Re FTX Australia Pty Ltd (admin apptd) and FTX Express Pty Ltd (admin apptd) Judicial Directions Application

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT

CORPORATIONS LIST

S ECI 2022 05010

IN THE MATTER of FTX AUSTRALIA PTY LTD (ACN 129 271 812) (administrators appointed) and FTX EXPRESS PTY LTD (ACN 657 907 894) (administrators appointed)

WHERE:

JOHN MOUAWAD IN HIS CAPACITY AS VOLUTARY ADMINISTRATOR OF FTX AUSTRALIA PTY LTD (ACN 129 271 812) (administrators appointed) and
FTX EXPRESS PTY LTD (ACN 657 907 894) (administrators appointed) (according to the attached Schedule)

Plaintiffs

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JUDGE:	Matthews J
WHERE HELD:	Melbourne
DATE OF HEARING:	28-29 November 2023, 7 December 2023
DATE OF JUDGMENT:	22 December 2023
CASE MAY BE CITED AS:	Re FTX Australia Pty Ltd (admin apptd) and FTX Express Pty Ltd (admin apptd) – Judicial Directions Application
MEDIUM NEUTRAL CITATION:	[2023] VSC 788

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CORPORATIONS – Application by voluntary administrators for directions in relation to treatment of creditors and claims in the administration of companies – Potential creditors are customers using an internet based platform to trade in cryptocurrency and crypto-derivatives – Division of customers into classes – Whether each class comprises creditors of one or more of the companies in administration – Corporations Act 2001 (Cth) – Insolvency Practice Schedule (Corporations), Schedule 2 to the Corporations Act 2001 (Cth), s 90-15.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr CT Moller SC with Ms V Bell	Piper Alderman
For Digital Surge Pty Ltd, a contradictor	Mr LF White	Emerson Lewis Legal
For Ebonex Australia Pty Ltd and Xiaohua Chen, contradictors	Mr DG Guidolin SC with Mr MN Thomas	Ashurst Australia
For Ni Hong, a contradictor	Mr B Ryde	Baker & McKenzie
For FTX Trading Limited	Mr SJ Maiden KC	Clayton Utz

TABLE OF CONTENTS

A.. Introduction.................................................................................................................................. 1

B.. Background................................................................................................................................... 2

B.1... The FTX business................................................................................................................. 2
B.2... Procedural history............................................................................................................... 5
B.3... FTX Trading’s application for leave to be heard............................................................. 7
B.4... Material relied upon by the parties................................................................................... 8
B.5... Relief sought by the Administrators................................................................................. 9

C.. The Contradictors....................................................................................................................... 12

C.1... Digital Surge....................................................................................................................... 12
C.2... Ebonex and Ms Chen........................................................................................................ 13
C.3... Ms Hong.............................................................................................................................. 14

D.. Relevant law................................................................................................................................ 15

E... FTX Trading’s submissions...................................................................................................... 16

F... Issues raised by the Administrators’ application................................................................ 17

G.. Question 1: Claims based on assets held on FTX.com platform....................................... 18

G.1... The Administrators’ submissions................................................................................... 18
G.2... The Contradictors’ submissions...................................................................................... 19
G.3... Analysis and consideration.............................................................................................. 20

H.. Question 2: Claims based on assets held on FTX.com platform after AUD deposit.... 20

H.1.. The Administrators’ submissions................................................................................... 20
H.2.. The Contradictors’ submissions...................................................................................... 20
H.3.. Analysis and consideration.............................................................................................. 21

I.... Question 3: Treatment of claims falling within Questions 1 and 2................................. 21

I.1.... The Administrators’ submissions................................................................................... 21
I.2.... The Contradictors’ submissions...................................................................................... 21
I.3.... Analysis and consideration.............................................................................................. 21

J.... Question 4: Claims based on deposit of AUD...................................................................... 21

J.1.... The Administrators’ submissions................................................................................... 22
J.1.1.... Status of customer deposits of AUD fiat............................................................ 22
J.1.2.... Representations made by FTX............................................................................. 23
J.1.3.... Possible claims available to customers............................................................... 25

J.2.... Digital Surge’s submissions............................................................................................. 26
J.2.1.... The contractual arrangements between Australian customers, FTX Express and FTX Aust.......................................................................................................................... 26
J.2.2.... The conversion of AUD fiat into stablecoins..................................................... 27
J.2.3.... Where was the “debt” held?................................................................................ 29
J.2.4.... Moneys held by FTX Aust.................................................................................... 30
J.2.5.... Debtor–creditor relationship................................................................................ 30
J.2.6.... Unjust enrichment................................................................................................. 31
J.2.6.1...... Mistake.................................................................................................. 32
J.2.6.2...... Total failure of consideration............................................................. 32

J.2.7.... Rescission for misrepresentation......................................................................... 33

J.3.... Ebonex and Ms Chen’s submissions............................................................................... 33
J.4.... Ms Hong’s submissions.................................................................................................... 34
J.6.... The Administrators’ submissions in reply..................................................................... 34
J.6.1.... Conversion of AUD fiat to stablecoins............................................................... 34
J.6.2.... Debtor–creditor relationship................................................................................ 35
J.6.3.... Unjust enrichment................................................................................................. 36
J.6.4.... Rescission for misrepresentation......................................................................... 37

J.7.... Analysis and Consideration............................................................................................. 37
J.7.1.... Conversion of AUD fiat to stablecoins............................................................... 37
J.7.2.... Status of customer deposits.................................................................................. 38
J.7.3.... Representations made by FTX............................................................................. 38
J.7.4.... Were FTX Express and FTX Aust acting as principals, or as agents of FTX Trading?.................................................................................................................................. 39
J.7.5.... Where was the “debt” held?................................................................................ 40
J.7.8.... Moneys held by FTX Aust.................................................................................... 40
J.7.9.... Debtor–creditor relationship................................................................................ 40
J.7.10.. Unjust enrichment................................................................................................. 42
J.7.10.1.... Mistake.................................................................................................. 43
J.7.10.2.... Total failure of consideration............................................................. 43

