The FTX hearing is held today: How should Chinese creditors protect their rights according to the law?

Original Title: "FTX Hearing Today! A Clear Explanation of the Rights Protection Path for Chinese Creditors"

Author: Xiao Za lawyer

Recently, the biggest news in the crypto asset world is that the international leading cryptocurrency exchange FTX has applied for bankruptcy reorganization in a court in Delaware under the U.S. Bankruptcy Code.

The Xiao Za team has received a large number of legal consultations regarding how to protect rights in this case. After investigation, FTX is registered in Antigua and Barbuda, and its headquarters has now moved to the Bahamas, but its main operating location is in the United States. A bankruptcy case with elements of "cross-border" and "virtual assets" is bound to involve many complexities that exceed the capabilities of ordinary lawyers and law firms. Adhering to the principle of providing benefits to readers, the Xiao Za team will analyze the U.S. bankruptcy process and the possible rights protection paths for Chinese creditors, hoping to help readers recover losses in this already cold "winter."

I. What Can Chinese Creditors Do at This Stage? How to Do It?

To understand what Chinese creditors can do at this stage, we first need to clarify what stage the FTX bankruptcy case has reached. On November 11 and November 14, 2022, FTX Trading Ltd and its 101 affiliated debtors (which refers to all its related companies and operating entities; hereinafter, unless otherwise specified, "debtors" refers to FTX and all its affiliated companies applying for bankruptcy reorganization) submitted a voluntary relief application to the federal bankruptcy court in Delaware under Chapter 11 of the U.S. Bankruptcy Code. According to official public information from the Delaware court, the main judge responsible for the case is John T. Dorsey, and a hearing on the "first-day motions" (also known as the "first-day hearing") is scheduled for today (November 22, 2022) at 11:00 AM.

The matters for the first-day hearing are not complicated and mainly aim to resolve jurisdictional issues. Since FTX's entity FTX Digital Markets located in the Bahamas has applied for Chapter 15 bankruptcy protection in the Southern District of New York, FTX is attempting to transfer the related case from New York to the Delaware court. Judge John T. Dorsey of Delaware needs to hear the motion for the change of venue and make a relevant ruling.

According to the provisions of the U.S. Chapter 11 bankruptcy reorganization process, the United States Trustee should consult with the top 20 unsecured creditors about their willingness to join the unsecured creditors' committee, which is generally composed of the seven largest unsecured creditors (the composition of the creditors' committee can be negotiated). Therefore, the immediate priorities for Chinese creditors are as follows.

(1) Join the Creditors' Committee

In the FTX bankruptcy case, the vast majority of investors are unsecured creditors. To successfully protect their rights, Chinese unsecured creditors should unite and actively strive to join the creditors' committee. Within the creditors' committee, Chinese creditors can influence the bankruptcy reorganization process and advocate for a higher recovery ratio for unsecured debts.

Additionally, if Chinese unsecured creditors can serve as members of the creditors' committee, they will be able to better and more comprehensively understand the debtors' specific financial information and actual operating conditions. This information is key to successfully protecting their rights and is crucial for creditors to make accurate judgments in the future.

(2) Preserve Evidence

Whether in a virtual asset bankruptcy case or a traditional bankruptcy case, preserving evidence is crucial. For creditors, the evidence that can currently be preserved includes their own account data, operational processes, transfer records, bank statements, as well as any conversation records with FTX and its affiliated company staff, FTX's official website pages, apps, etc. Notably, most of the objective evidence in this case is preserved in the form of electronic evidence. Creditors with the capability can use blockchain notarization or notary public services to preserve electronic evidence, especially chat records and evidence from FTX's online platforms that are not under their control and are easily tampered with or lost. This objective evidence will be key for us to assert legitimate claims and realize our rights in the future.

