After the collapse of the Terra ecosystem, a wave of bankruptcies swept through the cryptocurrency market. Celsius Network, Three Arrows Capital, Voyager Digital, FTX and a number of other major players have declared their own insolvency.
Many of these companies go through the relevant process in the United States, where filing an application under Chapter 11 United States Bankruptcy Code allows you to reorganize the business and pay off debts to creditors.
Exclusively for Cryplogger, GMT Legal lawyers talked about the advantages and disadvantages of the above approach, its differences from alternative models, as well as potential problems that cryptocurrency companies may face in this process.
What is Chapter 11 bankruptcy?
In the United States, the institution of bankruptcy allows the applicant to rebuild the business, close debts, and even “extend the life” of the troubled company.
Chapter 11 bankruptcy is often referred to as reorganizational bankruptcy because the debtor typically continues to manage the business, has the powers and responsibilities of a trustee, and is able to operate.
Basically, the same people continue to control the business as before the bankruptcy. However, in special cases (for example, those involving fraud or gross incompetence), a court-appointed trustee intervenes and performs these duties throughout the proceedings.
To successfully complete the procedure, the company needs to draw up a reorganization plan. In this case, creditors can vote in favor of the document. If it receives the required number of votes and meets certain legal requirements, the court will approve it.
What are the pros and cons of the procedure for the applicant and creditors?
The benefits of Chapter 11 bankruptcy are attributed by GMT Legal’s lawyers to retaining control of the company and being able to continue doing business. This allows for more complete reimbursement of funds to stakeholders.
“After the procedure begins, the company’s protection from creditors appears, that is, attempts to repay debts are suspended, which can also be a significant plus,” the company representative added.
Among the shortcomings of the process, experts identified long periods – up to several years – and high cost. They noted that the procedure is one of the most expensive types of bankruptcies, including due to legal costs for lawyers.
Can a court dismiss or dismiss a Chapter 11 bankruptcy case?
GMT Legal noted that the court may dismiss a Chapter 11 case for a variety of reasons. For example:
- failure to comply with court orders or the US Bankruptcy Code;
- insufficient protection of the interests of creditors;
- the inability of the debtor to carry out a successful reorganization;
- relevant claims of the debtor or the majority of creditors;
- adverse events that occurred during the bankruptcy process, such as a deterioration in the financial condition of the debtor.
Lawyers emphasized that the court can dismiss the case only if there are good reasons and after giving notice and the opportunity for a hearing to all interested parties.
Chapter 11 Bankruptcy Specifics for Cryptocurrency Companies
As mentioned above, in order to successfully complete the bankruptcy procedure, the debtor is required to provide a reorganization plan, which, among other things, indicates the value of its assets and liabilities.
In the case of crypto-currency companies, difficulties can arise, since the funds on their balance sheet are difficult to identify and evaluate.
“The volatility of tokens in the market can be very high, so the total value of a company’s crypto assets can change significantly, which complicates the process. In addition, in some cases, these assets are difficult to identify, as a company may have many custodial and non-custodial wallets. If some wallets have access only to certain people or they are not reflected in accounting documents, it can be problematic to get to the assets stored on them,” GMT Legal explained.
Lawyers also noted that problems may arise at the stage of liquidation of assets. The debtor may try to sell the entire position of the company in low-liquid tokens on the market, which will cause a sharp drop in their value. As a result, he will receive a smaller amount than he originally expected.
What are the alternatives?
According to experts, the most popular alternatives to the procedure under consideration are filing an application for Chapter 7 of the United States Bankruptcy Codeas well as the sale of assets outside bankruptcy and debt restructuring.
“However, for large companies with large debts and a desire to continue operations, the Chapter 11 option is often the best option. In addition, such bankruptcy provides benefits not only to the debtor, but also to creditors – in the event of a successful implementation of the reorganization plan, the latter receive a significantly larger part of the funds than in the case of Chapter 7 or other means,” explained GMT Legal.
Thus, the Chapter 7 bankruptcy procedure involves the liquidation of a business with the repayment of debts. Lawyers stressed that in this case the company ceases its activities, and creditors receive only a small part of the due payments.
