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Supreme Court of Victoria |
Last Updated: 9 December 2022
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2022 05010
IN THE MATTER
of FTX AUSTRALIA PTY LTD (ACN 129 217 812) (ADMINISTRATORS APPOINTED) and FTX
EXPRESS PTY LTD (ACN 657 907 894) (ADMINISTRATORS APPOINTED)
BETWEEN:
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JUDGE:
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WHERE HELD:
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DATE OF HEARING:
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DATE OF JUDGMENT:
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CASE MAY BE CITED AS:
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MEDIUM NEUTRAL CITATION:
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CORPORATIONS – Application by
administrators appointed to corporate group for extension of convening period
for second meetings
of creditors pursuant to s 439A(6) of the Corporations
Act 2001 (Cth) – Two companies in administration – Time needed
for thorough assessment of financial position of the companies
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Administrators do not yet have books and records of the companies - Complex
administration involving transnational corporate
group that dealt in
cryptocurrencies and other digital assets – Time needed for administrators
to prepare report to creditors
about the companies’ business, property,
affairs and financial circumstances – Extension of 9 months sought and
granted
– Re Riviera Group Limited [2009] NSWSC 585; (2009) 72 ACSR 352.
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Counsel
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Solicitors
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Mr Carl Möller SC and
Ms V E Bell, counsel for the Plaintiffs |
Piper Alderman
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1 On 11
November 2022, John Mouawad, Scott Langdon and Rahul Goyal
(‘the Administrators’) were appointed joint and several
administrators of FTX Australia Pty Ltd, and FTX Express Pty Ltd (‘the
Companies’) pursuant to s 436A of the Corporations Act
2001 (Cth) (‘the
Act’).
2 The Administrators held the
first meeting of creditors of the Companies on Thursday, 1 December 2022.
Application to extend the convening period
3 By originating process filed 7 December
2022, the Administrators seek an extension of time to convene the second meeting
of creditors
pursuant to s 439A(6) and s 447A of the Act.
4 By reason of ss 439A(1) and (5) of the Act,
the second meeting of creditors is to be convened by Friday 9 December 2022.
Pursuant to s 439A(2) of the Act, the second meeting must be held by
Friday, 16 December 2022.
5 The Administrators seek
an extension of the period to convene the meeting of creditors for a period of
nine months to 9 September
2023. The Court has power to grant the extension
under s 439A(6) of the Act.
6 The
Administrators’ application is supported by an affidavit sworn by Mr
Mouawad on 7 December 2022 (‘Mouawad
Affidavit’).
7 Mr Mouawad deposes that at
the first meeting of creditors held on 1 December 2022, he told the creditors of
the Companies that the
Administrators intended to apply to Court to extend the
convening period for the holding of the second meetings. Mr Mouawad
deposes
that to date, he has not received any objections from the creditors to
any such extension.
8 The Court’s function on an
application for extension of the convening period is to strike a balance between
the expectation
that an administration will be conducted speedily and the need
to ensure that undue speed will not prejudice any sensible and constructive
actions directed towards maximising the return to creditors and
shareholders.[1]
9 In
addition, an application may be assessed by reference to whether an extension is
necessary to enable administrators to prepare
and provide their report to
creditors about the company’s affairs in accordance with
r 75-225(3)(b) of the Insolvency Practice Rules (Corporations)
2016 (Cth) (‘Insolvency Rules’)
so that creditors are adequately informed for the purposes of deciding
whether the administration should be terminated, a Deed Of
Company Arrangement
(‘DOCA’) executed or the company placed into liquidation
(‘Administrators
Report’).[2]
10 In Strawbridge, Re Virgin Australia Holdings
Ltd (admins apptd) (No 2),[3]
Middleton J stated
that:[4]
The
administrator’s own opinion as to the need for an extension will be given
weight in an application of this kind.
11 In
Sims, Re Destra Corp Ltd, Emmett J
observed:[5]
A very important consideration is whether an extension is necessary to enable the administrator to prepare and provide the report and statements and to arrive at the opinions referred to in s 439A(4)(b), in order to inform creditors adequately so that the creditors will be in a position to choose whether to return the company to the directors, execute a deed of company arrangement or place the company into liquidation.