J.7.11.. Rescission................................................................................................................ 43
J.7.12.. Conclusion as to Question 4................................................................................. 44

K.. Question 5: Treatment of claims falling within question 4............................................... 44

K.1... The Administrators’ submissions................................................................................... 44
K.2... Digital Surge’s submissions............................................................................................. 44
K.2.1.. Proposed form of order........................................................................................ 44
K.2.2.. Conforming with the Chapter 11 bankruptcy proceedings............................ 45
K.2.3.. Size of the class of creditors................................................................................. 46

K.3... Other Contradictors’ submissions................................................................................... 46
K.4... The Administrators’ submissions in reply..................................................................... 46
K.4.1.. Conformity with the Chapter 11 proceedings................................................... 46
K.4.2.. Size of the class of creditors................................................................................. 47

K.5... Analysis and Consideration............................................................................................. 47
K.5.1.. Conformity with the Chapter 11 proceedings................................................... 47
K.5.2.. Size of the class of creditors................................................................................. 48
K.5.3 Conclusion regarding Question 5......................................................................... 48

L... Question 6: Claims based on unfulfilled requests to withdraw AUD............................ 48

L.1... The Administrators’ submissions................................................................................... 49
L.2... Digital Surge’s submissions............................................................................................. 51
L.2.1... Is it necessary for customers to have made a withdrawal request prior to the Appointment Time for them to be treated as creditors of FTX Aust or FTX Express?.................................................................................................................................. 52
L.2.2... Should customers who made a withdrawal request other than via the FTX.com platform prior to the Appointment Time, which was not met, be treated as creditors of FTX Aust or FTX Express?............................................................................... 53
L.2.3... Should customers who were dissuaded from making a withdrawal request in the period leading up to the Appointment Time by reason of the conduct of FTX Trading and/or FTX Aust and the availability of the FTX.com platform be treated as creditors of FTX Aust or FTX Express?............................................................................... 54
L.2.3.1.... Misrepresentation................................................................................ 54
L.2.3.2.... Access to the FTX.com platform........................................................ 56

L.3... Other Contradictors’ submissions................................................................................... 57
L.4... Administrators’ reply submissions................................................................................. 57
L.5... Analysis and consideration.............................................................................................. 58

M. Question 7: Treatment of claims falling within question 6............................................... 60

M.1.. The Administrators’ submissions................................................................................... 61
M.2.. Digital Surge’s submissions............................................................................................. 63
M.3.. Other Contradictors’ submissions................................................................................... 63
M.4.. Analysis and consideration.............................................................................................. 63

N.. Question 8: Claims based on deposit of fiat currency (other than in AUD).................. 63

N.1.. Administrators’ submissions........................................................................................... 64
N.2.. Contradictors’ submissions.............................................................................................. 65
N.3.. Analysis and consideration.............................................................................................. 65

O.. Question 9: Claims based on unfulfilled request to withdraw non-AUD fiat.............. 66

O.1.. The Administrators’ submissions................................................................................... 66
O.2.. Digital Surge’s submissions............................................................................................. 67
O.3.. Ebonex and Ms Chen........................................................................................................ 67
O.3.1.. Proper construction of the express terms........................................................... 68
O.3.1.1.... Applicable principles.......................................................................... 68
O.3.1.2.... Text, context and purpose.................................................................. 70
O.3.1.3.... Proper interpretation of the terms between FTX Express and the customers................................................................................................................ 75

O.3.2.. Implied term........................................................................................................... 77
O.3.4.. Estoppel by conduct.............................................................................................. 78

O.4.. Ms Hong’s submissions.................................................................................................... 82
O.5.. Administrators’ reply submissions................................................................................. 87
O.5.1.. Construction of the terms..................................................................................... 87
O.5.1.1.... Relevance of the FTX Tripartite Deed.............................................. 87
O.5.1.2.... Post-contractual conduct.................................................................... 88
O.5.1.3.... Text, context and purpose.................................................................. 89

O.5.2.. Implied term........................................................................................................... 96
O.5.3.. Estoppel................................................................................................................... 96
O.5.3.1.... Relevant principles.............................................................................. 97
O.5.3.2.... Applying these principles.................................................................. 99

O.6.. Analysis and consideration............................................................................................ 101
O.6.1.. Did Australian customers withdrawing non-AUD fiat have a contract with FTX Express?................................................................................................................. 101
O.6.2.. Construction of the terms................................................................................... 106
O.6.3.. Implied term......................................................................................................... 108
O.6.4.. Estoppel................................................................................................................. 108
O.6.5.. Conclusion regarding Question 9.2.................................................................. 109

P... Question 10: Treatment of claims falling within Questions 8 and 9............................. 109

P.1... Administrators’ submissions......................................................................................... 109
P.2... Contradictors’ submissions............................................................................................ 109
P.3... Analysis and consideration............................................................................................ 110

Q.. Question 11: Claims based on “open” derivative trades.................................................. 110

Q.1.. Administrators’ submissions......................................................................................... 110
Q.2.. Contradictors’ submissions............................................................................................ 112
Q.3.. Ms Hong’s submissions.................................................................................................. 112
Q.3.1.. Contractual provisions relied upon by Ms Hong........................................... 113
Q.3.1.1.... What are perpetual futures contracts?........................................... 113
Q.3.1.2.... FTX Aust Terms................................................................................. 114

Q.3.2.. Ms Hong’s submissions in respect of how to treat ‘open’ derivatives positions 115

Q.4.. Administrators’ reply submissions............................................................................... 117
Q.5.. Analysis and consideration............................................................................................ 118

R.. Question 12: Claims based on “closed” derivative trades............................................... 120

R.1... Administrators’ submissions......................................................................................... 120
R.2... Contradictors’ submissions............................................................................................ 121
R.3... Analysis and consideration............................................................................................ 121

S... Question 13: Treatment of claims falling within Questions 11 and 12......................... 121