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Cryplogger Newsletters: Keep your finger on the pulse of the bitcoin industry!
After the collapse of the Terra ecosystem, a wave of bankruptcies swept through the cryptocurrency market. Celsius Network, Three Arrows Capital, Voyager Digital, FTX and a number of other major players have declared their own insolvency.
Many of these companies go through the relevant process in the United States, where filing an application under Chapter 11 United States Bankruptcy Code allows you to reorganize the business and pay off debts to creditors.
Exclusively for Cryplogger, GMT Legal lawyers talked about the advantages and disadvantages of the above approach, its differences from alternative models, as well as potential problems that cryptocurrency companies may face in this process.
What is Chapter 11 bankruptcy?
In the United States, the institution of bankruptcy allows the applicant to rebuild the business, close debts, and even “extend the life” of the troubled company.
Chapter 11 bankruptcy is often referred to as reorganizational bankruptcy because the debtor typically continues to manage the business, has the powers and responsibilities of a trustee, and is able to operate.
Basically, the same people continue to control the business as before the bankruptcy. However, in special cases (for example, those involving fraud or gross incompetence), a court-appointed trustee intervenes and performs these duties throughout the proceedings.
To successfully complete the procedure, the company needs to draw up a reorganization plan. In this case, creditors can vote in favor of the document. If it receives the required number of votes and meets certain legal requirements, the court will approve it.
What are the pros and cons of the procedure for the applicant and creditors?
The benefits of Chapter 11 bankruptcy are attributed by GMT Legal’s lawyers to retaining control of the company and being able to continue doing business. This allows for more complete reimbursement of funds to stakeholders.
“After the procedure begins, the company’s protection from creditors appears, that is, attempts to repay debts are suspended, which can also be a significant plus,” the company representative added.
Among the shortcomings of the process, experts identified long periods – up to several years – and high cost. They noted that the procedure is one of the most expensive types of bankruptcies, including due to legal costs for lawyers.
Can a court dismiss or dismiss a Chapter 11 bankruptcy case?
GMT Legal noted that the court may dismiss a Chapter 11 case for a variety of reasons. For example:
- failure to comply with court orders or the US Bankruptcy Code;
- insufficient protection of the interests of creditors;
- the inability of the debtor to carry out a successful reorganization;
- relevant claims of the debtor or the majority of creditors;
- adverse events that occurred during the bankruptcy process, such as a deterioration in the financial condition of the debtor.
Lawyers emphasized that the court can dismiss the case only if there are good reasons and after giving notice and the opportunity for a hearing to all interested parties.
Chapter 11 Bankruptcy Specifics for Cryptocurrency Companies
As mentioned above, in order to successfully complete the bankruptcy procedure, the debtor is required to provide a reorganization plan, which, among other things, indicates the value of its assets and liabilities.
In the case of crypto-currency companies, difficulties can arise, since the funds on their balance sheet are difficult to identify and evaluate.
“The volatility of tokens in the market can be very high, so the total value of a company’s crypto assets can change significantly, which complicates the process. In addition, in some cases, these assets are difficult to identify, as a company may have many custodial and non-custodial wallets. If some wallets have access only to certain people or they are not reflected in accounting documents, it can be problematic to get to the assets stored on them,” GMT Legal explained.
Lawyers also noted that problems may arise at the stage of liquidation of assets. The debtor may try to sell the entire position of the company in low-liquid tokens on the market, which will cause a sharp drop in their value. As a result, he will receive a smaller amount than he originally expected.
What are the alternatives?
According to experts, the most popular alternatives to the procedure under consideration are filing an application for Chapter 7 of the United States Bankruptcy Codeas well as the sale of assets outside bankruptcy and debt restructuring.
“However, for large companies with large debts and a desire to continue operations, the Chapter 11 option is often the best option. In addition, such bankruptcy provides benefits not only to the debtor, but also to creditors – in the event of a successful implementation of the reorganization plan, the latter receive a significantly larger part of the funds than in the case of Chapter 7 or other means,” explained GMT Legal.
Thus, the Chapter 7 bankruptcy procedure involves the liquidation of a business with the repayment of debts. Lawyers stressed that in this case the company ceases its activities, and creditors receive only a small part of the due payments.
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