It seems that some companies and investors, such as Binance, are liable to pay creditors through clawback for FTX collapse as a result of fraud.
What about profitable customers? Suppose a customer made trading profits and earned interest from lending his cryptocurrencies on FTX. He managed to withdraw his funds just hours before FTX's collapse. Is he liable to for the clawback?
Are customers who withdraw their profits and lending earnings from FTX during its last days before its bankruptcy liable to clawback from creditors?
It seems that some companies and investors, such as Binance, are liable to pay creditors through clawback for FTX collapse as a result of fraud.
If the right conditions are met the amounts paid can be clawed back.
There are a lot of special rules that apply but the most general is that if you receive money or property to pay an amount owed on a debt within 90 days of the bankruptcy petition being filed without providing substantially contemporaneous and equivalent value at the time that you receive the money, and the amount received is more than you would have received in a Chapter 7 bankruptcy, then the amount received may be clawed back into the bankruptcy estate.
Usually, in financial transactions, the dollar values in an account in your name are considered to be contractual debts owed by the financial institution to you, rather than "your property". So paying amount the balance of an account (to the extent it has been at that level for at least 90 days before the filing of the bankruptcy petition) will usually be a preference and give rise to a clawback obligation if the bankruptcy estate choses to enforce that right (in a Chapter 7 that call is made by the bankruptcy trustee, in a Chapter 11 that call is made by the "debtor-in-possession"). If a clawback amount is not returned voluntarily, court action can be taken to recover it. This is what a court has ruled, for example, in one recent crypto bankruptcy case.
The lookback period is 1 year rather than 90 days for "insiders".
If the debt is backed by new collateral in this time period, even if not paid, the agreement to provide new collateral can be invalidated (certain additional technical rules apply to this provision).
Small amounts (up to $600 for consumer debtors and $5,000 for non-consumer debtors) are disregarded even if the payment would otherwise be a preference subject to being clawed back.
To make sure I have fully answered the question:
What about profitable customers? Suppose a customer made trading profits and earned interest from lending his cryptocurrencies on FTX. He managed to withdraw his funds just hours before FTX's collapse. Is he liable to for the clawback?
Yes. If the conditions described above are met. The logic is that people who pull out money at the last minute due to luck or insider information should not be treated differently than those who do not do so.
The relevant section of the bankruptcy code is 11 U.S. Code § 547 (Preferences). It states:
(a)In this section—
(1)“inventory” means personal property leased or furnished, held for sale or lease, or to be furnished under a contract for service, raw materials, work in process, or materials used or consumed in a business, including farm products such as crops or livestock, held for sale or lease;
(2)“new value” means money or money’s worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation;
(3)“receivable” means right to payment, whether or not such right has been earned by performance; and
(4)a debt for a tax is incurred on the day when such tax is last payable without penalty, including any extension.
(b)Except as provided in subsections (c), (i), and (j) of this section, the trustee may, based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses under subsection (c), avoid any transfer of an interest of the debtor in property—
(1)to or for the benefit of a creditor;
(2)for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3)made while the debtor was insolvent;
(4)made— (A)on or within 90 days before the date of the filing of the petition; or (B)between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5)that enables such creditor to receive more than such creditor would receive if— (A)the case were a case under chapter 7 of this title; (B)the transfer had not been made; and (C)such creditor received payment of such debt to the extent provided by the provisions of this title.
(c)The trustee may not avoid under this section a transfer—
(1)to the extent that such transfer was— (A)intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and (B)in fact a substantially contemporaneous exchange;
(2)to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was— (A)made in the ordinary course of business or financial affairs of the debtor and the transferee; or (B)made according to ordinary business terms;
(3)that creates a security interest in property acquired by the debtor— (A)to the extent such security interest secures new value that was— (i)given at or after the signing of a security agreement that contains a description of such property as collateral; (ii)given by or on behalf of the secured party under such agreement; (iii)given to enable the debtor to acquire such property; and (iv)in fact used by the debtor to acquire such property; and (B)that is perfected on or before 30 days after the debtor receives possession of such property;
(4)to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor— (A)not secured by an otherwise unavoidable security interest; and (B)on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor;
(5)that creates a perfected security interest in inventory or a receivable or the proceeds of either, except to the extent that the aggregate of all such transfers to the transferee caused a reduction, as of the date of the filing of the petition and to the prejudice of other creditors holding unsecured claims, of any amount by which the debt secured by such security interest exceeded the value of all security interests for such debt on the later of— (A) (i)with respect to a transfer to which subsection (b)(4)(A) of this section applies, 90 days before the date of the filing of the petition; or (ii)with respect to a transfer to which subsection (b)(4)(B) of this section applies, one year before the date of the filing of the petition; or (B)the date on which new value was first given under the security agreement creating such security interest;
(6)that is the fixing of a statutory lien that is not avoidable under section 545 of this title;
(7)to the extent such transfer was a bona fide payment of a debt for a domestic support obligation;
(8)if, in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $600; or
(9)if, in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $5,000.2
(d)The trustee may avoid a transfer of an interest in property of the debtor transferred to or for the benefit of a surety to secure reimbursement of such a surety that furnished a bond or other obligation to dissolve a judicial lien that would have been avoidable by the trustee under subsection (b) of this section. The liability of such surety under such bond or obligation shall be discharged to the extent of the value of such property recovered by the trustee or the amount paid to the trustee.
