Group of FTX creditors Object to Reorganisation Plan, Seeks Reform

Key Takeaways

• The group of creditors argue that the cash payouts in the reorganisation plan would trigger taxable events for creditors
•  The plan proposes reimbursing creditors with claims of $50,000 or less up to 118% of their claims.

A group of FTX creditors, led by vocal critic Sunil Kavuri, filed an objection on May 30th, 2024, to the bankrupt crypto exchange’s reorganization plan in US bankruptcy court. The objection argues the plan falls short on several key points, including failing to adequately serve creditor interests and ignoring property rights issues.

The crux of the objection revolves around the proposed cash settlements. Kavuri’s group argues these cash payouts would trigger taxable events for creditors, forcing them to shoulder unexpected financial burdens. As an alternative, the objection proposes reimbursing creditors with assets instead of cash.

Another point of contention is the distribution of funds from the FTX estate, which the creditors believe could be facilitating the distribution of stolen assets. Chapter 11 bankruptcy law is cited to support this claim.

Beyond these central points, the objection raises additional concerns. The Kavuri group finds the terms of service ambiguous, the debtor’s liquidation analysis inconsistent, and the disclosure statement lacking information on relevant legal proceedings. Additionally, they requested the inclusion of an examiner report and an updated disclosure statement that incorporates IRS communications.

This objection comes a month after FTX unveiled its repayment plan. The plan proposes reimbursing creditors with claims of $50,000 or less up to 118% of their claims. This encompasses roughly 98% of all creditors. All non-governmental creditors would be entitled to full reimbursement of their claims, along with a 9% interest accrued since the bankruptcy filing date in November 2022. FTX characterized this interest as compensation for the “time value of investments.”

The Kavuri-led group, however, swiftly denounced the repayment plan as “insulting.” A court hearing to address these objections is scheduled for June 25th, 2024.

This is however not the first time the FTX creditors have expressed disappointment at FTX’s bankruptcy estate’s reorganisation plan. 

 In Mid-2023, FTX’s Official Committee of Unsecured Creditors UCC argued that the embattled firm’s plan was one-sided and largely ignored suggestions the UCC raised during discussions.

Earlier this year, FTX creditors also launched a lawsuit against Sullivan & Cromwell, the legal firm overseeing the FTX bankruptcy. The creditors accused the firm of failing to stop the fraud while positioning themselves for a lucrative position as FTX’s primary bankruptcy counsel. However, an independent bankruptcy court probe found no evidence that the law firm had any knowledge about the fraud or ignored any “red flags” when it performed pre-bankruptcy work

FTX filed for bankruptcy in November 2022 with a $8 Billion deficit. Its founder Sam Bankman Fried was sentenced to sentenced to 25 years in prison in March 2024. Prosecutors have alleged that SBF Bankman-Fried took over $10bn  from unsuspecting customers in “one of the biggest financial frauds” in US history