12 In Riviera Group Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed),[6] Austin J identified a number of categories of cases in which an extension had been granted. The determinative factors found in previous cases and most relevant for present purposes are as follows:
(a) the size and scope of the business;
(b) a large number of employees with complex entitlements;
(c) complex transactions entered into by the company;
(d) complex corporate group structure and intercompany loans;
(e) the time needed for thorough assessment of a proposal for a DOCA;
(f) where extension will allow for the sale of the business as a going concern; and
(g) where the additional time is likely to enhance the return for unsecured creditors.
13 In Mighty River, Nettle and Gordon JJ (in dissent, but not relevantly in this respect)[7] referred to a number of cases including Re Reviera and concluded:[8]
... Generally speaking, courts have been disposed to grant substantial extensions in cases where the administration has been complicated by, for example, the size and scope of the business, substantial offshore activities, large numbers of employees with complex entitlements, complex corporate structures and intercompany loans, and complex recovery proceedings, and, more generally, where the additional time is likely to enhance the return to unsecured creditors. Provided the evidentiary case for extension has been properly prepared, there has been no evidence of material prejudice to those affected by the moratorium imposed by the administration, and the administrator’s estimate of time has had a reasonable basis, the courts have tended to grant extensions for the periods sought by administrators. ...
14 The extension of the convening period
is sought by the Administrators as their investigations are not yet sufficiently
complete
and they are therefore not in a position to provide a recommendation to
creditors as required by r 75–225(3)(b) of the Insolvency
Rules. Prior to the second meeting, the Administrators must prepare and
provide a report (being the Administrators Report required by
the Insolvency
Rules) about the Companies’ business, property, affairs and financial
circumstances and to express an opinion about whether it would
be in the
creditors’ interest for the administrations of the Companies to end and
for control to be returned to the directors,
of the companies to execute DOCAs,
or the Companies be wound up, and the reasons for that opinion and such other
information known
to the Administrators which will enable the creditors to make
an informed decision.
15 Not only are the
Administrators’ investigations not yet sufficiently complete, they have
been severely hampered in conducting
their investigations to date as they do no
have any books or records of the Companies. There is an absence of physical
records and
it appears that the Companies relied on access to digital records,
primarily the records on the platform ftx.com. The Administrators
have been
shut out of access to that platform at this point, due to concerns about the
platform being the subject of cyber attacks.
Identifying the Companies’
creditors, including which of the Companies’ customers are creditors and
in what amount,
is a task still to be performed by the Administrators, and they
cannot do that until their access to information is restored.
16 Further, given the complexities involved in the
administrations, the Administrators will be unable to provide a meaningful
Administrators
Report or to form an opinion and provide a recommendation to
creditors by the time the Administrators Report is due to be sent to
creditors.
17 I accept the Administrators’ submissions that it is not possible for them to meet the statutory timeframes and that an extension is necessary, for the reasons set out below.
(a) Highly complex nature of the administrations:[9] The administrations are highly complex. First, there is the scale and nature of the companies’ activities, which involved dealings in cryptocurrencies and other digital assets and derivatives based on those assets with approximately 30,000 customers. Second, the companies are part of a transnational corporate group – with parent companies located in the United States and Caribbean. Third, those companies themselves have collapsed, and are in US bankruptcy administration.
(b) Inadequacy of the Companies’ books and records:[10] Next, the administrators have only limited books and records. Without access to the FTX trading platform, the administrators cannot determine the status of individual customers’ positions under the derivative contracts. This position is unlikely to be remedied even with access to information held by the related companies overseas since the trustees administering the overseas companies have identified a similar lack of books and records.
(c) Customers’ claims:[11] Not only did the companies have approximately 30,000 customers, but each customer had unique facts and circumstances that will be relevant to the determination of their claims.
(d) Preparation of report:[12] More time is needed to prepare the Administrators Report and to make properly formed recommendations about the Companies’ future.
(e) Chapter 11 proceedings and possibility of a DOCA proposal:[13] The Chapter 11 proceedings are at an early stage. The solicitors assisting the US bankruptcy trustees have requested that the Administrators seek an extension to the convening period. Although the FTX Group is not presently able to confirm any prospect of a DOCA, further time ought to be given for that possibility to be explored.
