MtGox trustee Nobuaki Kobayashi has filed with a Tokyo court a new draft civil rehabilitation plan to allocate assets to the exchange’s creditors. Will he bring a solution and long-awaited payouts?
Late last week, MtGox lenders received notice of a new civilian rehabilitation plan that was filed in court on January 15 by MtGox trustee Nobuaki Kobayashi. At the same time, Coinlab circulated a press release according to which it reached a “historic agreement” with Nobuaki Kobayashi and MGIF LP, a division of Fortress Investment Group, on compensation of $ 11 million in damages caused by MtGox. MGIF is one of the largest lenders of MtGox, which bought back the exchange’s debts from many clients.
However, with this agreement, not everything is as smooth as the major players in this business represent it in the media. In fact, there is now a confrontation over the remaining assets of MtGox between Coinlab and MGIF, owned by Mike Novogratz’s company. At the same time, MGIF seeks to weed out small creditors by fully paying off their debt, so that the case becomes less widespread, and also to convince as many of the remaining ones as possible to agree to a fixed payment based on the remainder of unallocated cryptocurrencies.
The key point of the “agreement” with Coinlab – the company’s claims are designated in the rehabilitation plan as secondary in the event of payment of $ 11 million. After that, the obligations to it will be considered secondarily, after the rest of the creditors. According to the plan under consideration by the court, the bulk of Coinlab’s compensation will be made not from the balances of assets distributed among all pending payments, but from MGIF money.
The rehabilitation plan is not final and is now being considered by a Japanese court, after which most creditors will have to vote for it. Then the practical issues of payments must be resolved.
All of this means that compensation will not be distributed anytime soon, and the trustee will not flood the market with a huge amount of bitcoin overnight. If this plan is not adopted, the case may return to the format of bankruptcy with a completely different distribution of payments.
In early 2014, MtGox applied for civil rehabilitation, which was soon overturned by petitions from creditors who believed that MtGox could not be rehabilitated. The process was converted to bankruptcy proceedings.
The MtGox case was an unprecedented bankruptcy case, in part due to the magnitude of the losses and the sheer number of creditors involved, but primarily due to the exchange’s significant assets remaining. In the case of MtGox, over 200,000 BTC survived due to the fact that they were in an old format wallet that was in use until June 2011. This caused difficulties in satisfying creditors fairly, as the existing rules do not take into account such situations.
Over time, a major problem arose with the bankruptcy process: Japanese bankruptcy claims are legally denominated only in Japanese yen, and claims in BTC and BCH are converted to Japanese yen at the exchange rate at the beginning of the process. Back then, Bitcoin was only worth $ 440. Despite the sale of some of the bitcoins to compensate for the costs of the case, most of the crypto assets were not liquidated, BTC continued to rise in value and already exceeded the book value of obligations in fiat currency on the day of filing for bankruptcy.
From a legal point of view, this meant that MtGox became “solvent” again, despite the fact that the lenders in BTC were still at a disadvantage. In addition, Japanese bankruptcy law prevents more than 100% of the carrying amount of claims from being paid, resulting in a “surplus” of assets that could eventually be paid to MtGox owners rather than creditors.
Given the situation, lenders made a lengthy effort to try to avoid this outcome and ultimately won out. In 2018, a Tokyo court ruled to suspend MtGox’s bankruptcy proceedings and begin a civil rehabilitation process. On the day of the beginning of civil rehabilitation, BTC cost $ 7,226, and BCH – $ 940.
As a compromise, an agreement was reached to ensure that claims for compensation in fiat currencies, which were to be paid 100% in accordance with bankruptcy rules, will not be considered secondary to civil rehabilitation. This required the sale of a certain amount of BTC and BCH to create a cash reserve and guarantee 100% repayment of fiat claims regardless of the market price of BTC. Thus, in total, about a third of the remaining MtGox bitcoins were sold.
The question of whether to keep BTC or sell it and pay off the debt to creditors in Japanese yen has also been raised repeatedly, as most creditors prefer to receive compensation in cryptocurrency. Based on this, the trustee has so far refrained from selling BTC and BCH other than coins to create a cash reserve, and is apparently working to make it possible to distribute compensation to lenders in cryptoassets.
While this is good news for lenders, it also means that the distribution process is more complicated than standard bankruptcy.
Conflict with Coinlab
In early 2013, MtGox and Coinlab announced a partnership, according to which the Canadian company Coinlab was to accept American clients of the exchange. However, Coinlab was unable to obtain a license to operate in the United States. In May 2013, after MtGox started having problems, Coinlab sued the exchange for breach of contract, demanding compensation in the amount of $ 75 million.
The lawsuit with Coinlab made matters worse for every lender involved. Back in May 2017, Mark Karpeles, owner and director of MtGox, wrote an open letter to Coinlab hoping to convince her to agree to a $ 5 million compensation.However, in February 2019, CoinLab filed for $ 16 billion in compensation.
