Litigation and Alternative Dispute Resolution

The FTX Group, an international cryptocurrency exchange platform, spectacularly collapsed in November 2022, resulting in FTX Trading Limited and 101 affiliated companies filing for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court in Delaware. The Australian arm of the FTX group, FTX Australia Pty Ltd (‘FTX Aust’) and FTX Express Pty Ltd (‘FTX Express’) (collectively the ‘Companies’) was placed into administration in Australia shortly before the Chapter 11 filing.

The FTX collapse attracted global headlines with allegations that insiders engaged in widespread misappropriation of customer funds. The high profile founder and former, CEO of the FTX Group, Sam Bankman-Fried, was convicted on fraud and other charges in the United States in December. The nature of FTX’s cryptocurrency exchange platform and the global scope of its operations has presented a range of complex legal and factual questions for determination in a number of jurisdictions, in order to facilitate recoveries for large number of creditors globally.

On 22 December 2023, Her Honour Justice Matthews of the Supreme Court of Victoria delivered judgment in respect of an application under s90-15 of the Insolvency Practice Schedule (Corporations) (‘IPS’) being Schedule 2 of the Corporations Act 2001 (Cth) (‘Act’) made by John Mouawad and Scott Langdon from KordaMentha, in their capacity as joint and several administrators of FTX Aust and FTX Express . Piper Alderman represented the administrators in that application and briefed Carl Moller SC with Vicki Bell, both members of the Victorian Bar.

Background

At the time of appointment:

• the Companies had 24,656 customers (13,294 of FTX Express and 11,362 of FTX Aust;
• the total value recorded (crypto-assets or fiat currency) in the Companies’ customer accounts on the FTX.com platform was AUD218.56 million (AUD186.58 million for FTX customers and AUD31.97 million for FTX Express customers;
• 747 customers (411 of FTX Aust and 336 of FTX Express) had sought to convert crypto-assets to AUD and withdraw the AUD, but these withdrawals had not yet been processed; and
• the total amount sought to be withdrawn was AUD28.84 million (AUD15.21 million by FTX Aust customers and AUD13.63 million by FTX Express customers).

The administrators recovered cash held in bank accounts in the name of FTX Express totalling AUD39,311,480.31 and for FTX Aust totalling AUD2,731,466.56.

As a result of their investigations, the administrators categorised customers as follows:

1. Australian customers who still held crypto-assets in their FTX.com account at the appointment time;
2. Australian customers who held AUD denominated balances in their FTX.com account at the appointment time;
3. Australian customers who had requested a withdrawal in USD or other non-AUD fiat currency prior to the appointment time; and
4. Australian customers who had requested a withdrawal in AUD fiat currency prior to the appointment time.

The administrators sought judicial advice in respect of a number of key issues including:

• whether the administrators would be justified in admitting, or not admitting, certain persons who claim to be creditors of one or both of the Companies, to vote at the second meetings of creditors of the Companies;
• how the administrators should treat the monies they have recovered from bank accounts held in the names of the Companies; and
• whether the administrators would be justified and acting reasonably in treating open ‘over the counter’ crypto-derivative contracts or positions to which FTX Australia was a party as closed with effect from the appointment time.

Four contradictors were granted leave to be heard in opposition to aspects of the administrators’ application. The application was issued in September 2023 and was heard over three days in late November and early December 2023.

The decision

Justice Matthews dealt with the application by considering a series of questions that had been agreed between the administrators and the contradictors.

Following lengthy submissions from the parties over a three day hearing, Her Honour accepted the administrators’ submissions on each question put to the Court for determination. Key takeaways from the judgment are as follows:

1. The administrators are justified in admitting as creditors of FTX Express customers who had requested, prior to the appointment time, a withdrawal of fiat currency in AUD from the FTX.com platform, which request had not been fulfilled at the appointment time;
2. Customers who had requested a withdrawal of fiat currency other than AUD from the customer’s account on the FTX.com platform prior to the appointment time are not creditors of FTX Australia or FTX Express;
3. Customers who held crypto-assets in an account on the FTX.com platform at the appointment time are not creditors of FTX Australia or FTX Express;
4. Customers who had entered a derivative trade or position with FTX Australia, which trade or position had not closed at the appointment time, the profits and losses on which were booked every 30 seconds by the FTX.com platform, do not have a claim against FTX Australia in relation to the trade or position;
5. The administrators are justified and acting reasonably in treating derivative contracts or positions to which FTX Australia was a party that were not closed at the appointment time as closed with effect from the appointment time; and
6. The funds that the administrators have recovered from bank accounts held by FTX Express and FTX Australia are assets of those companies.

It was common ground that the ambit of s 90-15 of the IPS extends to the determination of substantive rights. However, it was also common ground that the administrators were not seeking the determination of substantive rights but rather how they were to treat particular classes of customers in the conduct of the administration, particularly in respect of voting entitlements at the second meetings of the Companies’ creditors. Justice Matthews took this approach – that is, her findings go no further than that, however, she did acknowledge that there will be a certain gravitational pull arising from her decision. Orders were made on 2 February 2024.

The decision now paves the way for the administrators to finalise their s 439A report to creditors and convene the second meetings. The convening period in respect of the second meetings of the Companies’ creditors has been extended to 11 March 2024.

Click on this link to read the full decision.