Chapter 11 bankruptcy is often called a reorganizational bankruptcy because the debtor generally continues to manage the business, has the powers and responsibilities of a trustee, and is able to operate.
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 several other major players have filed for bankruptcy.
Many of these companies go through the corresponding procedure in the United States, where filing for bankruptcy under Chapter 11 allows the company to reorganize and pay off debts owed to creditors.
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 receiver steps in and performs these functions throughout the process.
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.
Exclusively for ForkLog, lawyers from GMT Legal discussed the advantages and disadvantages of the above approach, its differences from alternative models, as well as potential issues that cryptocurrency companies may face in this process.
What Are the Pros and Cons of the Procedure for the Applicant and Creditors?
Among the benefits of Chapter 11 bankruptcy, the attorneys at GMT Legal include maintaining control over the companies and the ability to continue doing business. This allows for a more complete repayment of funds to interested parties.
Among the shortcomings of the process, the experts identified long periods – of up to several years – and high cost. They noted that the proceeding is one of the most expensive types of bankruptcies due to attorneys’ legal fees.
GMT Legal noted that the court can dismiss a Chapter 11 case for a variety of reasons. The lawyers stressed that the court can dismiss the case only if there are good reasons and after giving notice and an opportunity for a hearing to all interested parties.
In order to successfully complete the bankruptcy proceeding, the debtor must provide a plan of reorganization that, among other things, indicates the value of its assets and liabilities.
In the case of cryptocurrency companies, difficulties can arise, since the funds on their balance sheet are difficult to identify and evaluate.
What are the Alternatives?
According to experts, the most popular alternatives to this procedure are filing under Chapter 7 of the US Bankruptcy Code, as well as selling assets outside of bankruptcy and debt restructuring.
Thus, the Chapter 7 bankruptcy proceeding involves the liquidation of a company with the payment of debts. The lawyers stressed that, in this case, the company ceases its activities and creditors receive only a small part of the due payments.
By Audy Castaneda