18 I accept the Administrators’ submissions that:
(a) it would be in the best interests of creditors for the convening period to be extended by a period of nine months; and
(b) the proposed extension will not unduly prejudice creditors, and any prejudice is greatly outweighed by the benefits to creditors of the additional time that will be available to:
(i) prepare and circulate the Administrators Report to creditors and consider how a vote as to the future of the Companies should be exercised;
(ii) enable creditors more accurately to quantify their claims and to lodge proofs of debt; and
(iii) enable the FTX Group to determine whether to propose a DOCA.
19 Insofar as the length of the extension
is concerned, nine months is a very long extension. In this regard, the
Administrators
submit that an extension of that length is appropriate. They
rely on the matters set out below.
20 As Farrell J
observed in Re Moodie (in their capacity as joint and several administrators
of Harrisons Pharmacy Pty Ltd (admins apptd)(recs and mgrs
apptd),[14] the trend is towards
more lengthy convening periods. Her Honour referred to six month extensions
having been granted in a number
of
cases.[15]
21 There are several cases where the convening
period has been extended by nine months or more.
(a) a nine-month extension was granted by Davies J in Re Arrium.[16] Her Honour noted the size, complexity and scope of the administration of the Arrium group and observed that:[17]
A substantial period of time is justified to give the administrators the time needed to investigate the affairs of the companies to be able to report properly to creditors in accordance with s 439A(4)(a) of the Act and give consideration to whether a deed or deeds of company arrangement or scheme of arrangement might be propounded as part of any restructure, recapitalisation or sale.
(b) a nine-month extension was also granted by Judd J in Re Algeri (in their capacity as joint and several administrators of Colorado Group Ltd (admins apptd) (recs and mgrs apptd)).[18] The Colarado group operated 428 stores in Australia and New Zealand and had 3,477 employees. The application was supported by the receivers appointed to the group, who had commenced a sale process that would require up to nine months to complete. The administrators’ evidence was that they could not prepare a meaningful report to creditors in the absence of the completion of the sale process.
(c) in Owen and Others (in their capacity as joint and several administrators of Rivercity Motorway Pty Ltd (admins apptd)(rcs and mgs)[19] (concerning the administration of the Rivercity Motorway Group, which operated the ‘CLEM7 Tunnel’ in Brisbane), Logan J extended the convening period for 21 months. The extension was to enable the receivers to engage in a process that lead to the sale of the tunnel business. In Owen and Others (in their capacity as joint and several administrators of Rivercity Motorway Pty Ltd (admins apptd) (rcs and mgs)(No 4),[20] Logan J granted a further extension of 12 months.
22 The Administrators intend to convene
the second meetings as soon as practicable depending on developments, such that
they may be
held earlier than the end of the extended period sought by the
Administrators.[21]
23 Finally,
the Administrators’ proposed orders will reserve liberty to any person who
can demonstrate sufficient interest to
apply to vary the
orders.
24 In my view, the following factors weigh
in favour of the extension sought:
(a) the extension will enable the preparation of a report to creditors which complies with the requirements of r 75–225(3)(b) of the Insolvency Rules (formerly s 439A(4) of the Act) and the provision of an opinion by the Administrators as contemplated by s 438A of the Act as to whether it would be in the interests of the Companies’ creditors for the Companies (or either of them) to execute a DOCA, for the administration to end or for the Companies to be wound up;
(b) there is a possibility that should the extension of the convening period not be granted, the Administrators may seek to adjourn the second meeting of creditors which would result in associated wasted expenditure, and would in itself not provide a sufficient period for the Administrators to complete the tasks necessary for preparing a meaningful Administrators Report;
(c) this is a very complex administration, due to the nature of the business of the Companies and the parlous state of the Companies’ books and records. It is rendered even more complex by the Chapter 11 proceedings relating to the US entities and the complex relationships between the various entities in the FTX Group;
(d) by way of example of the complexity of the administration, in the declaration filed by Mr John Ray, Chief Executive Officer of the FTX debtors in the Chapter 11 proceedings on 17 November 2022, Mr Ray states that he has over 40 years of legal and restructuring experience, including being the chief restructuring officer or chief executive officer in several of the largest corporate failures in history, including Enron. Mr Ray goes on to say:[22]
Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.
