The Property (Digital Assets etc) Bill: A Wider Category of Assets for the Insolvent Estate?

The new Property (Digital Assets etc) Bill (the Bill) introduced into Parliament on 11 September 2024 will widen the definition of “property” in general law. This article considers the impact of the Bill on the law relating to insolvency.

What does it mean for you?

In a nutshell, the Bill will expand what property constitutes the insolvent’s estate. This means office-holders can, with increased certainty, exercise their statutory powers under the Insolvency Act 1986 (IA 1986) over digital and unconventional assets. This could potentially mean those assets could be realised and creditors could potentially receive a larger dividend from the distribution of the insolvent’s estate.

The Bill

Clause 1 of the Bill states that:

“A thing (including a thing that is digital or electronic in nature) is not prevented from being the object of personal property rights merely because it is neither—

(a) a thing in possession, nor

(b) a thing in action.”

What is a “property” in insolvency law?

“Property” is defined in s 436 of IA 1986 as “money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property.”

Case law has delimited the boundary of “property” in insolvency law. Examples of things that are not s 436 properties include:

• The prospect of getting an award from the Criminal Injuries Compensation Board (CICB) (now Criminal Injuries Compensation Authority): Re Campbell [1997] Ch 14;
• The compensation payable to postmasters under a group litigation order compensation scheme: Secretary of State for Business and Trade v Abdulali [2024] EWHC 1722 (Ch);

IA 1986’s statutory definition of “property” is narrower than the common law definition that a property must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability, as set out by Lord Wilberforce in National Provincial Bank Ltd v Ainsworth [1965] AC 1175.

Given the increasing importance of digital assets such as cryptoassets, on 28 June 2023, the Law Commission published the Digital Assets Final Report and, on 30 July 2024, it published a supplemental report and the draft Bill.

How does the Bill expand “property” in insolvency law?

The purpose of the Bill is to remove any lingering doubt arising from Colonial Bank v Whinney (1885) 30 Ch D 261 in which Fry LJ said “All personal things are either in possession or in question. The law knows no [a third thing] between the two.”

If this remains good law, then for personal property rights to attach, two conditions must be satisfied:

(1)   The thing is a “property”.

Whether a thing is a “property” appears to be regime-specific. Generally, Lord Wilberforce’s or other equivalent definition is used, but, in certain regimes, different definitions may be applied, such as s436 of IA 1986.

(2)   That thing is either a thing in possession or in action.

As the Law Commission has noted, recent cases indicate the existence of a third category (particularly crypto-tokens), casting some uncertainty on Fry LJ’s authority. The Bill therefore seeks to clarify that it is no longer a requirement for personal property rights to attach to a thing.

While, at first glance, the Bill does not affect “property” in insolvency law, the Bill extends what constitutes a s436 property by extending the common law definition of property. This flows from two propositions:

(a)   Properties that satisfy both the common-law definition and Fry LJ’s condition (common law properties) form a subset of properties that satisfy s436 (s436 properties).

s436 properties include “… every description of property wherever situated …”. While it appears circular, this means s436 covers properties that fall within other regimes’ definition of property. As a result, if a property is a common law property, then, by definition, it must also be a s436 property, regardless of the definition and test used.

The converse is not true. For example, a waste management licence is a s436 property but neither a thing in possession nor action: Re Celtic Extract Ltd (in liquidation) [2000] 2 WLR 991.

(b)   There are properties that are neither s436 properties nor common law properties, so the sets of common law properties and section436 properties still have room to expand.

An example is the prospect of getting an award from the CICB in Re Campbell above, which is neither a s436 property nor a thing in action.

The consequence is that if a thing previously not recognised as a property is now recognised as a common-law property because of the Bill, s436 will automatically expand to make that thing a s436 property. For example, if in a future case, the prospect of getting an award from the CICB was held to be a common law property (which was not the case in Re Campbell), then s436 will also expand to include it (though in reality this might be considered unlikely given Lord Wilberforce’s fourth criterion of having “some degree of permanence or stability”).

At this stage, it is impossible to predict the emergence of property types that have not yet been conceived of, which will be included in the future. This is also the concern of the Law Commission. In their words, the Bill is “deliberately agnostic” about the characteristics of third category things. It does “not wish to ossify in statutory form any particular type of technology (that might be commonplace today, but could well be obsolete in five years’ time, or even less).” What is clear is that the Bill will definitively bring crypto-assets and non-fungible assets within the definition of the insolvent estate.

The legal understanding of these properties, digital assets in particular, is being developed at a rapid pace, and a type of property previously unthought of may appear. However, once the courts decide that an new type of property is a common law property (or a property in any other regime), then simultaneously it will also be a s436 property for the purposes of insolvency proceedings.

Conclusion

We live in an exciting time – new technologies necessitate new definitions of “property” under general and insolvency laws. The Bill does a great job clarifying that Fry LJ’s condition no longer holds true while avoiding the pitfall of defining a third category as the law and technology are developing rapidly. In the context of insolvency, when the court considers a new exotic type of property to be a common law property as a result of the Bill, it will also be a property for the purposes of insolvency proceedings.