In short, we expect the euphoria of blockbuster corporate mergers and acquisitions and sky-high valuations of all manner of assets to give way to the “back-end” side of the law, for sombre (and often acrimonious) litigation. This said, for our “front-end” colleagues, as the 2007 global financial crisis taught us, every cloud has a silver lining: prepare for more distressed M&A and restructuring work to occur.

Here are our predictions for what might be the most prominent areas in the disputes space this year:

Aftermath of the crypto collapse

If 2020 and 2021 were exemplified by irrational exuberance in the crypto markets by investors, 2022 was when they reaped what they sowed. The value of major crypto-related assets such as cryptocurrencies (bitcoin and Ethereum) and NFTs (non-fungible tokens, a unique digital identifier that records ownership of a particular digital asset on a blockchain, often digital art) have all plummeted, leading to ignominious collapses of very high-profile cryptocurrency exchanges such as Celsius, BlockFi, and, most notably, FTX. Since all these collapses occurred during the tail end of 2022, the smoke will not likely clear until mid-2023, and possibly beyond.

The collapse of crypto exchanges resulted in huge losses by creditors of every stripe, from professional institutional titans like Sequoia Capital and SoftBank to the average college student retail investor, all clamouring to get their money back from the downfall of the exchanges.

In Australia, insolvency practitioners from KordaMentha have been appointed administrators of FTX Australia (the Australian arm of FTX), and proceedings have already been started in the Supreme Court of Victoria, heralding the beginning of what will inevitably be an extremely daunting task of maximising recovery for more than 30,000 creditors. Crypto-related litigation is likely to involve many cross-border issues: tussles between insolvency practitioners in different jurisdictions, enforcement and recognition of foreign orders, and conflict of laws — just to name a few.

We predict that one of the key topics of dispute arising from the collapse of an exchange will centre on whether crypto-assets depositors retained a proprietary interest in the asset, or whether title passed to the exchange — this will no doubt focus on issues of contract law and the laws of equity. Unlike with an ordinary stock brokerage where customer funds are usually segregated from the financials of the brokerage itself, the likely absence of segregation of customer funds by crypto exchanges may result in customers being treated as a mere unsecured creditor with respect to those funds and will have to, in the words of US Securities and Exchange Commission chair Gary Gensler, “stand in line at a bankruptcy court”. This is particularly troubling, especially in a largely unregulated space, as sophisticated institutional investors will often have complex security arrangements in place, which put them in a better position to recover their funds, leaving the novice unsecured retail investors holding the bag. Regardless, this will provide the courts with a significant opportunity to clarify some key principles in this novel area of the law and should definitely be one of the key disputes trends in 2023.

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Fraud-related cyber crime

With the promulgation of cryptocurrencies and similar digital assets as the medium of exchange, we have also seen a significant increase in fraudulent activity in this space. These schemes typically involve making misleading representations to lure unsuspecting investors into invest in a hot new cryptocurrency or some other digital asset before freezing withdrawals of customer funds and subsequently absconding with the funds or otherwise misappropriating them in some way — essentially the digital version of the traditional pump-and-dump schemes.

Courts, particularly those in the common law jurisdictions with high levels of crypto integration, such as in the UK, Hong Kong and Singapore, have shown great speed and willingness to adapt existing measures (most notably freezing, tracing and delivery up orders) to provide relief to aggrieved parties. In doing so, we have seen innovative measures to adapt traditional legal principles to suit a rapidly changing digital world, such as the use of “persons unknown” orders to give effect to injunctions even when the identity of the wrongdoer is not ascertainable, and an increasingly liberal approach to assuming jurisdiction over foreign disputes.

As the world is likely to sink into deeper economic turmoil in 2023, it can be expected that the frequency of fraudulent activity will continue to increase, and so will fraud-based asset recovery measures. This trend will not pass Australia by.