(3) Timely Entrust Professional U.S. Lawyers for Debt Registration

Recently, many clients have inquired whether the Xiao Za team can undertake rights protection in the FTX bankruptcy case. Unfortunately, although the Xiao Za team has long been engaged in the field of legal services for virtual assets and has formed a highly specialized and internationalized legal team, as Chinese lawyers, we cannot practice in the U.S. It would be irresponsible to casually help everyone protect their rights. In other words, the vast majority of domestic lawyers can only organize Chinese bankruptcy creditors and provide some consulting services, but cannot actually represent cases (even for consulting services, there are significant limitations; domestic lawyers holding only Chinese practicing qualifications cannot provide accurate interpretations of U.S. law). Therefore, those who truly want to resolve issues still need to seek help from professional U.S. bankruptcy lawyers.

The Xiao Za team advises everyone to entrust professional U.S. bankruptcy lawyers as soon as possible to safeguard their rights. Taking advantage of the fact that the "first-day hearing" has just been held today and the creditors' committee has not yet been established, timely intervention can maximize the protection of their legitimate rights and interests.

Due to the limited time for debt registration, any delays or entrusting lawyers unfamiliar with the U.S. bankruptcy legal system and procedures could lead to errors in debt registration, resulting in an embarrassing situation where rights cannot be protected. Although the Xiao Za team cannot undertake representation in U.S. bankruptcy cases, the Dacheng Law Firm, where the Xiao Za team is located, is a globally recognized international legal service institution with a professional bankruptcy lawyer team in Delaware, and partners in need can directly contact the Xiao Za team for recommendations.

II. FTX Bankruptcy Case Hearing Today: Choosing the Bankruptcy Court

In fact, the essence of this hearing is the issue of "forum shopping." "Forum shopping" is not new in the U.S. bankruptcy judicial field. As mentioned earlier, the U.S., as a developed capitalist country, has a highly market-oriented bankruptcy market, and the corresponding bankruptcy courts are relatively independent of the U.S. court system, with rather lenient jurisdictional rules. This gives all parties involved in the bankruptcy process more choices, including allowing and encouraging them to "choose a court" within a legal framework. Each party involved in the bankruptcy process naturally has its own "calculations" when it comes to "choosing a court."

Unlike ordinary Chinese courts exercising jurisdiction over bankruptcy cases, in U.S. judicial practice, the original jurisdiction over bankruptcy cases is held by bankruptcy courts. These bankruptcy courts are spread across various states and, while formally part of the federal district court system, bankruptcy judges are appointed directly by the federal circuit court where the bankruptcy court is located, serving a term of 12 years (statistically, the reappointment rate for bankruptcy judges is about 92%). This system design aims to ensure that U.S. bankruptcy courts possess professionalism and relative independence, resembling specialized courts in China (such as internet courts, intellectual property courts, etc.).

Creditors choose courts mainly based on the debt repayment rate and the degree of respect the court shows for creditors' opinions. Bankruptcy administrators choose courts primarily based on the court's level of expertise (expertise affects whether large cases are accepted; the more large cases, the higher the administrator's fees) and the extent to which the court discounts the administrator's fees (this is due to the difficulty of fully repaying creditors in bankruptcy cases). Additionally, the bankrupt company itself needs to carefully choose the bankruptcy court, mainly considering whether the bankruptcy court is friendly enough to the management of the bankrupt company (the Southern District Bankruptcy Court in New York has established its status as a bankruptcy hub due to the professionalism of its judges and its friendliness towards the management of bankrupt companies).

Where there are people, there are communities, and different people have different communities. The differences among various bankruptcy courts provide opportunities for parties involved in the bankruptcy process to realize their interests within the rules. Just as criminal defense lawyers in the U.S. carefully select jurors to influence the direction of cases, the nuances of choosing a court in bankruptcy law are also numerous and are one of the aspects that best reflect the professional level of lawyers involved in the bankruptcy process. In famous cases such as the bankruptcies of Enron, WorldCom, and Lehman Brothers, certain parties involved in the bankruptcy process have used forum shopping to maximize their interests.

Historically, the Delaware Bankruptcy Court was undoubtedly the leader in U.S. bankruptcy cases in the 1990s due to its judges' professionalism and fair handling attitude. However, with the further prosperity of the market economy and the relative migration of economic centers in the 21st century, the Delaware court has gradually shown a situation of "more cases than people." The Southern District Bankruptcy Court in the U.S. has risen since 2000 and has gradually developed into a "North Star" in the bankruptcy world, rivaling Delaware. As a common law country, regardless of which court FTX chooses for jurisdiction, this case will be significant enough to be recorded in history and will directly promote the development of relevant laws concerning virtual assets.

