.

(e)  The Councillors are re-elected every two years. Decision making by the Council is by majority votes of the Councillors.  At the latest election held in August 2022, the 1^st to 4^th Defendants and other individuals were elected by the OM Token holders as Councillors whereas James and his associates did not come forward to seek re-election.

(iii)  In relation to the Hex Account Withdrawals:

(a)  By reason of the aforesaid matters, the assets in the Hex Account were not beneficially owned by MDI or RioDeFi.  John, Will and the 3^rd Defendant (acting in the capacity as Councillors at the time) had authority to authorise the Hex Account Withdrawals for legitimate business purposes as envisaged in the White Paper.

(b)  In fact, James and Stephane were informed of each of the Hex Account Withdrawals when initiated. Further, James or Stephane had authorised the vast majority of the Hex Account Withdrawals.

9.  In this application, the Plaintiffs seek interim injunctive reliefs against the Defendants.  The original reliefs sought are much wider, including injunction against disposing of or dealing with cryptocurrency, prohibition against use of trade marks and passing-off, order requiring disclosure of assets and transfer of digital assets.  In the first hearing of the Summons application before DHCJ Leung (as he then was) on 2 September 2022, the learned judge refused to grant these original reliefs on an interim-interim basis.

10.  The Plaintiffs have abandoned the claim for these reliefs in the substantive hearing, and the remaining relief sought is an order requiring the disclosure of books and records relating to the operation of the Project (“the Accounts Disclosure Order”).   According to the Plaintiffs, the aim of such relief is to allow them to have access to and inspect information and documents on the Project’s financial operation and give effect to the Plaintiffs’ alleged “right to information” under the Employment Agreements and the Management Agreement.  Mr Lam, SC, counsel for the Plaintiffs, argues that such relief is necessary to allow the Plaintiffs to monitor the Project’s operation and development pending trial, and if necessary, take further protective measures for their interests in the Project.

Discussions

11.  Both sides have made lengthy submissions on the merits of the claim.  I do not propose to discuss the merits in any details here.  At this stage, it suffices for me to say that cryptocurrency trading is a new, novel and innovative business.  The Hong Kong courts, and indeed many other courts in different jurisdictions, have little experience in dealing with such kind of disputes.  The courts may not be familiar with the modius operandi and the structures for the operation of such kind of business.  The legal effects of the Governance Agreement, the White Paper, the Management Agreement and the Employment Agreements have to be fully investigated at the trial.  Given the allegations by both camps, the court is not in a position to form a preliminary view about the overall merit of the claim.  The court should therefore focus on the balance of convenience issues and examine the possible effects of the granting and non-granting of the Accounts Disclosure Order on the parties.

12.  In my judgment, the balance of convenience certainly favours the granting of the Accounts Disclosure Order.

13.  Damages are plainly an inadequate remedy if the application is refused. The cryptocurrency industry is fast-growing, and decisions are often made with a view to obtaining a first-mover advantage. With the level of assets controlled and managed by the Defendants, it is important that the Plaintiffs be given regular updates on the financial operation of the Project, given their claim over the ownership, management and control of the Project.  I agree with Mr Lam that it is difficult if not impossible to quantify the Plaintiffs’ loss in monetary terms if they have no visibility of the Project’s financial operation. They would not be in a position to know the basis of the decisions made by Defendants in the case of any complaint or challenge against the Defendants’ decisions. The problems are further complicated by the difficulties in tracing transactions in the cryptocurrency field, which are often anonymised.

14.  Further, unlike the other reliefs originally sought in the Summons, the Accounts Disclosure Order would not disrupt the operation of the cryptocurrency trading business under the Project.  Quite on the contrary, the managers of the Project should be under some kind of duty to keep proper accounts, and the Accounts Disclosure Order would certainly promote the healthy operation of the business.

15.  To oppose the application, the Defendants are also seeking to rely on, inter alia, the following arguments to oppose the granting of the relief:

(i)    The Accounts Disclosure Order involves a huge task to be performed on a monthly basis preparing a schedule setting out details of every payment made in the course of the business with various details with supporting documents, and such continuous disclosure obligations are highly onerous for the Project which is not a listed company with vast manpower resources.

(ii)   Some of the books and records may contain confidential business secrets. There is a risk that, if such confidential information is disclosed to the Plaintiffs, it may cause irreparable damage to the Project’s business and the OM Token holders who have an economic interest in the business.

(iii)  There was delay on the part of the Plaintiffs in commencing legal proceedings or lodging the present application.

16.  Despite the able submissions of Mr Stock, SC, counsel for the Defendants, I cannot agree with these arguments.

17.  Firstly, no matter what is the substantive entity owning or responsible for the operation of the Project, the 1^st to 4^th Defendants, as the Councillors, should have a duty to keep proper account about the operation of the cryptocurrency trading business under the Project.  Even if the Defendants’ case is to be upheld by the court, the Councillors would have a duty to account to the OM Token holders about the funds in the Project.  The Accounts Disclosure Order should not cause any additional or significant hardship or burden on the 1^st to 4^th Defendants, as one would expect that they have to discharge such duty to the OM Token holders in any event.

18.  Secondly, a properly worded undertaking by the Plaintiff’s legal and financial advisers of not disclosing the supporting documents to the Plaintiffs should properly take care of the Defendants’ concern about possible disclosure of trade secrets to the Plaintiffs.  In the hearing, the parties indicated to the court that they would work out the terms of the undertaking, and I do not believe that the risk of disclosure should be a reason for the court to deny the making of the Accounts Disclosure Order.

19.  Thirdly, I do not find that there was any delay on the part of the Plaintiffs in commencing legal proceedings or lodging the present application.  According to the Plaintiffs’ case, the Defendants’ misappropriation intensified gradually, and it was only in early to mid-2022 that MDI saw fit to commence this action.  In any event, even if there was delay which I do not accept, justice demands the granting of the Accounts Disclosure Order, which is only a protective measure in the case that the Plaintiffs succeed in their claim, or indeed a healthy measure for operation of the Project in the interest of the OM Tokens holders.

20.  I also reject Mr Stock’s argument that the Plaintiffs, by applying for the Accounts Disclosure Order, are in substance seeking for an order for account under O 43 of the RHC, which is a remedy that should not be granted in the interlocutory stage.  As submitted by Mr Lam, there is fundamental distinction between the two remedies.  The aim of the present application is to preserve the status quo pending trial by letting the Plaintiffs to have some visibility about the financial operation of the Project which they claim is owned by them.  There is nothing “novel” with such kind of interlocutory relief.  Interim orders for preservation of disputed trust assets including disclosure orders are often sought in the courts.  There are also many instances in which the courts make interlocutory disclosure orders to ascertain the whereabouts of the property claimed in the context of misappropriation and breach of fiduciary duty claims.[1]  Hence, such argument has no merit at all.

21.  For the above reasons, I granted the Accounts Disclosure Order in the hearing.  The parties agreed on the format for the provision of the accounts, and the supporting documents will only be disclosed to the legal and financial advisers of the Plaintiffs subject to non-disclosure undertakings.

22.  Despite that the Plaintiffs have abandoned some of the reliefs sought in the original Summons, I am of the view that the costs of the whole application should be costs in the cause.   I therefore so ordered.