FTX creditors formally object to bankruptcy reorganization plan

A group of FTX creditors led by Sunil Kavuri has filed a formal objection to the restructuring plan submitted by the bankrupt exchange’s administrator.

In court filings on June 5, the creditor groups argued that the proposed restructuring plan did not meet their group's best interest standards.

In his objection, Sunil Kavuri clearly pointed out that FTX’s bankruptcy reorganization plan has legal deficiencies because it contains some clauses that are not in the interest of the creditor’s estate and does not properly handle issues related to property rights. These views are the main basis for his questioning of the plan.

Controversial points among creditor groups

The creditor group clearly pointed out that if FTX uses cash to repay debts, it will face a tax problem, and this tax burden can be avoided by repaying it in kind. In other words, if FTX repays the money in cash, the creditor will have to report taxes on those gains when it accepts the payment.

Therefore, the creditor group believes that in order to reduce the tax pressure on creditors, non-cash repayment methods should be considered, such as distributing some assets or other forms of physical objects, which can help creditors reduce their tax burden and achieve a more favorable tax treatment.

Creditor groups voiced their concerns in the filing, stating:

"Since FTX has stated that they regard this 'forced exchange' as an act that generates tax obligations, this will cause customers to encounter unnecessary tax pressure when accepting cash repayments. But if it is done in the form of 'kind' instead distribution, you can effectively avoid these additional tax burdens.”

The creditor group further emphasized that FTX needs to update its disclosure statement regarding its settlement agreement with the Internal Revenue Service (IRS) and should include a formal report from the examiner. This objection follows FTX’s recent tax settlement agreement with the IRS, which means FTX needs to more transparently reflect tax-related settlement details in legal documents.

Specific implementation terms of the settlement plan

Under the specific terms of the settlement, the IRS will receive $200 million in priority claim payments within 60 days of the settlement being approved. In addition, the IRS will receive a $685 million sub-priority claim once FTX's customers are repaid in full. This shows that during the bankruptcy and reorganization process of FTX, tax issues received special attention and treatment, ensuring that the rights and interests of the tax authorities were protected to a certain extent.

On May 7, FTX’s bankruptcy administrator announced a reorganization plan under which creditors will be repaid in full in cash. For those creditors with claims under $50,000, they will be eligible for 118% repayment within 60 days of court approval. At the same time, other non-governmental creditors will also receive their entire claims, plus interest of up to 9% as compensation.

The plan follows objections from FTX creditor groups and an in-depth review of the restructuring plan.

Conclusion:

The dissenting action of the creditor group in the FTX bankruptcy case highlights the complexity of the bankruptcy reorganization process and the firm stance of creditors in protecting their own interests. The concerns raised by the group led by Sunil Kavuri, especially regarding tax treatment and property rights issues, have brought new challenges and considerations to FTX’s bankruptcy reorganization plan. The in-kind repayment method advocated by creditor groups aims to find a more reasonable and tax-efficient solution, which reduces the additional tax burden that may arise from cash repayment.

In addition, updated requirements for IRS settlement agreement disclosure statements reflect the pursuit of transparency and compliance during the bankruptcy and reorganization process. With the restructuring plan proposed by the FTX bankruptcy administrator, including full cash repayment to small creditors and interest compensation to other creditors, this process not only tests the adaptability and flexibility of the legal framework, but also reflects the need to deal with large-scale creditors. The complexity of balancing the interests of all parties involved in a large-scale bankruptcy case.

With the in-depth review and possible adjustments to the bankruptcy reorganization plan, all stakeholders, including creditors, tax authorities, and FTX’s management, are looking forward to reaching a fair and reasonable solution to promote the smooth resolution of FTX’s bankruptcy case. And provide important references and lessons for the future development of cryptocurrency trading platforms.

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