S.1.... Administrators’ submissions......................................................................................... 122
S.2.... Contradictors’ submissions............................................................................................ 122

S.3.... Ms Hong’s submissions.................................................................................................. 122
S.4.... Analysis and consideration............................................................................................ 123

T.. Question 14: Closing out “open” derivative contracts...................................................... 124

T.1... Administrators’ submissions......................................................................................... 125
T.2... Contradictors’ submissions............................................................................................ 126
T.3... Ms Hong’s submissions.................................................................................................. 126
T.4... Administrators’ reply submissions............................................................................... 127
T.5... Analysis and consideration............................................................................................ 127

U.. Question 15: Funds in FTX Express’ bank accounts.......................................................... 128

U.1... The Administrators’ submissions................................................................................. 129
U.2... Contradictors’ submissions............................................................................................ 129
U.3... Analysis and consideration............................................................................................ 130

V.. Question 16: Funds in FTX Aust’s bank accounts............................................................. 130

V.1... The Administrators’ submissions................................................................................. 130
V.2... The Contradictors’ submissions.................................................................................... 130
V.3... Analysis and consideration............................................................................................ 130

W. Question 17: Treatment of claims falling within questions 15 and 16.......................... 131

W.1.. The Administrators’ submissions................................................................................. 131
W.2.. The Contradictors’ submissions.................................................................................... 131
W.3.. Analysis and consideration............................................................................................ 131

X.. Questions 18 and 19: Other customer claims...................................................................... 132

X.1... The Administrators’ submissions................................................................................. 132
X.2... Digital Surge’s submissions........................................................................................... 132
X.3... Other Contradictors’ submissions................................................................................. 133
X.4... Analysis and consideration............................................................................................ 133

Y.. Questions 20 to 23 – additional questions........................................................................... 133

Y.1... Administrators’ position................................................................................................ 134
Y.2... Contradictors’ position................................................................................................... 134
Y.3... Analysis and consideration............................................................................................ 135

Z.. Conclusion................................................................................................................................. 135

ANNEXURE........................................................................................................................................ 1

HER HONOUR:

A Introduction

This decision concerns an application under s 90-15 of the Insolvency Practice Schedule (Corporations) (‘IPS’) being Schedule 2 of the Corporations Act 2001 (Cth) (‘the Act’) made by John Mouawad and Scott David Harry Langdon (together ‘the Administrators’) in their capacity as voluntary administrators of FTX Australia Pty Ltd (ACN 129 217 812) (‘FTX Aust’) and FTX Express Pty Ltd (ACN 657 907 894) (‘FTX Express’) (together ‘the Companies’). The Administrators seek directions in respect of how to treat customers of the Companies for the purposes of the administration, particularly in respect of voting entitlements for the second meeting of creditors, along with other relief. This will be explained in detail later.

The Companies form part of the FTX Group, a transnational corporate group that provided an exchange platform for the buying and selling of crypto-assets. FTX Aust was responsible for issuing “over the counter” trades in crypto-derivatives and other related instruments and is a wholly owned subsidiary of FTX Trading Limited (‘FTX Trading’). FTX Trading is the parent company of various national branches around the world and is incorporated and registered in the Caribbean islands of Antigua and Barbuda. FTX Express is a digital currency exchange that converted customer deposits of fiat currency into crypto assets and vice versa. FTX Express is a wholly owned subsidiary of FTX Aust.

Key to the FTX Group’s operations was an online trading platform hosted at (‘FTX.com’) which was owned and operated by FTX Trading. Through FTX.com, customers could hold and trade assets variously described as cryptocurrencies, digital currencies, virtual currencies, crypto-assets and digital assets (‘crypto-assets’).

On 11 and 14 November 2022, FTX Trading and 101 affiliated companies filed for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court in Delaware.

On 11 November 2022, the Companies’ directors resolved under s 436A of the Act to appoint the Administrators.

B Background
B.1 The FTX business

Set out below is an explanation of how the FTX.com platform worked and the role of various entities within the FTX Group, including the Companies. There is some dispute about some elements of this, which will be dealt with in detail later, however it is necessary to describe in broad terms how it worked so that the issues and discussion can be understood.

The Companies’ operations concerned Australian-based customers of the FTX.com trading platform. Before FTX filed for bankruptcy, FTX.com provided most of the services available to Australian FTX customers, such as:

(a) sending existing crypto-assets to their account;

(b) converting fiat currency into crypto-assets;

(c) trading in crypto-assets;

(d) trading in derivative products;

(e) converting crypto-assets into fiat currency; and

(f) transferring crypto-assets from FTX.com to elsewhere.

The trading functions of FTX.com were performed by FTX Trading and did not involve FTX Express or FTX Aust. FTX Aust was authorised to provide financial product advice and deal in derivatives to retail and wholesale clients, and conducted a business providing margin foreign exchange trading to wholesale and retail clients. However, FTX Aust did not operate its own website, trading platform or exchange. Its customers used the FTX.com platform, which showed the value of the customer’s position in any “over the counter” derivative trades with FTX Aust and the value of their collateral. Neither FTX Aust or FTX Express ever held crypto-assets, whether for or on behalf of customers or at all. Instead, these crypto-assets were held by FTX Trading. Although customers each had separate accounts on the FTX.com platform (each, an ‘Account’), FTX Trading did not hold customers’ crypto-assets separately from other customers. Instead, customers’ crypto-assets were held in “omnibus” crypto-wallets along with the crypto-assets of other customers.

Customers depositing AUD fiat currency did so via FTX Express, who then converted it to crypto-assets held on the FTX.com platform.[1] When customers deposited AUD fiat, no funds were transferred from FTX Express to FTX Trading.
[1]This is a matter of some contention, and will be dealt with later.

Customers wanting to make a withdrawal in fiat currency could select for it to be made in USD (the default) or by converting to another fiat currency such as AUD. If a customer wanted to withdraw fiat currency other than in AUD (eg, USD), the payment was processed through a U.S. bank account held by another entity in the FTX Group. Neither FTX Express or FTX Aust were involved in such transactions.[2] Where customers requested withdrawals in AUD, no funds were transferred from FTX Trading to FTX Express. Instead, the funds paid to the customer came from bank accounts held in the name of FTX Express.
[2]Whether FTX Express was involved in such transactions is a matter of some contention, and will be dealt with later.