III. What Will Happen Next in the FTX Bankruptcy Case?

From the perspective of handling bankruptcy cases, U.S. federal bankruptcy law provides different types of bankruptcy options, including bankruptcy liquidation (Chapter 7), municipal (regional) entity reorganization (Chapter 9), bankruptcy reorganization (Chapter 11), adjustment of farm and fishing debts (Chapter 12), and adjustment of personal debts (Chapter 13). FTX has chosen Chapter 11 bankruptcy reorganization.

Generally speaking, Chapter 7 and Chapter 11 are the most commonly used in U.S. bankruptcy law. Chapter 7 is bankruptcy liquidation, which involves completely selling off the company's assets to pay off debts, after which the company can no longer continue operations, which can be considered a "death on the spot" for the company. Chapter 11, on the other hand, is bankruptcy reorganization, which is often referred to as "I think I can still be saved." Companies choosing Chapter 11 must have "salvageable value." After entering the Chapter 11 reorganization process, the bankruptcy administrator needs to provide a reorganization plan, which often involves bringing in other investors (white knights) to obtain cash flow to revitalize the assets.

To ensure the success of the company's reorganization, it is necessary for it to continue operating during the reorganization process to see hope for emerging from the shadows in the future. Therefore, the law requires that all creditors, including secured creditors, cannot realize their claims at this time, and the collateral for their claims cannot be enforced to meet the needs of the company for continued production and operation. Ideally, the debtor can provide creditors with payments greater than or equal to what they would receive in bankruptcy liquidation, allowing the debtor to avoid liquidation.

Generally, the Chapter 11 reorganization process is as follows:

1. The company intending to apply for bankruptcy reorganization submits an application to the federal bankruptcy court.

2. A "first-day hearing" is held within 48 hours after submission (the FTX bankruptcy case was postponed by one day) to discuss relevant procedures (such as court selection) for subsequent work;

3. A creditors' committee is formed 14 days after the application;

4. 30-60 days after the application, a creditors' committee meeting is held, where the bankruptcy administrator answers inquiries from creditors (and their attorneys);

5. 120 days after the application, the bankruptcy reorganization plan is completed and submitted for review by the creditors' committee. After approval by the creditors' committee and the court, the reorganization plan begins to be implemented;

6. 14 days after the creditors' committee's approval, the bankruptcy reorganization plan takes effect for the debtor. Creditors' claims are frozen, and creditors are prohibited from taking measures to realize their claims, while any legal actions against the company are temporarily prohibited. This bankruptcy reorganization "golden vest" can only be lifted by the court. Of course, the above procedures are only general procedures; in practice, especially in cases like FTX, which are large-scale and involve cross-border and virtual assets, it is unlikely to be resolved in just a few years.

Currently, opinions on FTX vary. Many people believe it is a scam with no salvageable value, and that pursuing bankruptcy reorganization is merely a delaying tactic, as the enormous debt hole makes repayment impossible (some well-known investment institutions have already voted with their feet and exited). However, there are still some who maintain a degree of confidence in it. The Xiao Za team believes that the key to whether FTX can be salvaged lies in whether it can find enough external funding and reach a consensus with the creditors' committee (it is reported that there may be 100,000 to 1 million creditors worldwide).

Final Thoughts

Recently, both Hong Kong and mainland China have frequently released positive signals for the Web3 economy. The Xiao Za team sincerely hopes that the winter of virtual assets will pass quickly, but this requires everyone's joint efforts. The FTX incident will undoubtedly be recorded in history, not only because its scale and impact are larger than the "Mt. Gox" incident from several years ago, but also due to its unique case identity, which may set a precedent for the bankruptcy of virtual asset companies in the U.S. and even globally, thus providing a more scientific and up-to-date institutional supply for the bankruptcy of virtual asset companies in the legal system.

Finally, overseas rights protection is a long and arduous journey, but the Xiao Za team is always here.