Insolvency and bankruptcy generally

With many leading economists, the World Bank and the International Monetary Fund all predicting a recession in 2023, it is highly likely that the scourge of insolvency will continue its rampage across the economic landscape. With the end of the war in Ukraine nowhere to be seen, keeping energy prices sky-high, and other supply shortages globally, Goldman Sachs has predicted that commodities prices will increase by a whopping 40 per cent in 2023. Such increases will no doubt further bite into the bottom line of businesses, particularly those whose business model involves inherently low margins — such as construction. This, in conjunction with rising interest rates (which are not likely to fall until at least late 2023) and increased enforcement activity post-pandemic by government agencies such as the ATO, plays a part in pushing these businesses to insolvency.

An increase in the insolvency of companies and bankruptcy of individuals is likely to lead to an increase in insolvency-based claims, such as the recovery of voidable transactions and claims against directors for insolvent trading.

We are also likely to see shareholders and other investors — at both the equity and debt level of companies — seeking to recover their investment losses by closely examining representations made by the company and its officers in the lead-up to an investment. We, therefore, predict an uptick in misleading and deceptive conduct claims to be made against companies, their officers and potentially their advisers.

Further, now that the so-called “creditor duty” is firmly entrenched in the common law by the UK Supreme Court (a conclusion which has historically found reasonable support in Australian law and, if push comes to shove, is therefore likely to be upheld in Australia by the High Court), directors now find themselves at risk of legal liability to creditors.

With the increased risk of director liability, directors will want to ensure that the company maintains current and adequate D&O insurance coverage.

Finally, auditors can expect liquidators to carefully review their work to identify any cases of audit negligence. Usually, a liquidator will want to examine whether the negligence of an auditor enabled a company to continue trading and incurring losses or otherwise, for example, failed to identify fraud. A central battleground in these cases is causation — did the auditor’s negligence cause the loss — but nevertheless, an uptick in insolvencies should see an uptick in audit negligence cases.

Fraud

Aside from crypto-related fraud, a financial downturn is likely to see a rise in fraud-based claims generally. It is often in a downturn that “Ponzi schemes” come to light as investors seek to withdraw money and companies take a closer look at which expenses to cut, only to discover internal fraud. As the saying goes, fraud is perpetrated in the good times and discovered in the bad times.

Supply-related disputes

With rising commodity prices, the rising cost of living, global political tensions and wars, and ongoing supply chain disruption, we expect to see more supply-related disputes in 2023. These might particularly include shipping disputes and contractual disputes (especially where suppliers refuse to supply pre-agreed quantities at pre-agreed prices). These disputes will often be international in nature, and we, therefore, expect to see an uptick in international commercial arbitration.

Regulatory changes

As with most hot-button legal issues at the moment, all roads lead back to crypto, and regulations are no exception, both nationally and internationally.

There is likely to be a contest with the Australian Securities and Investments Commission (ASIC) and similar government organisations on not only the nature of cryptocurrency assets (i.e. whether they are financial products subject to existing regulations or otherwise), but also around alleged misrepresentations made by many crypto exchanges as to their status as being “fully registered and licensed”, despite the licence being very general in nature and making no mention of crypto-assets at all.

On an international level, the Financial Stability Board (of which all G20 economies are members) has recently issued recommendations for a comprehensive international framework on the treatment and regulation of all “crypto-asset activities”, which, despite its non-binding nature, will hopefully eventually be adopted by all member states (akin to a crypto-version of the Basel Accords) in order to give some sense of certainty for all stakeholders involved in this area. Further deliberations and implementation of these changes will no doubt continue in 2023, and regulatory enforcement lawyers will want to stay tuned.

Data and privacy breaches

With the Optus and Medibank cyber attacks, and a plethora of less-publicised attacks, which led to the theft of personal data, 2023 is likely to see more civil claims and enforcement action by ASIC. We will also see how class actions play out in this space in Australia, with three class action law firms already lining up against Medibank.

Final thought

While the above predictions inevitably involve a certain degree of tea-leaf reading, one thing is for sure: the disputes market will see more activity in 2023 than in recent years.

Trevor Withane is a partner at Ironbridge Legal.