The dealings of Australian-based customers with accounts on the FTX.com platform were governed by the following agreements:[3]
[3]There were multiple versions of the terms described in (a) and (c) below, however the parties agreed on which versions apply in respect of the issues before the Court, as will be explained later.

(a) FTX Trading’s “FTX Terms of Service” (‘FTX Trading Terms’), which customers were required to accept when creating an account on FTX.com;

(b) FTX Express’ “FTX Express DCE Terms of Use”, which took effect after 10 September 2022 (‘FTX Express Terms’), which were available to customers on the FTX.com website; and

(c) the “FTX Australia Terms of Service” (‘FTX Aust Terms’), which came into effect when customers used the services of FTX Aust through FTX.com.

There was also a “Tripartite Agreement” dated 10 September 2022 between FTX Trading, FTX Express, and FTX Aust (‘FTX Tripartite Agreement’) that provided (amongst other things) for FTX Aust to enter “back-to-back” trades with FTX Trading to hedge against any loss arising from its exposure to derivatives.

Shortly after the Chapter 11 proceedings commenced, access to FTX.com was cut off and has not been reinstated. At the time the Administrators were appointed on at 11:05am on 11 November 2022 (‘Appointment Time’),[4] the Companies had a total of 24,656 customers (13,294 of FTX Express and 11,362 of FTX Aust). The total value recorded (crypto-assets or fiat currency) in the Companies’ customer accounts on the FTX.com platform was AUD218.56 million (AUD186.58 million for FTX Aust customers and AUD31.97 million for FTX Express customers).
[4]I understand that this is in Australian Eastern Daylight Savings Time.

At the Appointment Time, 747 customers (411 of FTX Aust and 336 of FTX Express) had sought to convert crypto-assets to AUD and withdraw the AUD, but which withdrawals had not yet been processed. The total amount sought to be withdrawn was AUD28.84 million (AUD15.21 million by FTX Aust customers; AUD13.63 million by FTX Express customers).

According to the Administrators, funds have since been recovered totalling:

(a) AUD39,311,480.31 in cash held in bank accounts in the name of FTX Express; and

(b) AUD2,731,466.56 in cash held in bank accounts of FTX Aust.

The Administrators categorise Australian FTX customers according to the customers’ dealings with the Companies. These categories are:

(a) Australian customers who still held crypto-assets in their FTX.com account at the Appointment Time;

(b) Australian customers who still held AUD stablecoin in their FTX.com account at the Appointment Time;

(c) Australian customers who had requested a withdrawal in USD or other non-AUD fiat currency prior to the Appointment Time; and

(d) Australian customers who had requested a withdrawal in AUD fiat currency prior to the Appointment Time.

B.2 Procedural history

This proceeding was commenced by the Administrators by way of originating process on 7 December 2022, by which they sought an extension of the convening period.

On 4 September 2023, the Administrators filed an application under s 90-15 of the IPS and under the inherent jurisdiction of the Court (‘interlocutory process’).

On 5 September 2023, the Administrators caused an email to be sent to all known customers of the Companies for whom they have an email address, providing a link to a page on the Administrators’ website containing copies of:

(a) an update to creditors dated 5 September 2023 (‘September update’);

(b) the interlocutory process; and

(c) the affidavit of John Mouawad sworn on 4 September 2023 in support of the interlocutory process.

In the September update, the Administrators:

(a) provided an update on the administrations of the Companies;

(b) explained the relief the Administrators seek under the interlocutory process and the consequences for customers of the Companies if the relief is granted; and

(c) explained that customers who want to be heard (or oppose the relief sought) will have the opportunity to do so.

On 7 September 2023 I made orders requiring that any person who wished to be heard on or to oppose any of the relief sought in the interlocutory process must give the Administrators – by no later than 4pm on 28 September 2023 – a written notice that identifies:

(a) the aspect(s) of the relief the person wishes to be heard on or to oppose;

(b) for each such aspect, the grounds on which the person wishes to be heard or oppose the relief.

On 13 October 2023 I made orders granting leave for:

(a) Ebonex Australia Pty Ltd (ACN 649 668 011) (‘Ebonex’) and Xiaohua Chen (‘Ms Chen’) to be heard in the proceeding in opposition to the relief sought in paragraph 6(e) of the Administrators’ interlocutory process;

(b) Digital Surge Pty Ltd (‘Digital Surge’) to be heard in the proceeding in opposition to the relief sought in one or more of paragraphs 6(a), (b) and (c) of the interlocutory process and otherwise in relation to the relief sought in paragraphs 3, 5 and 7 of the interlocutory process.

(c) Ni Hong (‘Ms Hong’) to be heard in the proceeding, in opposition to the relief sought in paragraph 6(a), (e), (f), (g) and 8 of the interlocutory process.

(d) Kevin Nguyen (‘Mr Nguyen’) to be heard in this proceeding.

I also made orders:

(a) for the filing and serving of any affidavit material and submissions by the Administrators; by Ebonex, Ms Chen, Digital Surge and Ms Hong (together, ‘Contradictors’); and by Mr Nguyen; and

(b) requiring the lawyers for the Administrators and the Contradictors to confer about the issues to be determined at the hearing of the interlocutory process and for the Administrators to then file and serve a document setting out:

(i) a list of the issues as agreed (‘List of Issues’); and

(ii) any further or other issues that any of the Administrators and the Contradictors contend ought also be determined.

B.3 FTX Trading’s application for leave to be heard

At the hearing of the application, counsel for FTX Trading sought leave to be heard (without being made a party) under r 2.13 of the Supreme Court (Corporations) Rules 2023 (Vic) on the basis that FTX Trading:

(a) had been working closely with the Administrators, supported the Administrators’ application, and agreed with their written submissions, save to the extent that it is submitted that claims lie against FTX Trading, as any claims against FTX Trading are properly to be determined under the U.S. proceeding; and

(b) may be able to raise certain matters for consideration.

