FTX Bankruptcy Restructuring Team Promises Full Compensation to Users and an Additional 18% Interest
After 19 months of lengthy legal battles and liquidation processes, the FTX bankruptcy restructuring team has finally brought a glimmer of hope to the affected users. According to the restructuring plan released by the team on Tuesday (5/8) local time, claimants with amounts below $50,000, which accounts for approximately 98% of the creditors, will not only receive full compensation but also an additional 18% interest. All compensation will be paid in cash.
The bankruptcy restructuring team stated that if all of FTX’s assets are sold, the company will have up to $16.3 billion in cash available for distribution, while the amount owed to customers and other non-government creditors is approximately $11 billion.
Led by John J. Ray III, a bankruptcy lawyer with 40 years of experience who previously handled the Enron bankruptcy case, FTX’s bankruptcy restructuring team has worked tirelessly for 19 months to collect FTX’s scattered assets worldwide. The estimated compensation amount has progressed from 90% in October 2023 to full payment in January of this year, and now to the situation where most creditors can also receive interest. According to Bloomberg, in previous bankruptcy cases in the United States, it is extremely rare for creditors to receive both full payment and interest.
In order to generate enough cash to pay the claims, the team liquidated FTX and Alameda Research’s investments in other startups and stocks, including an 8% stake in the artificial intelligence startup Anthropic, one of OpenAI’s biggest competitors, founded by former members of OpenAI. The transaction raised a total of $884 million.
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Some claimants are unhappy with the “dollarization” of compensation and calculate that they are still losing two-thirds of their value based on the current cryptocurrency prices.
Although the plan sounds generous, some FTX creditors are deeply dissatisfied.
The reason for the dissatisfaction lies in the common “dollarization” process in bankruptcy proceedings.
This means that users are forced to calculate their asset losses in dollars. According to FTX’s bankruptcy restructuring application filed in November 2022, the price of Bitcoin had dropped to $16,000 at that time, and according to legal requirements, this became the basis for the team’s compensation.
However, the current value of Bitcoin has risen to over $60,000 per coin, and these creditors believe that forcing them to accept compensation in “dollar terms” is an “insult” to them as creditors. Taking into account the increase in asset value, the actual compensation for each person is less than one-third, and they believe that the “118%” figure is just a play on words by the bankruptcy restructuring team.
In addition, the plan includes a series of small-print stipulations, one of which is seen as threatening. According to bankruptcy restructuring practices, companies that declare bankruptcy can recover funds that have left the company’s treasury before the formal declaration of bankruptcy. In other words, if users attempted to withdraw funds between the FTX crisis and the formal declaration of bankruptcy, the bankruptcy restructuring team could sue these users to recover the funds. However, this small-print stipulation states that if users agree to receive compensation in “dollar terms,” the bankruptcy restructuring team will not initiate lawsuits – implying that users have no choice but to agree.
These creditors also allege that the reason why FTX now has enough assets to compensate users in cash is due to the recent significant increase in cryptocurrency market prices. They have also organized a voting group of approximately 1,600 people, preparing to vote against the implementation of the plan in June.
The restructuring team denies profiting from the rise in cryptocurrency prices and convinces government agencies to waive their priority claims.
In response to the criticism that the compensation funds mainly come from the increase in cryptocurrency prices, the restructuring team strongly denies it.
In a press release, they stated that when FTX.com filed for Chapter 11 in November 2022, there was already a huge funding gap. In reality, FTX only possessed 0.1% of the Bitcoin and 1.2% of the Ethereum recorded on the books. Therefore, FTX, as the debtor, did not profit from the recent rise in cryptocurrency prices.
Apart from the opposing creditors, the efforts made by the restructuring team led by John J. Ray III have also been applauded by the majority of the public.
In addition to the general public, regulatory and government agencies are also among the victims of FTX’s collapse. The restructuring team negotiated with the Internal Revenue Service (IRS) and the Commodity Futures Trading Commission (CFTC) in the United States. The IRS agreed to settle its $24 billion claim with $200 million in cash and $685 million in subordinate claims. The CFTC and other unnamed government claim entities also agreed to downgrade their claims as long as FTX’s users and investors receive full compensation and interest. (Note: Subordinate claims are only compensated after all creditors and other government entities have been compensated.)
The current plan is still pending approval by the U.S. Bankruptcy Court, and the hearing is expected to take place in June. If the number of votes exceeds two-thirds of the creditors and receives the agreement of more than half of the voting creditors, the plan will be approved, and FTX expects to begin repayment within 60 days after the plan takes effect.
Sources:
Coindesk, Wired, Bloomberg, The Block
