Bankruptcy proceedings against FTX are off to a delayed start, following the filing of its first-day motions yesterday.
Required to formally commence proceedings, these documents describe the events leading up to the bankruptcy and typically request emergency relief. They are called first-day motions because they are typically filed the same day as a bankruptcy petition.
But while FTX filed for bankruptcy on Friday morning, these documents were not published until Monday evening.
Commentators remarked that the delay was representative of the convoluted case FTX presents. “This is playing out in a much more slow and opaque way than usual,” one restructuring adviser told Financial Times. He said complications surrounding the case had impeded him from providing sound advice to creditors.
FTX Appoints New Directors
The filings described the onset of the liquidity crisis, which led to the resignation of founder Sam Bankman-Fried as CEO. Upon acceding to the role, John Jay Ray III filed for bankruptcy in order “to secure customer and debtors assets”. A seasoned restructuring executive, Ray previously served in oversight positions in the bankruptcies of high profile cases like Enron.
Ray subsequently appointed new directors, each experienced in bankruptcy cases, including Joseph Farnan, Jr. at FTX Trading, Matthew Doheny at FTX Trading, and Matthew R. Rosenberg at Alameda Research.
FTX needs such experts to fill these roles to demonstrate to the court that it can effectively manage proceedings itself. If the court lacked confidence in the company’s ability to do so, it could hire an independent Chapter 11 trustee. This trustee would then replace the chief executive and hire their own advisers to manage the case.
FTX and Its Creditors
In its petition last week, FTX claimed to have 100,000 creditors, and between $10-50 billion of assets and liabilities. However, the latest filing revealed that the actual figure could be closer to 1 million creditors.
Once the case commences, the bankruptcy agency of the Department of Justice will appoint a committee of unsecured creditors, likely to be mostly FTX account holders.
Consequently, FTX petitioned for a consolidation of sorts in the consideration of its various related companies. Rather than treat each of the over 134 entities as individual cases, FTX requested joint administration of the overall group.
FTX further requested creating a list of the top-50 creditors for the group, instead of the top-20 for each company.
No Claw Backs
One legal expert said that creditors would likely pursue reimbursement through personal lawsuits against Bankman-Fried and other FTX executives.
“There’s billions in potential preference actions and SBF and his crew are likely to get sued up the wazoo,” he said. Such preference actions are payments made just prior to bankruptcy filings, which creditors could potentially “claw back.”
However, another legal expert pointed out that according to FTX’s terms of service, title over the assets remained with customers. This effectively precludes “claw backs” from customers who managed to withdraw their funds prior to the bankruptcy petition.
Despite its exploits, the exchange managed to stay true to a core crypto tenet of personal ownership of assets.
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