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In the intricate landscape of finance and commerce, bankruptcy acts as an essential tool that enables struggling businesses to reorganize and restore their financial health.
One of the most recognized types of bankruptcy is Chapter 11, a legal procedure in the United States that allows companies to restructure their operations while shielding them from immediate creditor claims. This article explores the complexities of Chapter 11 bankruptcy, its aims, processes, and significant instances within the cryptocurrency sector.
Understanding Chapter 11 bankruptcy
Chapter 11 bankruptcy, commonly known as “reorganization bankruptcy,” offers companies, regardless of size, the opportunity to improve their financial situation while maintaining their operations.
This chapter permits a debtor (the company) to present a plan that specifies how it will manage its financial responsibilities, including repaying creditors over a prolonged timeframe, reducing debts, and reorganizing operations for enhanced efficiency and profitability.
Related: Prime Trust bankruptcy identified by crypto community months in advance
Aims of Chapter 11
The main objectives of Chapter 11 bankruptcy are twofold: to provide the debtor with a chance to reorganize its financial situation and to optimize returns for creditors.
By allowing the debtor to revamp its operations and financial framework, Chapter 11 seeks to support the company’s return to profitability, thereby protecting jobs and ensuring business continuity.
The Chapter 11 bankruptcy procedure
- Filing for bankruptcy: The process begins when the distressed company submits a Chapter 11 bankruptcy petition to the relevant federal bankruptcy court.
- Automatic stay: Following the filing, an “automatic stay” is enacted, stopping most creditor actions against the company. This provides the debtor with temporary relief from creditor pressure, facilitating the development of a reorganization plan.
- Creating a plan: The debtor is generally allowed a limited timeframe to exclusively propose a reorganization plan. This plan outlines how the company will manage its debts, cut costs, and optimize operations. The plan requires approval from creditors and the court.
- Creditor voting: Creditors cast votes on whether to accept or reject the reorganization plan. If a majority of creditors in each class approve, the plan proceeds.
- Confirmation: The court reviews the plan to ensure it complies with legal standards and is equitable to all parties involved. If sanctioned, the plan is confirmed, and the debtor begins its implementation.
- Implementation: The company now operates under the confirmed plan, making necessary adjustments to meet its obligations and restore financial health.
Chapter 11 bankruptcies in the cryptocurrency sector
The cryptocurrency sector, despite its rapid expansion and potential, has faced various financial challenges and legal issues. Several companies in this field have resorted to Chapter 11 bankruptcy to address financial troubles:
Prime Trust
After facing a shortfall in customer funds, crypto custodian Prime Trust sought Chapter 11 bankruptcy protection in Delaware on Aug. 15, 2023. The entities seeking Chapter 11 relief include Prime Core Technologies Inc., Prime Trust LLC, Prime IRA LLC, and Prime Digital LLC.
Prime Trust Chapter 11 bankruptcy filing: https://t.co/esfnhDmGjK
25,000 to 50,000 creditors
largest unsecured claims are customers
estimated liabilities between $100 million to $500 million
estimated assets between $50 million to $100 million pic.twitter.com/DkFOwvn9Xz— Pledditor (@Pledditor) August 15, 2023
Bittrex
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The cryptocurrency trading platform also filed for Chapter 11 bankruptcy protection in May 2023. The bankruptcy petition involves multiple entities, including Bittrex Inc. based in Seattle, two Bittrex entities located in Malta, and an associated entity named Desolation Holdings LLC.
SVB Financial Group
In an effort to preserve value, SVB Financial Group in distress has filed a self-initiated request for court-supervised restructuring through Chapter 11. This action took place in March 2023 and was directed toward the United States Bankruptcy Court.
Genesis Global Capital
Genesis Global Capital, a cryptocurrency lending firm, initiated Chapter 11 bankruptcy proceedings in the Southern District of New York in January 2023. According to the filing on Jan. 19, the company estimated its liabilities and assets to be within the range of $1 billion–$10 billion. This action also includes its parent company, Genesis Global Holdco, and an affiliated lending division named Genesis Asia Pacific, both of which sought bankruptcy protection.
Core Scientific Inc
In December 2022, Core Scientific Inc, a prominent publicly traded cryptocurrency mining company in the United States, attributed its Chapter 11 bankruptcy filing to a combination of factors, including falling Bitcoin (BTC) prices, rising energy costs, and a substantial unpaid debt of $7 million owed by the insolvent crypto lender Celsius Network.
FTX
In November 2022, the sudden bankruptcy of the Bahamas exchange followed $6 billion in withdrawals within 72 hours, with Binance not providing assistance. Alameda Research, FTX’s associated hedge fund, also filed for bankruptcy. This high-profile collapse involved founder Sam Bankman-Fried.
Related: Who is Sam Bankman-Fried: Profile, biography, FTX, arrest and more
BlockFi
In late November 2022, BlockFi, a crypto lending platform, filed for Chapter 11, following the collapse of FTX just two weeks earlier. BlockFi cited a liquidity crisis due to its significant exposure to FTX. The New Jersey-based firm had relied on a $400 million credit line from FTX for survival, especially after fellow crypto lenders Voyager Digital Ltd and Celsius Network went bankrupt earlier in 2022.
Celsius Network
In July 2022, Celsius, a crypto lending platform, announced Chapter 11 bankruptcy due to the collapse of TerraUSD and Luna, which led to the lender’s downfall.
Three Arrows Capital (3AC)
On July 1, 2022, the crypto hedge fund Three Arrows Capital filed for bankruptcy, citing the May collapse of stablecoin TerraUSD and Luna as the reason.
Voyager Digital
On July 6, 2022, Voyager Digital, a crypto lending firm based in New Jersey, filed for U.S. bankruptcy. The cause was a default on a crypto loan exceeding $650 million by Three Arrows Capital.
Chapter 11 bankruptcy acts as a vital mechanism for businesses, including those in the cryptocurrency sector, to reorganize their operations and overcome financial challenges. By offering a framework for rehabilitation, it balances the interests of debtors and creditors while enabling companies to sustain operations, protect jobs, and contribute to the economy.
