Virtual Digital Assets under the IBC: Can Decentralised Assets be Controlled and Preserved in CIRP?

Introduction

The Insolvency and Bankruptcy Code, 2016 ("IBC") was enacted to establish a consolidated, time-bound insolvency resolution framework in India, based on the maximisation of the value of assets of the corporate debtor, balancing stakeholder interests, as reflected in its Preamble. The Code is asset-based in its statutory structure, and assumes that in the process of insolvency resolution, identification, protection, and maximisation of recovery of all assets constituting the insolvency estate will have to be accomplished in the course of the Corporate Insolvency Resolution Process (CIRP).

In furtherance of this objective, the IBC imposes affirmative obligations upon the resolution professional (“RP”) under Sections 18 and 25 to take custody and control of the assets of the corporate debtor, while Section 30(2)(e) requires resolution plans to conform to the overarching objective of value maximisation. The Code has evolved to accommodate intangible and non-physical property such as intellectual property, contractual rights, and digital records. Nonetheless the growing inclusion of Virtual Digital Assets (VDAs) on corporate balance sheets introduces a class of assets whose decentralised structure resists traditional notions of control and custody under insolvency law

VDAs are cryptographically encrypted, decentralised and transferable at high speeds in an irreversible way. These features complicate traditional notions of asset custody, control, and preservation contemplated under the IBC. Although they are now more economically relevant, the Code remains silent regarding the classification, holding, and valuation of VDAs during the process of CIRP. Within this framework, the treatment of VDAs raises the question of whether assets that are legally cognisable yet technologically decentralised can be meaningfully subjected to an insolvency regime premised on control.

Conceptual Position of Virtual Digital Assets in Indian Law

VDAs as Digital Representations of Value

The legal status of VDA in India was mainly established by its statutory definition in Section 2(47A) of the Income Tax Act, 1961. This provision defines VDAs as cryptographically generated digital representations of value, a code, numbers, or tokens that have been subjected to a cryptographic process of expressing value in a digital form, and that can be traded in a plethora of financial transactions or in investments. The broad scope of the definition is obviously purposeful. By calling VDAs value-carrying instruments that are engaged in financial operations, Parliament has apparently embraced the fact that these assets carry economic meanings of their own rather than being merely transactional data or auxiliary digital information.

This has been enhanced in judicial recognition. The SC in the Internet and Mobile Association of India v. RBI. When evaluating the validity of the regulatory restrictions by the RBI, the SC clarified that virtual currencies were not a legal tender, but their functional utilisation as a store of value and medium of exchange was accepted. Such acknowledgment establishes the economic reality of VDAs without keeping them under strict monetary and commodity systems.

The Madras HC also explained the proprietary nature of VDAs in Rhutikumari v. Zanmai Labs, in which cryptocurrency in possession of an exchange was accepted as an intangible proprietary interest that can be characterised as property. This recognition is significant in insolvency action, as it affirms that VDAs can be owned, can be attributed legally, and can be controlled. A combination of the statutory definition and judicial acknowledgement together substantiates that VDAs are legally acknowledged and economically useful assets in Indian law.

VDAs as Financially Relevant Digital Assets

VDAs belong to a wider group of financially significant digital assets that exist in a digital format, which can be readily quantified as economic value, and can be transferred and realised electronically. Notably, the VDA itself, as opposed to the metadata produced by its transactional history, is the value-bearing asset. This distinction presupposes pertinence in the insolvency procedures, where the foreground is on the assets that can be preserved and realised to the advantage of creditors.

Nature of Virtual Digital Assets under the IBC – Property or Not?

Before addressing procedural challenges arising during CIRP it is necessary to determine whether VDAs fall within the substantive scope of the IBC. The applicability of the Code depends upon the asset in question qualifying as “property” capable of forming part of the insolvency estate.

Statutory Scope of “Property” under the IBC

The term “property” is defined under Section 3(27) of the IBC, which encompasses money, goods, actionable claims, land and every description of property situated in India or outside India, together with every description of interest, whether present or future, vested or contingent. The broad scope of this definition can be explained by the intention of the legislature that the law on insolvency continues to accommodate changing categories of assets such as intangible assets and non-traditional assets.

