Chinese Creditors Sue FTX Over $470 Million Payout Freeze

Chinese creditors have initiated legal action against FTX, contesting the freeze on payouts totaling $470 million. The FTX Recovery Trust, responsible for managing the distribution of assets to creditors, has halted payouts to 49 countries, including China, pending legal approval. This move has sparked significant backlash from Chinese creditors, who argue that the freeze is unfair and lacks a solid legal foundation.

Weiwei Ji, a Singaporean resident representing over 300 Chinese creditors, has filed an objection in Delaware Bankruptcy Court against FTX’s latest plan. Ji argues that he was unfairly labeled a “Chinese creditor” by FTX based solely on his passport, despite living in Singapore. He notes that FTX is paying in U.S. dollars, which is legal, and crypto payouts are allowed in China as digital assets are treated as personal property. Ji’s family has four verified FTX accounts, with claims worth over $15 million, and he argues that the proposed plans put their payouts at risk in an unfair way.

The motion to pause payouts was filed by the FTX Estate on July 2, citing potential legal trouble, including fines, personal liability for FTX officials, or even jail time. The list of restricted jurisdictions includes countries like Russia, Egypt, Afghanistan, Tunisia, Zimbabwe, Ukraine, and Moldova. The FTX creditor trust argues that sending money to these regions could break local laws and lead to legal trouble, putting funds for other creditors at risk. This freeze impacts 5% of all approved claims. To resolve the issue, FTX has asked a U.S. court for permission to hire local lawyers to check if payments can legally go through. Local experts will check if payouts are legally allowed. If not, the claims may be canceled and returned to the trust.

Ji argued that labeling China as a restricted jurisdiction has no legal basis. He explained that payouts can still happen through Hong Kong and pointed to the Celsius case as an example. While China bans crypto trading, digital assets are still legal property, and Hong Kong is becoming more crypto-friendly. He also urged the court to reject the proposed restrictions, saying that there is no legal risk in paying Chinese creditors and it’s a part of the bankruptcy process.

Over 500 Chinese creditors are challenging FTX’s request to delay payouts, arguing that FTX is breaking earlier promises and unfairly targeting creditors based on nationality. They assert that this is not just about money, but about fairness, trust, and being treated equally. The creditors contend that the payout freeze disproportionately affects them, as many have been waiting for compensation for losses incurred due to FTX's collapse. They assert that the delay in receiving their funds is causing further financial hardship and that the trust's decision to freeze payouts is arbitrary and unjustified.

The legal battle is expected to be protracted, with both sides presenting their arguments in court. The situation highlights the complexities involved in the liquidation process of a major financial institution like FTX. The trust's decision to freeze payouts is aimed at ensuring that all legal requirements are met and that the distribution of assets is conducted in a transparent and equitable manner. However, the move has raised concerns about the fairness of the process and the potential for further delays in compensation for creditors.

The legal dispute also underscores the challenges faced by international creditors in seeking redress for financial losses. The involvement of multiple jurisdictions and the need to comply with various legal frameworks add layers of complexity to the resolution process. The outcome of the case will have implications for how similar disputes are handled in the future, particularly in the context of cross-border financial transactions.

The Chinese creditors' legal challenge is part of a broader effort to hold FTX accountable for its actions and to ensure that creditors receive fair compensation for their losses. The case serves as a reminder of the importance of transparency and accountability in the financial sector, as well as the need for robust legal frameworks to protect the interests of creditors. The resolution of the dispute will be closely watched by stakeholders in the financial industry, who are keen to see how the legal system addresses the complexities of cross-border financial disputes.