In support of its application to be heard, FTX Trading listed the following as matters that it may be able to raise:

(a) Any party who held assets on the FTX.com exchange will have the opportunity to seek to prove its claim in the U.S. proceeding.

(b) Proofs of those claims will be dealt with in the U.S. proceeding and under the supervision of the U.S. court.

(c) Questions concerning any rights which such parties might have against FTX Trading or its assets are properly dealt with in the U.S. proceeding.

On 29 November 2023, I made orders granting FTX Trading leave under r 2.13 to be heard on the Administrators’ application, without being made a party to the proceeding:

(a) to answer questions from the Court; and

(b) to respond to particular submissions made by the plaintiffs or any of the Contradictors, subject to the Court first allowing responses on each such submission.

B.4 Material relied upon by the parties

The Administrators rely on the affidavits of:

(a) John Mouawad sworn on 4 September 2023 (‘1^st Mouawad affidavit’), 6 September 2023 (‘2^nd Mouawad affidavit’); 12 October 2023 (‘3^rd Mouawad affidavit’); 23 October 2023 (‘4^th Mouawad affidavit’) and 17 November 2023 (‘5^th Mouawad affidavit’); and

(b) Zhongyi Xu sworn on 19 October 2023 (‘Xu affidavit’).

On behalf of the persons granted leave to be heard, the following documents have been filed:

(a) Affidavit of Mr Nguyen affirmed on 30 October 2023 (‘Nguyen affidavit’);

(b) Two affidavits of Ms Chen affirmed on 7 November 2023 (‘1^st Chen affidavit’) and 5 December 2023 (‘2^nd Chen affidavit’);

(c) Two affidavits of Joshua Lehman, chief technology officer and co-founder of Digital Surge, affirmed on 2 November 2023 (‘1^st Lehman affidavit’) and 24 November 2023 (‘2^nd Lehman affidavit’);

(d) Affidavit of Jenny Wei, chief operating officer of Ebonex, affirmed on 9 November 2023 (‘Wei affidavit’); and

(e) Statement of facts agreed between the Administrators and Ms Hong (‘Hong Agreed Facts’).

The parties also rely on:

(a) the Administrators’ Outline of Submissions filed on 21 November 2023 (‘Administrators’ Submissions’);

(b) Outline of Submissions of Digital Surge (‘Digital Surge Submissions’);

(c) Outline of Submissions for Ms Hong (‘Hong Submissions’);

(d) Written Outline of Submissions of Ebonex and Ms Chen (‘Ebonex/Chen Submissions’);

(e) FTX Trading’s Outline in Support of Application to be Heard (‘FTX Application’);

(f) FTX Trading’s Written Outline of Closing Submissions (‘FTX Submissions’); and

(g) The Administrators’ outline of submissions in reply (‘Administrators’ Reply Submissions’).

Apart from filing the Nguyen affidavit, Mr Nguyen played no further role in the application. He did not appear at the hearing and he made no written submissions.

B.5 Relief sought by the Administrators

The interlocutory process concerns:

(a) how the Administrators should treat money they have recovered from bank accounts held in the name of the Companies;

(b) whether the Administrators should admit certain persons, who claim to be creditors of one or both of the Companies, to vote at the second meetings of the Companies’ creditors, currently scheduled to be convened by 12 March 2024; and

(c) other consequential relief, as will be explained.

The Administrators seek various orders under s 90-15 of the IPS, including that:

(a) the Administrators are justified and acting reasonably in treating as an asset of either FTX Express or FTX Aus monies held in the bank accounts described at paragraphs 94 and 178 of the 1st Mouawad affidavit;[5]
[5]Interlocutory process, [1]-[2].

(b) the Administrators are justified in admitting as a creditor of FTX Express or FTX Aust (as the case may be) a person who was a customer of FTX Express and/or FTX Aust and who asserts a debt or claim based on the circumstance that the person had requested, prior to the Administrators’ appointment as the voluntary administrators of FTX Express and FTX Aust, a withdrawal of fiat currency in AUD from the FTX.com platform, which request had not been fulfilled at the Appointment Time;[6]
[6]Interlocutory process, [3].

(c) the Administrators are justified in not admitting as creditors of FTX Express or FTX Aust (as the case may be) a person who was an Australian customer of FTX Express and/or FTX Aust to the extent the person’s debt or claim is based – without more – on any of the following circumstances:[7]

[7]Interlocutory process, [6].

(iii) the person holds or had held crypto-assets on the FTX.com platform (whether for the purpose of trading them or as collateral for the purpose of trading in derivative products with FTX Aust);

(iv) the person had transferred crypto-assets that were held on the FTX.com platform at the Appointment Time;

(v) the person had deposited AUD with FTX Express (or one of its predecessors providing digital currency exchange services) and, (following conversion into stablecoin or otherwise), the person purchased crypto-assets via the person’s account on the FTX.com platform;

(vi) the person had deposited USD with a banking partner of FTX Trading or its affiliates that was credited into the person’s account on the FTX.com platform;

(vii) the person had requested, prior to the Administrators’ appointment, a withdrawal of fiat currency in USD or other non-AUD fiat from the FTX.com platform, which request had not been fulfilled at the Appointment Time;

(viii) the person had entered a derivative trade or position with FTX Aust, which trade or position had not closed at the Appointment Time; and

(ix)the person had entered a derivative trade or position with FTX Aust which had closed before the Administrators’ appointment, but the person had not made a withdrawal request from the FTX.com platform before the Administrators’ appointment.

C The Contradictors
C.1 Digital Surge

Digital Surge was established in July 2017 and operates a digital currency exchange (‘DCE’) registered with AUSTRAC. Digital Surge used a variety of external cryptocurrency exchange platforms to provide its customers with a range of cryptocurrency trading opportunities. In October 2022, Digital Surge opened an account on FTX.com and began trading in crypto-assets and crypto derivatives.