Support for this interpretation of the code may be found in the Insolvency Law Committee Report (2020), wherein the large amplitude of the word 'property' is stressed in addition to its nature to encompass even those assets which could not have been foreseen at the time of legislation.

Judicial Reasoning and Functional Inclusion

Although Indian insolvency jurisprudence has not yet directly classified VDAs under the IBC, the adjudication under the Code reflects a functional, rather than formalistic, approach to asset inclusion. NCLT and NCLAT have repeatedly characterized intangible assets (e.g., contractual rights, licenses and rights of spectrum use) as part of the insolvency estate where they possess economic value and are capable of being assigned or operated. These tribunals have looked at commercial substance and control rather than physical properties of the asset.

Additionally, in National Provincial Bank Ltd v. Ainsworth, it was held that for a property to be considered to exist, it must have been defined, identifiable by third parties, assumed by third parties, and permanent. VDAs are: identifiable by a unique cryptographic key; transferable via blockchain systems; and permanent because of an immutably distributed ledger. Therefore, VDAs qualify as intangible property within the meaning of Section 3(27) of the IBC and are capable of forming part of the insolvency estate of a corporate debtor.

Treatment of Virtual Digital Assets during CIRP

Upon the commencement of CIRP, all the assets qualifying under the term “property” under Section 3(27) form a part of the insolvency estate. Once VDAs have been identified as intangible property, the statutory scheme concerning the status of custody, control, and preservation of assets would apply.

Identification and Inclusion in the Insolvency Estate

VDAs can form part of the insolvency estate only where ownership or effective control is established. Recent disclosure requirements under the Companies Act 2013 (Schedule III) provide a starting point for identifying such holdings. Additionally, Sections 18 and 25 give the RP authority to request full cooperation from suspended management and relevant service providers to determine VDAs' existence and specific whereabouts. Once a direct linkage between the corporate debtor and the VDA is proved, the property becomes part of the insolvency estate.

Custody, Control, and Preservation

After inclusion, the RP should take control and exercise proper custody of VDAs to prevent any unauthorised transfers or depletion. Section 14 imposes a moratorium on the transfer or disposal of corporate debtor assets, including VDAs, during the whole CIRP. Practically speaking, VDAs might be maintained through custodial arrangements with exchanges or through self-custody systems using private cryptographic keys. VDAs stored in exchanges have the potential to be secured through close cooperation with the platform, but self-custodied VDAs present novel and difficult challenges as their successful governance solely relies on access to the private key.

Insolvency-Specific Risks

The decentralised and irreversible nature of VDA transactions creates distinct insolvency risks in a CIRP. Loss or non-disclosure of private keys can render VDAs irretrievable despite continuing legal ownership. The volatility of prices further complicates the valuation and timing of resolution. These attributes have a direct influence on the statutory duty of the RP to preserve and uphold asset value and distinguish VDAs among the traditional intangible assets that the IBC usually deals with.

Conclusion

Virtual Digital are increasingly significant components of corporate balance sheets and modern insolvency proceedings. Though the IBC doesn't specifically address VDAs, the broad definition of ‘property’ under Section 3(27) permits their inclusion in the insolvency estate after properly establishing ownership or effective control. Courts' recognition of VDAs as intangible property provides additional support for their treatment under the Code. Nevertheless, they are difficult to administer within the framework of CIRP because of the decentralisation, use of personal cryptographic keys, and price volatility as well as the inability to reverse transfers directly affecting the maintenance of value.

The VDA treatment conducted under the IBC should work within the statutory framework that is in existence and should be technologically neutral without contradicting the value maximisation objective of the Code.  This tension suggests the need for a more technologically informed insolvency practice one that equips resolution professionals with mechanisms to secure digital assets, while preserving the Code’s commitment to value maximisation.

Author: Akshat Jain, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.