By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s Bahamian liquidators say they need the Supreme Court to determine who the local subsidiary’s customers truly are so they can “claw back” preferential payments and prevent the winding-up from “stalling”.

Brian Simms KC, the Lennox Paton senior partner, in a March 15, 2023, affidavit said it was “crucially important” to the progress of himself and his co-provisional liquidators that the Chief Justice Sir Ian Winder be able to give “directions” on several “core fundamental issues”.

He and the PricewaterhouseCoopers (PwC) accounting duo of Kevin Cambridge and Peter Greaves are presently seeking to ensure that any “directions” ruling does not violate the freezing order imposed by the Delaware Bankruptcy Court when FTX’s non-Bahamian entities were placed in Chapter 11 bankruptcy protection (see other article Page 1B), as any breach could result in sanctions and penalties being imposed on US-based assets belonging to FTX Digital Markets.

That is the Bahamian subsidiary that Mr Simms and the PwC duo are winding-up under the Supreme Court’s supervision. Among the key issues that Sir Ian will be asked to determine is which “terms of service”, which governed the relationship between FTX’s international platform and its customers, apply and on what date - as this is critical to working out when, and if, clients were migrated to FTX Digital Markets and became its customers.

Another vital issue that Sir Ian will be asked to decide is whether FTX Digital Markets was holding assets, either digital, fiat or both, on trust for investors/clients in a fiduciary or escrow capacity. If it was, then assets treated in such a manner will belong to the client, but if they were not then such properties belong to the liquidation estate.

Pointing out that their “directions” application relates solely to FTX Digital Markets, its clients, assets and creditors, and not the entities in Chapter 11 in the US, Mr Simms asserted: “All of the issues raised in the directions application are core fundamental issues arising from the provisional liquidation of FTX Digital and which can only be resolved by this court. The requirement for directions has become urgent.

“Until the joint provisional liquidators have some certainty as to who FTX Digital’s customers are, the governing law of various agreements and the effect of such agreements, the provisional liquidation will in effect and substance stall. The further and efficient progress of the provisional liquidation is crucially important because there are various parties who withdrew digital assets and fiat from FTX Digital in the days immediately before the commencement of the provisional liquidation in respect of whom there may be actions to claw back those withdrawals.

“The resolution of the issues which are the subject of the directions applications will determine the incidents of the claw back claims. The appropriate causes of action for clawing back withdrawals are dependent on whether assets were held on trust, making FTX Digital’s customers beneficiaries of assets held, or whether assets were owned absolutely by FTX Digital with the consequence that FTX Digital’s customers are creditors,” Mr Simms added.

“In each case there are different claw back remedies which are dependent on the basis on which the assets were held. For obvious reasons the determination of these issues is fundamental to the provisional liquidation and until they are resolved the provisional liquidation of FTX Digital cannot satisfactorily progress.”

Previous filings have alleged that some 1,500 “Bahamian” clients were able to recover a collective $100m in potential “fraudulent preferences” that were withdrawn in violation of asset freezes imposed by both the Supreme Court and Chapter 11 processes. it is these withdrawals that Mr Simms and his colleagues will be targeting.

However, John Ray, the FTX US chief in charge of the 134 entities in Chapter 11 bankruptcy in Delaware, is understood to be alleging that an earlier “terms of service” apply and, as result, no international, non-US customers were migrated to FTX Digital Markets before the crypto exchange imploded in early November 2022. Therefore, they are customers of his Chapter 11 entities, not the Bahamian provisional liquidation proceedings.

The importance of the “directions” hearing, though, was spelt out in a March 9, 2023, letter from the liquidators’ US attorneys to Mr Ray’s legal representatives. Brian Pfeiffer, an attorney with White & Case, wrote: “The requirement for the joint provisional liquidators to seek directions in the application has become urgent.

“Until the joint provisional liquidators have some certainty as to who their customers are, the governing law of various agreements and the effect of such agreements, its provisional liquidation cannot progress. This is crucially important because there are various parties who withdrew sums from FTX Digital in the days immediately before the commencement of the provisional liquidation.

“The joint provisional liquidators need confirmation that FTX Digital has standing to claw back those payments and needs to take action quickly. Moreover, a determination of the aggregate amount and nature of creditor claims that may be properly asserted against FTX Digital is critical to the progression of the liquidation process in The Bahamas, and to the joint provisional liquidators’ ability to make reasoned and well-informed business decisions related thereto.”