The Trustee has dismissed CoinLab’s claims and is currently challenging them in court. CoinLab now requires a smaller amount – according to Japanese law, the plaintiff must provide a small part of the amount in the claim as collateral. This is to discourage the filing of claims of this size. However, CoinLab is still threatening to litigate its original $ 16 billion lawsuit.
Despite the unreliability of CoinLab’s claims and the potential damage to MtGox’s creditors if claims for $ 16 billion are successfully satisfied, the company continues to fight, which could turn into years of litigation. According to a previous court decision, CoinLab was awarded multimillion-dollar damages in damages under the contract. However, the loss of profits claims were rejected and CoinLab filed an appeal.
Attempts by the trustee to set an upper limit on the amount that CoinLab can theoretically receive will be an important step towards unlocking the remaining property assets and making the undisputed assets available for distribution to creditors.
On January 15, Coinlab released information to the media that a “historic agreement” was reached on the MtGox case. This claim is exaggerated – CoinLab’s claim remains in dispute. The Trustee believes CoinLab should not receive anything. CoinLab has repeatedly tried to slow down the rehabilitation process so that no assets are distributed among creditors until the end of the trial and the satisfaction of its claims.
Thus, the “agreement” to compensate CoinLab for $ 11 million under the rehabilitation plan is a compromise made by the trustee in the interests of creditors and expediting the payment process.
Updated rehabilitation plan
Last month, Nobuaki Kobayashi presented to the court on the remaining allocation plan purses exchange of assets, and on January 15 lenders MtGox received notice of the court of the new rehabilitation plan. If this plan is approved by the court, then all MtGox creditors will have to vote for it. If the plan is approved by a claim-weighted majority vote, the actual asset allocation process can begin.
According to the plan, the priority will be those lenders to whom the exchange must compensate losses in fiat currency and small amounts. To compensate this group of creditors, additional cryptocurrency may be sold. First of all, all creditors will be made a base payment of 200,000 yen – about $ 2,000. If the exchange’s debt to the creditor was less than this amount, he will receive 100% of the debt.
Lenders who have applied for compensation in cryptoassets can expect to be paid. However, it will only be produced in BTC and BCH. The rest of the crypto assets will be converted to fiat currencies. At the same time, the decision on the distribution of BTC and BCH will be made taking into account the rate in fiat currency at the time of the start of the civil rehabilitation process: $ 7,226 and $ 940, respectively.
Once claims are settled in fiat currencies, asset balances will be paid in prorated payments between claimants. If a civil rehabilitation plan is adopted in court, then creditors will be offered two options for compensation: early or final payment. In case of early payment, the creditor will receive a payment of 21% of the amount of the claims immediately, together with a base payment of $ 2,000.
Final payment implies compensation after distribution, if successful, which is not guaranteed. According to the document, if there are a lot of assets left, then the creditors who agreed to the final payment can receive about 22-23% of the amount of claims in BTC. Fundamentally, the distribution of money in the final payment depends on whether the trustee succeeds in beating Coinlab in court. If, after the distribution process, there is little money left, then those who chose the final payment may end up with less than the creditors who preferred early payment.
It is in this 2% difference that MGIF is interested as the largest lender of MtGox. Despite the seemingly insignificant figure, at the current rates of cryptocurrencies we are talking about tens of millions of dollars. Therefore, it is beneficial for the fund, firstly, to “eliminate” Coinlab from the equation, even with a payment of $ 11 million, and convince as many of the remaining creditors as possible to agree with the “fast” payment of 21% of the debt in cryptocurrencies. Then MGIF and the staunchest creditors will have the rest of the pie.
Payment process and options for the outcome of the case
Regardless of the payment option chosen by the lender, cryptoassets will not be distributed directly, but through exchanges and custodians. The compensation will be credited not to the personal account of the creditor, but to the general account of the exchange. At this point, the payment of compensation by the trustee is considered complete, and he is not responsible for how the exchange or custodian will distribute assets between users.
Since the proposed rehabilitation plan involves the sale, but not the acquisition of cryptoassets, there may be a problem of lack of cryptocurrency to pay compensation. In this case, payments will be made in fiat currency – creditors will need to provide bank account details. In the absence of a bank account, the money can be collected in cash at the office in Japan. If the creditor does not collect the money, it will be forwarded to the Legal Affairs Bureau of Japan.
Thus, there are several options for the development of events:
The plan is approved by all interested parties. In this case, Coinlab receives $ 11 million, fiat lenders receive 100% compensation, and cryptocurrency lenders receive 21% immediately or an unknown percentage after the final distribution. MGIF expects to receive a “premium” of 1-2% over those who agreed to a quick payment. In this case, most lenders will receive money in the next few months. The final calculations may be delayed indefinitely.
The court or some of the creditors will require changes to the plan . In this case, its consideration will be delayed, and the asset distribution scheme may change.
- Coinlab withdraws from the agreement and demands to bring the case back to court. Here again claims for $ 16 billion arise (perhaps the company will reduce the amount to a more reasonable one). Then it cannot be ruled out that the court will reject the civil rehabilitation plan and the case will be returned to the framework of bankruptcy proceedings. In this case, the long-term struggle of creditors may drag on for more years with an unobvious ending.