Chinese FTX creditors push back against potential payout exclusion
A Chinese creditor of failed crypto exchange FTX has filed an objection on his own behalf and that of 300 others, with a U.S. bankruptcy court against a motion lodged with a view towards excluding payouts to creditors resident in China, Russia and 47 other foreign jurisdictions.
Potential distribution forfeiture
The FTX Recovery Trust, an entity formed in January to oversee the FTX bankruptcy estate following the adoption of a plan of reorganization, filed a motion last week seeking the approval of the Delaware Bankruptcy Court in the United States to adhere to new parameters related to the claims of creditors residing in restricted overseas jurisdictions.
Besides China and Russia, the list of restricted jurisdictions also includes many within the Asian region, including Afghanistan, Iran, Iraq, Macau, Myanmar (Burma), Nepal, North Korea, Pakistan, Qatar, Bangladesh and Cambodia.
The FTX estate claims that these jurisdictions have regulations and laws restricting cryptocurrency transactions. In such cases, the FTX Recovery Trust claims that it cannot break local laws.
The difficulty for creditors resident in these countries is that if it's deemed illegal to reimburse them, they won’t qualify for the next scheduled distribution from the estate. In that instance, distribution forfeiture will be triggered.
Taking to X on July 7, FTXcreditor.com, an entity that has been buying up bankruptcy claims from FTX creditors over the course of the FTX bankruptcy process, highlighted the peril that creditors residing in these restricted countries may face. It stated:
“Distribution forfeiture is triggered at every distribution record date. The first record date already passed, if your claim is still tied to a local KYC when the stamp drops, that tranche is potentially gone.”
Short timeframe for objections
Mr. Purple, a pseudonymous distressed assets bankruptcy professional who has been advocating for FTX creditors since the collapse of the business in November 2022, concurred with this view in a subsequent post on X. He pointed out that an extremely short timeframe has been given to affected creditors to respond. The motion was filed on July 2 and objections are due by July 15.
$500 million in claims are at stake which accounts for 5% of all creditor claims. Of this, 82% of these claims belong to Chinese creditors.
In a series of follow-up posts, the bankruptcy professional describes several procedural issues that he believes will result in it being incredibly difficult for affected creditors to have their funds reimbursed.
Mr. Purple concludes:
”The incentives are designed to be extremely risk averse in finding [a legal opinion] that paying creditors is legal! [The estate’s lawyers will] take the fees and say its not legal.”
In his court filing, the Chinese creditor, who is resident in Singapore, stated:
“My family holds four KYC-verified accounts with aggregate claims exceeding $15 million USD.” . . . “We have fully complied with every procedural requirement under the Plan. The proposed motion now jeopardizes our right to distribution in an arbitrary and inequitable manner.”
On X, he asserted that the FTX Recovery Trust’s motion “constitutes an impermissible and material modification of the Plan.”
Aside from legal action, the only other potential solution for creditors residing in restricted countries is to sell their claims. However, claims buyers are pricing in greater risk with lower rates and less favorable terms.