To fund its trading, Digital Surge deposited 4,001,000 AUD in fiat currency via FTX Express into its FTX.com Account from an external bank account, in two separate deposits on 31 October 2023 and 3 November 2023.

By the time FTX collapsed in November 2022, more than half of Digital Surge’s crypto-assets were held on the FTX trading platform. Without access to FTX.com, Digital Surge was forced to suspend trading on its platform and was placed under administration on 8 December 2022. At this time, Digital Surge’s account on FTX.com still held:

(a) 3,601,852.76 in AUD fiat currency or AUD stablecoin (whether or not the AUD balance displayed on FTX.com represented fiat currency or stablecoin is a point of contention for Digital Surge that it addresses in its submissions); and

(b) 22,304,928.00 USD worth of crypto-assets;

making Digital Surge the largest potential creditor of FTX Express and/or FTX Aust.

At the time of writing, Digital Surge has two AUD fiat withdrawal requests outstanding:

(a) AUD50,000 requested on 9 November 2022, at 4:04pm; and

(b) AUD3,551,852.76 requested on 11 November 2022, at 4:16pm (after the Appointment Time).

Digital Surge seeks an order that the Administrators admit as creditors of FTX Express and/or FTX Aust customers of FTX Express and/or FTX Aust who deposited AUD fiat currency with FTX Express, to the extent that they had a positive AUD fiat balance in their favour at the Appointment Time, whether or not those customers had made a withdrawal request at the Appointment Time.

C.2 Ebonex and Ms Chen

Ebonex was established in 2021 and operates a DCE through an app available for download on mobile devices. The mobile app allows customers to buy, sell and trade cryptocurrency. Ebonex also operates an “over the counter” desk for trades exceeding 25,000 AUD in value and which offers lower transaction fees than the mobile app.

Ebonex registered an account and started trading on FTX.com on or about 16 December 2021. Ebonex used its FTX.com account to deposit cryptocurrency and fiat currency; hold cryptocurrency; buy and sell cryptocurrency; hold ‘futures’ positions; and withdraw cryptocurrency and fiat currency.

Ebonex had three bank accounts set-up to receive fiat currency withdrawals from its FTX account:

(a) a Signet Bank USD currency account;

(b) an ANZ Bank AUD account; and

(c) a Zepto AUD account.

Ms Chen registered an account and started trading on FTX.com on or about 25 March 2022. Ms Chen opened her account with FTX.com for her own personal investment purposes, and her activities on the platform included receiving deposits of cryptocurrency, trading cryptocurrency and making withdrawals in fiat currency.

Ms Chen had two bank accounts set-up to receive fiat currency withdrawals from her FTX account:

(a) a Westpac USD currency account; and

(b) a Bank of China (Hong Kong) multi-currency account.

During their time as customers of FTX.com, both Ebonex and Ms Chen made numerous requests for withdrawals of fiat currency —in both AUD and USD — into bank accounts nominated by them during the withdrawal process. Except for the withdrawals described below, which have not been satisfied, these withdrawal requests were satisfied.

On 8 and 9 November 2022, Ebonex requested withdrawals in USD totalling USD1,683,370.28 into its Signet Account, which have not been satisfied. On 11 November 2022, Ms Chen requested withdrawals in USD totalling USD650,000, which have not been satisfied.

C.3 Ms Hong

Ms Hong was, at all relevant times, ordinarily resident in Australia. She held an Account on the FTX.com platform which was opened on 20 November 2021.

As at the Appointment Time,

(a) Ms Hong’s Account held digital assets with a total value of USD60,591.62, comprising:

(x) USD53.343.02, which was the subject of a withdrawal request made at 3:54 AEDT on 10 November 2022;

(xi)Various crypto-assets and USD totalling USD7,248.60.

(b) Ms Hong’s Account had six open positions in crypto-derivatives, all of which were perpetual futures contracts.

Prior to the Appointment Time:

(a) Ms Hong had deposited both fiat currency in SGN (Singapore) and USD, and crypto-assets into her Account;

(b) Ms Hong had withdrawn both USD fiat and crypto-assets.

After the Appointment Time, Ms Hong:

(a) Cancelled the withdrawal request referred to in paragraph 46(a)(i) above at 15:48 AEDT on 11 November 2022;

(b) Made a withdrawal request of USD56,246.24 from her Account on the platform at 18:45 AEDT on 11 November 2022;

(c) Received an email confirmation that FTX had received that second withdrawal request.

D Relevant law

Section 90-15 of the IPS relevantly provides as follows:

(1) The Court may make such orders as it thinks fit in relation to the external administration of a company.
(2)The Court may exercise the power under subsection (1):
(a) on its own initiative, during proceedings before the Court; or
(b) on application under section 90-20.

(3) Without limiting subsection (1), those orders may include any one or more of the following:
(a) an order determining any question arising in the external administration of the company;
(b) an order that a person cease to be the external administrator of the company;
(c) an order that another registered liquidator be appointed as the external administrator of the company;
(d) an order in relation to the costs of an action (including court action) taken by the external administrator of the company or another person in relation to the external administration of the company;
(e) an order in relation to any loss that the company has sustained because of a breach of duty by the external administrator;
(f) an order in relation to remuneration, including an order requiring a person to repay to a company, or the creditors of a company, remuneration paid to the person as external administrator of the company.

(4) Without limiting the matters which the Court may take into account when making orders, the Court may take into account:
(a) whether the liquidator has faithfully performed, or is faithfully performing, the liquidator's duties; and
(b) whether an action or failure to act by the liquidator is in compliance with this Act and the Insolvency Practice Rules; and
(c) whether an action or failure to act by the liquidator is in compliance with an order of the Court; and
(d) whether the company or any other person has suffered, or is likely to suffer, loss or damage because of an action or failure to act by the liquidator; and
(e) the seriousness of the consequences of any action or failure to act by the liquidator, including the effect of that action or failure to act on public confidence in registered liquidators as a group.