...
The FTX Group did not keep appropriate books and records, or security controls, with respect to its digital assets.
(e) there is no obvious prejudice to any party as a result of an extension. In any event, liberty to apply to the Court will be reserved for any person with a sufficient interest.
25 Accordingly, an extension to the convening period will be granted until 9 September 2023.
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BETWEEN:
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JOHN MOUAWAD IN HIS CAPACITY AS VOLUNTARY ADMINISTRATOR OF FTX AUSTRALIA
PTY LTD (ACN 129 217 812) (ADMINISTRATORS APPOINTED) AND
FTX EXPRESS PTY LTD
(ACN 657 907 894) (ADMINISTRATORS APPOINTED)
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First Plaintiff
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SCOTT DAVID HARRY LANGDON IN HIS CAPACITY AS VOLUNTARY ADMINISTRATOR OF FTX
AUSTRALIA PTY LTD (ACN 129 217 812) (ADMINISTRATORS APPOINTED)
AND FTX EXPRESS
PTY LTD (ACN 657 907 894) (ADMINISTRATORS APPOINTED)
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Second Plaintiff
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RAHUL GOYAL IN HIS CAPACITY AS VOLUNTARY ADMINISTRATOR OF FTX AUSTRALIA PTY
LTD (ACN 129 217 812) (ADMINISTRATORS APPOINTED) AND FTX
EXPRESS PTY LTD (ACN
657 907 894) (ADMINISTRATORS APPOINTED)
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Third Plaintiff
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FTX AUSTRALIA PTY LTD (ACN 129 217 812) (ADMINISTRATORS APPOINTED)
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Fourth Plaintiff
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FTX EXPRESS PTY LTD (ACN 657 907 894) (ADMINISTRATORS APPOINTED)
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Fifth Plaintiff
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[1] See Diamond Press Australia Pty Ltd [2001] NSWSC 313 (Barrett J); Algeri, Re Colorado Group Ltd [2011] VSC 260 (Judd J); Mighty River International Limited v Hughes; Mighty River International Limited v Mineral Resources Limited [2018] HCA 38; (2018) 130 ACSR 427, 447-8 at [73] (‘Mighty River’) (Nettle and Gordon JJ) and Farnsworth v About Life Pty Ltd (Administrator Appointed); In the Matter of About Life Pty Ltd (Administrator Appointed) [2019] FCA 11 (Thawley J).
[2] Silvia, In the matter of Austcorp Group Limited (Administrators Appointed [2009] FCA 636 at [18] Lindgren J (and the authorities referred thereto).
[3] [2020] FCA 717; (2020) 144 ACSR 347 (‘Re Virgin No 2’).
[4] Ibid, [68].
[5] [2008] FCA 2002, [22] (citations omitted).
[6] [2009] NSWSC 585 (‘Re Riviera’).
[7] As noted in Re Virgin No 2.
[8] Mighty River, [73].
[9] See Mouawad Affidavit, s F.3.
[10] See Mouawad Affidavit, s F.7.
[11] See Mouawad Affidavit, [39] – [81.3].
[12] See Mouawad Affidavit, s E and [81.2].
[13] Mouawad Affidavit, Sections F.6 and [81.4].
[15] Including Re Chemeq Ltd (admins apptd) (recs and mgrs apptd); Ex parte McMaster [2007] WASC 154 (Le Miere J); Re IMO an application by Horne and Vrsecky (in their capacities as joint and several administrators of Australian Property Custodian Holdings Ltd) (admins apptd) (recs and mngrs apptd) [2010] VSC 657 (Gardiner AsJ); Strawbridge (administrator) v Retail Holdings Pty Ltd (admins apptd) [2013] FCA 151 (Jagot J).
[16] [2016] FCA 487; (2016) 113 ACSR 302.
[17] Ibid, [30].
[19] [2011] FCA 295 (Logan J).
[20] [2012] FCA 1491; (2012) 92 ACSR 255.
[21] Mouawad Affidavit, [60].
[22] Mouawad Affidavit, [63].
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URL: http://www.austlii.edu.au/au/cases/vic/VSC/2022/763.html