(e)(1)For the purposes of this section— (A)a transfer of real property other than fixtures, but including the interest of a seller or purchaser under a contract for the sale of real property, is perfected when a bona fide purchaser of such property from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest that is superior to the interest of the transferee; and (B)a transfer of a fixture or property other than real property is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee.
(2)For the purposes of this section, except as provided in paragraph (3) of this subsection, a transfer is made— (A)at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at, or within 30 days after, such time, except as provided in subsection (c)(3)(B); (B)at the time such transfer is perfected, if such transfer is perfected after such 30 days; or (C)immediately before the date of the filing of the petition, if such transfer is not perfected at the later of— (i)the commencement of the case; or (ii)30 days after such transfer takes effect between the transferor and the transferee.
(3)For the purposes of this section, a transfer is not made until the debtor has acquired rights in the property transferred.
(f)For the purposes of this section, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition.
(g)For the purposes of this section, the trustee has the burden of proving the avoidability of a transfer under subsection (b) of this section, and the creditor or party in interest against whom recovery or avoidance is sought has the burden of proving the nonavoidability of a transfer under subsection (c) of this section.
(h)The trustee may not avoid a transfer if such transfer was made as a part of an alternative repayment schedule between the debtor and any creditor of the debtor created by an approved nonprofit budget and credit counseling agency.
(i)If the trustee avoids under subsection (b) a transfer made between 90 days and 1 year before the date of the filing of the petition, by the debtor to an entity that is not an insider for the benefit of a creditor that is an insider, such transfer shall be considered to be avoided under this section only with respect to the creditor that is an insider.
(j) (1)In this subsection: (A)The term “covered payment of rental arrearages” means a payment of arrearages that— (i)is made in connection with an agreement or arrangement— (I)between the debtor and a lessor to defer or postpone the payment of rent and other periodic charges under a lease of nonresidential real property; and (II)made or entered into on or after March 13, 2020; (ii)does not exceed the amount of rental and other periodic charges agreed to under the lease of nonresidential real property described in clause (i)(I) before March 13, 2020; and (iii)does not include fees, penalties, or interest in an amount greater than the amount of fees, penalties, or interest— (I)scheduled to be paid under the lease of nonresidential real property described in clause (i)(I); or (II)that the debtor would owe if the debtor had made every payment due under the lease of nonresidential real property described in clause (i)(I) on time and in full before March 13, 2020. (B)The term “covered payment of supplier arrearages” means a payment of arrearages that— (i)is made in connection with an agreement or arrangement— (I)between the debtor and a supplier of goods or services to defer or postpone the payment of amounts due under an executory contract for goods or services; and (II)made or entered into on or after March 13, 2020; (ii)does not exceed the amount due under the executory contract described in clause (i)(I) before March 13, 2020; and (iii)does not include fees, penalties, or interest in an amount greater than the amount of fees, penalties, or interest— (I)scheduled to be paid under the executory contract described in clause (i)(I); or (II)that the debtor would owe if the debtor had made every payment due under the executory contract described in clause (i)(I) on time and in full before March 13, 2020. (2)The trustee may not avoid a transfer under this section for— (A)a covered payment of rental arrearages; or (B)a covered payment of supplier arrearages.
Clawbacks are required if the payment was preferential or if the company was insolvent when they were made.
A preferential payment is one made to a creditor when payments to other creditors in similar circumstances were denied. For example, assume that a company has a number of 30-day creditors that they habitually pay in 60 days. However, one creditor is particularly diligent in pursuing its debts and, as a result, is paid 30-35 days. Such a payment might be recovered as preferential. This is, of course, massively unfair but that’s how it is.
Once a company becomes insolvent - that is, unable to pay its debts as and when they fall due - it must cease trading immediately and apply for bankruptcy. Any transactions after that point are potentially revocable. Pinpointing that exact instant is tricky but it occurs when it should have been apparent to reasonably competent directors of the company.
In this particular case, there appears to have been massive fraud to disguise the fact that the company was insolvent. As a result it’s likely that insolvency happened a long time ago so many transactions may have occurred after that point. As the article points out, the clawback is limited to 90 days prior to filing so potentially all payments made within that period are fair game.