It was common ground that the ambit of s 90-15 of the IPS extends to the determination of substantive rights. However, it was also common ground that the Administrators were not seeking the determination of substantive rights in their interlocutory process but rather how they were to treat particular classes of customers in the conduct of the administration, particularly in respect of voting entitlements at the second creditors’ meeting. Accordingly, that is the approach I have taken: the findings here go no further than that, acknowledging the Administrators’ point that there is a certain gravitational pull arising from this decision.

E FTX Trading’s submissions

FTX Trading submits that any findings of the Court ought not extend to a determination of, or finding concerning, the rights of any person or class against FTX Trading or any of the property of FTX Trading. In summary:

(a) The Ch 11 Proceedings impose a worldwide stay on pre-petition claims against FTX Trading and its property. Such claims will be dealt with in FTX Trading’s Ch 11 Proceeding.

(b) In this proceeding, no party seeks orders against FTX Trading or its property, and it is unnecessary for the Court to determine the rights of any person(s) against FTX Trading in order to decide the interlocutory process.

(c) Common law principles and s 581 of the Act call for the Court to afford comity to the Ch 11 Proceedings when exercising its discretion in the present proceeding.

While many of the submissions, particularly those of the Administrators, were to the effect that certain customers’ claims do not lie against the Companies as those claims lie against FTX Trading, the Administrators were not seeking positive findings against FTX Trading in that regard.

I accept FTX Trading’s submissions. Where I have made findings that certain customers do not have claims against either or both of the Companies, that is not because I have found that their claims lie against FTX Trading. Rather, it is because they do not have claims against either of the Companies, but that does not mean that they do not have claims against others, including against FTX Trading.

F Issues raised by the Administrators’ application

As noted above, prior to the hearing I made orders that the Administrators and Contradictors confer and provide the List of Issues. This was provided prior to the hearing in draft and was in the form of a series of questions. At the end of the second day of hearing and prior to the Administrators’ Reply Submissions, I asked the parties to finalise the List of Issues and set out in columns the positions of the Administrators and the Contradictors regarding each question. The final List of Issues, along with a column for my answers, is set out in the annexure to these reasons.

It is convenient to deal with the application by considering each of the questions in the List of Issues. The Administrators’ Submissions addressed each question, whereas the Contradictors did not structure their submissions in that way. I have therefore set out their submissions where relevant to one of the questions, noting that some submissions relate to more than one question. Where they do, they have been considered for all relevant questions regardless of where in the below reasons those submissions are summarised.

G Question 1: Claims based on assets held on FTX.com platform

Question 1 provides as follows:

Is the fact that an Australian-domiciled person had an account on the FTX.com platform, into which crypto-assets had been transferred that were still held in the account at the Appointment Time, sufficient to make the person a creditor of:
1.1 FTX Express?
1.2 FTX Aust?

G.1 The Administrators’ submissions

The Administrators submit that both the facts and contractual arrangements make clear that the crypto-assets held in customer accounts on the FTX.com platform were held by FTX Trading, not by FTX Express or FTX Aust. In particular:

(a) Clause 4 of Schedule 13 of the FTX Trading Terms[8] states that “FTX Australia does not hold any client property” and “it is only FTX Trading that will ever hold your Digital Assets”;

(b) Clause 5 of the FTX Aust Terms[9] states that “At no time does FTX Australia accept any money or Digital Assets or any property from you” and that customers’ deposits to acquire crypto-assets are “processed by FTX Express” and “unless withdrawn, will be stored in your digital wallet . . . held by FTX Trading”.

(c) Clause 3.6 of the FTX Express Terms[10] confirms that confirmed that FTX Express did not deal with crypto-assets by stating that “All payments to us must be received and paid in Australian dollars. We do not allow any depositing or withdrawal of Digital Currencies.”

[8]There were three versions of the FTX Trading Terms, the most recent of which, version three dated 13 May 2022, was accepted by all as the version applicable for this application. A copy of that is at CB 251 to CB 312. There were two versions of Schedule 13, which was the schedule to the FTX Trading Terms specifically applicable to Australian customers, the applicable version of which was dated 18 September 2022 and is included in the applicable version of the FTX Trading Terms.

[9]There were two versions of the FTX Aust Terms, the most recent of which applied from 19 September 2022 and was accepted by all as the version applicable for this application. A copy of that is at CB 542 to CB 580.

[10]There was only one version of the FTX Express Terms, a copy of which is at CB 481 to CB 491.

The Administrators submit that the facts are consistent with these contractual provisions, as neither FTX Aust nor FTX Express held, recovered or transferred crypto-assets. As such, insofar as customers’ claims are based on the value of crypto-assets and other assets held in their accounts on FTX.com, those claims lie against FTX Trading, not the Companies.

The Administrators submit that this conclusion is supported by the proposed treatment of such customers under the draft plan of reorganisation filed in the Chapter 11 proceedings, which provides that:

All customers of FTX.com will constitute a single class, regardless of the type of token or product held and will have a claim in an amount equal to the USD value of their customer entitlements on FTX.com at the petition time…

During oral submission, counsel for the Administrators confirmed that the term “crypto-assets” in Question 1 did not include cryptocurrency derivatives.

The Administrators submit that Questions 1.1 and 1.2 should therefore be answered as ‘No’.

G.2 The Contradictors’ submissions

None of the Contradictors took an opposing view on this question.

Digital Surge says that Questions 1.1 and 1.2 should be answered ‘No’.

Ebonex and Ms Chen take no position in relation to Questions 1.1 and 1.2.

Ms Hong takes no position in relation to Questions 1.1 and 1.2.

G.3 Analysis and consideration

I accept the Administrators’ submissions on this question. It is clear from the suite of contractual arrangements that crypto-assets were not held by FTX Aust or FTX Express. The answer to Questions 1.1 and 1.2 is therefore ’No’.

