FTX Trading Limited and Chapter 11 Bankruptcy
In the past week, we have all been hit with the sudden news of the collapse of one the largest cryptocurrency exchange platforms — FTX Trading Limited.
On November 11, 2022, it was announced that the company filed for Chapter 11 bankruptcy. It also announced that its founder and CEO Sam Bankman-Fried has been replaced by John Ray III — a wall street turnaround titan noted for having a Midas touch with troubled companies like Enron.
Most people are wondering what filing for Chapter 11 bankruptcy means and if there is any hope at all for creditors of FTX and those who might have lost their investments. This write-up is meant to walk you through the workings of Chapter 11 bankruptcy and what it means to key stakeholders of FTX Trading Limited.
Chapter 11 bankruptcy also known as restructuring bankruptcy comes from a section of the US Bankruptcy code which allows insolvent corporations domiciled in the USA to reorganise their assets and debts under the court’s supervision while remaining in business.
Ghana’s Corporate Insolvency and Restructuring Act, 2020 (Act 1015) provides a similar legal regime for insolvent companies domiciled in Ghana.
Many major corporations including fortune 500 companies have at some point used Chapter 11 bankruptcy to restructure their debts while continuing to be in business and rising from their ruins like a phoenix from the ashes. Some of such fortune 500 companies include; Marvel Entertainment (1996), Chrysler LLC(2009), Texaco, General Motors, Ally Financial, United Airlines and K-Mart.
How does it work?
Chapter 11 bankruptcy, unlike Chapter 7 bankruptcy — which involves outright sales of assets to settle creditors — aims at helping corporations stay in business while renegotiating their debt position and payment terms with their creditors. This bankruptcy is either filed by the corporation itself or by its distressed creditors and administered under a court’s supervision.
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The assets of corporations filing under Chapter 11 are mostly considered to be valuable and could be used to turn the corporation around when managed effectively. This appears to be the case for FTX Trading Limited as John Ray III was quoted saying, “The FTX Group has valuable assets that can only be effectively administered in an organised, joint process. I wanted to ensure every employee, customer, creditor, contract party, stockholder, investor, governmental authority and other stakeholders that we are going to conduct this effort with diligence, thoroughness and transparency.”
As part of the restructuring under this chapter, Corporations usually apply for Debtor-in-Possession (DIP) financing arrangements. This arrangement allows the corporation to secure liquid funds to remain operational while reorganising its debts and operations. DIP financing takes a senior position in the organisation’s debt structure and must be settled before any other debt or equity is settled.
Chapter 11 bankruptcy starts with the filling of Form B 101 in the United States Bankruptcy Court. This, as mentioned earlier, could be filled voluntarily by the debtor or by creditors that meet certain requirements. In addition, the corporation is required to file schedules of its assets and liabilities, schedules of current income and expenditure, schedules of executory contracts and unexpired leases and a statement of financial affairs. Upon filling out the voluntary petition form and settling all administrative fees, the court grants relief to the corporation and considers it a debtor in possession (DIB). This relieves it from all of its indebtedness up until the time the relief was entered. All assets and liabilities up to the time the relief was granted are transferred to the DIB.
The debtor in possession is confirmed with a fiduciary position and is expected to perform all functions relating to the continuous running of the business. The DIB with approval from the court is allowed to engage the service of professionals to assist in administering its role in the bankruptcy process. The operations and progress of the DIB are monitored by a trustee or a bankruptcy administrator. The trustee also requires the DIP to report on a monthly bases its revenue and expenditures. Failure to comply with the directives of the trustees risks the chapter 11 bankruptcy case being dismissed or forced to be filed under another chapter.
As mentioned earlier, the court grants an automatic stay after a Chapter 11 bankruptcy petition has been filed. This provides a period where all judgements, debt collection and foreclosures up till the time of filing are suspended and may not be persuaded by the creditors. The automatic stay is to provide a breather for the corporation to negotiate its debt position and terms. All expenses or debts incurred after the bankruptcy filing date are allowed to be paid for. The frequency, however, is sometimes regulated by the court.
While the automatic stay is in force, the DIB is required by the bankruptcy court to file a reorganisation plan within 120 days from the date of filing. An additional 180 days is granted by the court to allow confirmation to be obtained for the plan. Where the DIB fails to file a plan within 180 days, other parties of interest such as the creditors are allowed to file a plan.
A plan to liquidate the assets of the corporation under chapter 11 may be acceptable if it is economically advantageous to do so as compared to liquidating under Chapter 7.
Chapter 11 requires that the reorganisation plan designates classes of claims and ensures all members of a class are treated equally. The plan is also to classify claim holders as secured creditors, unsecured creditors and equity security holders.
An entire class of claims in the reorganisation plan is deemed to be accepted if it is accepted by creditors that hold at least two-thirds of the total amount in the class. Provisions are made to allow the plan to be modified before its finally confirmed and brought into force
The entire Chapter 11 bankruptcy case could get dismissed if the reorganisation plan is objected to and does not get accepted. Upon rejection, the corporation returns to what it was before the filing or the court could convert the case into a chapter 7 bankruptcy.
Chapter 11 bankruptcy is considered one of the most expensive and complex bankruptcy chapters. Despite this, it has proven over the years to be more advantageous to both the corporations and their stakeholders
It’s too early to say what the prospect of FTX Trading Limited is given that they have just initiated the Chapter 11 process. Let’s cross our fingers and see what happens in the upcoming days.
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