Clawbacks refer to money paid out that must be returned due to certain circumstances, such as an insolvent company needing to recover funds paid within 90 days before filing for Chapter 11 bankruptcy. This means that creditors could seek to recover transfers made by FTX to external parties, including the $2.1 billion paid to Binance during Binance's Series A investment in FTX. The bankruptcy court could decide to return the crypto assets or the money equal to their value, depending on the asset's value at the time of transfer, bankruptcy filing, lawsuit filing, or judgment. There are three main types of clawbacks: preference, fraudulent transfer made to defraud creditors, and fraudulent transfer made for less than reasonably equivalent value while the debtor was insolvent.
Types of Clawbacks in Bankruptcy Cases
Clawbacks in bankruptcy cases refer to the recovery of money paid out that is required to be returned due to certain circumstances, such as an insolvent company needing to recover funds paid within 90 days before filing for Chapter 11 bankruptcy. In the event of a clawback, the bankruptcy court could determine the return of the crypto assets or the money equal to their value, considering the assets' value at the time of transfer, bankruptcy filing, lawsuit filing, or judgment. There are three main types of clawbacks:
Preference: This type of clawback is allowed under section 547 of the Bankruptcy Code and allows the debtor or trustee to avoid any transfer of property made to a creditor within 90 days before the bankruptcy while the company was insolvent. This type of clawback can be defended if the transfer is made in ordinary business.
Fraudulent transfer made to defraud creditors: This type of clawback is allowed under section 548 of the Bankruptcy Code and refers to a fraudulent transfer of property made while the debtor was insolvent with the actual intent to defraud creditors.
Fraudulent transfer made for less than reasonably equivalent value while the debtor was insolvent: This type of clawback is also allowed under section 548 of the Bankruptcy Code and refers to a transfer of property made while the debtor was insolvent and for which the debtor received less than reasonably equivalent value.
Potential Impact of FTX Bankruptcy on Businesses and Investors
The potential clawback of billions of dollars in the wake of the FTX Group bankruptcy could significantly impact businesses and investors. Creditors may seek to recover transfers made by FTX to external parties, including the $2.1 billion paid to Binance during Binance's Series A investment in FTX. This means that these businesses and investors could be required to return the funds. In addition, other businesses, such as Silvergate Bank, could also be required to return the money as the bankruptcy proceeding progresses. Customers who liquidate their crypto as cash run the risk of having to return crypto, which exposes them to the risk of the value of the crypto increasing. Customers who hold onto their crypto run the risk of being required to return cash even if the crypto they are holding is not liquidated for the amount of the judgment.
FTX Bankruptcy and Potential Fraud and Mismanagement
The FTX Group bankruptcy case may involve fraud and mismanagement, similar to other bankruptcy cases. However, it is important to note that bankruptcy proceedings and clawbacks are separate from criminal investigations or charges. If FTX is found to have engaged in fraud or mismanagement, this could be grounds for a fraudulent transfer clawback under section 548 of the Bankruptcy Code. This type of clawback allows for the recovery of property transferred while the debtor is insolvent and with the actual intent to defraud creditors. It is up to the bankruptcy court to determine if FTX engaged in fraudulent or mismanaged actions and, if so, how this will impact the recovery of funds for creditors.
Potential Defenses to Clawback Claims
There are several defenses to clawback claims in bankruptcy cases, including if the transfer was made in ordinary business. This means that the transfer was made in accordance with the company's regular business practices and was not out of the ordinary. Another defense to a clawback claim is if the transfer was made for reasonably equivalent value, meaning that the transfer recipient provided something of equal value in return. It is up to the bankruptcy court to decide if these defenses apply in the case of FTX and any potential clawback claims.
Risks for Customers in FTX Bankruptcy Case
Customers of FTX may face risks as the bankruptcy case progresses and potential clawback claims are considered. If a clawback is successful, customers who liquidated their crypto as cash may be required to return crypto, which exposes them to the risk of the value of the crypto increasing. Customers who hold onto their crypto may be required to return cash even if the crypto they hold is not liquidated for the amount of the judgment. This means that customers may face financial risk no matter what action they take in regard to their crypto assets. Customers need to keep track of developments in the FTX bankruptcy case and consult with financial advisors or legal counsel as needed.