HQuestion 2: Claims based on assets held on FTX.com platform after AUD deposit

Question 2 provides as follows:

Is the fact that an Australian-domiciled person had an account on the FTX.com platform, in which account crypto-assets were held (at the Appointment Time) that had been purchased following a deposit of AUD fiat by or on behalf of the person, sufficient to make the customer a creditor of:
2.1 FTX Express?
2.2 FTX Aust?

H.1 The Administrators’ submissions

The Administrators submit that — for the same reasons outlined in response to Question 1 — claims based on the value of assets held in customers’ accounts on the FTX.com platform lie against FTX Trading, not FTX Aust or FTX Express. It makes no difference that the assets were purchased with fiat currency deposited by or on behalf of the relevant customer. The Administrators further submit that no claim could lie against FTX Aust because it was not involved — whether as a matter of fact or obligation — in the process by which AUD fiat was deposited and “converted” into crypto-assets.

H.2 The Contradictors’ submissions

Digital Surge says that Questions 2.1 and 2.2 should be answered ’No’.

Ebonex and Ms Chen take no position in relation to Questions 2.1 and 2.2.

Ms Hong takes no position in relation to Questions 2.1 and 2.2.

H.3 Analysis and consideration

I accept the Administrators’ submissions on this question. It is clear from the suite of contractual arrangements that crypto-assets were not held by FTX Aust or FTX Express. The fact that they were purchased following a deposit of AUD fiat is of no relevance or consequence. The answer to Questions 2.1 and 2.2 is therefore ’No’.

I Question 3: Treatment of claims falling within Questions 1 and 2

Question 3 provides as follows:

If the answer to any of questions 1.1, 1.2, 2.1, or 2.2 is “yes”:
3.1How should the Administrators treat the claims of the person?
3.2Specifically, insofar as such a claim arises from holding crypto-assets (that is, it does not arise from (a) an “open” derivative contract to which the person was party as at the Appointment Time or (b) any withdrawal requests the person made), for what amount (if any) should the person be admitted to vote at the second meeting of creditors of FTX Express and/or FTX Aust (as the case may be) in respect of the claim?

I.1 The Administrators’ submissions

The Administrators submit that question 3 will only require consideration if any of questions 1.1, 1.2, 2.1 or 2.2 is answered ’Yes’. Because all those questions should be answered ’No’, the Administrators submit that it is unnecessary to answer Questions 3.1 and 3.2.

I.2 The Contradictors’ submissions

The Contradictors agree with the Administrators that it is unnecessary to answer questions 3.1 and 3.2.

I.3 Analysis and consideration

I accept the Administrators’ submissions on this question. If the answer to questions 1.1, 1.2, 2.1 or 2.2 is ‘No’ then it is unnecessary to answer question 3.

J Question 4: Claims based on deposit of AUD

Question 4 provides as follows:

Where a customer of FTX Aust or FTX Express:
4.1deposited AUD fiat with FTX Express (or one of its predecessors as a provider of digital currency exchange services) for use on the FTX.com platform; and
4.2the amount of the deposit was credited to the customers’ account on the FTX.com platform (following conversion into stablecoin or otherwise),

is the fact that the customer deposited the AUD fiat sufficient to make the customer a creditor of:
4.3 FTX Aust?
4.4 FTX Express?

J.1 The Administrators’ submissions
J.1.1 Status of customer deposits of AUD fiat

A key consideration for Question 4 is the status of an Australian customer’s deposit of AUD fiat once it has been processed and credited on the FTX.com platform. During oral submissions, counsel for the Administrators provided the example of a customer who deposits 100 AUD of fiat currency into their Account on FTX.com and subsequently uses 75% of that deposit to purchase crypto-assets. The Administrators submit that in such a situation there is no leftover AUD fiat in the customer’s account. The deposit is converted to AUD stablecoin before being credited to the customer’s account. Therefore, what remains in the customer’s account after part of the deposit is used to purchase crypto-assets is AUD stablecoin.

According to the Administrators, once the value of a customer’s fiat deposit with FTX Express was credited to the customer’s Account on FTX.com, the customer had received that value. In other words, the customer received what he or she had bargained for – that is the conversion of fiat currency to a form of digital, electronic or other form of money that is then available to the customer on FTX.com for the buying, selling or trading of crypto-assets.

Counsel for the Administrators provided the counterfactual scenario of a fiat deposit made with FTX Express but which is then never credited to the customer’s Account on FTX.com because, for example, the company is placed into voluntary administration before that occurs. In this situation, Mr Moller SC submitted, the customer would be owed a debt by FTX Express, based on either a total failure of consideration or a Quistclose-type trust.

J.1.2 Representations made by FTX

According to the Administrators’ written submissions, the focus of question 4 is whether Australian customers who had deposited AUD fiat that was credited to their accounts on FTX.com — but not necessarily used to purchase crypto-assets — might have claims arising from statements that, once credited to their accounts, the amount deposited would be held in stablecoins.

The Administrators submit that FTX Trading and FTX Aust made representations and/or were subject to obligations that:

(a) where customers did not immediately purchase crypto-assets, their fiat would be converted to stablecoin; and

(b) where customers sold their crypto-assets without making a withdrawal, the balance of their account would be held in stablecoin (if sold for AUD).

Relevantly:

(a) Schedule 13 of the FTX Trading Terms provided that (emphasis added by the Administrators):

If you send fiat currency to the DCE provider, the DCE provider shall convert your fiat currency to stablecoins automatically by default. FTX Trading does not hold client money or E-Money for clients of FTX Australia. Any account balances shown in fiat currency are provided for convenience only. All such balances are held by FTX Trading in stablecoins.

(b) Clause 5 of the FTX Aust Terms provided that:

In the event that you fail to convert Fiat Currency to your chosen Digital Asset, the DCE Provider will convert Fiat Currency to stablecoins on a 1:1 basis automatically by default.

(c) Clause 4.2(e) of the FTX Tripartite Agreement provided that:

In the event that the Customer sends fiat currency to the DCE, the DCE shall convert such fiat currency to stablecoins on a 1:1 basis automatically and by default.

(d) Section 3.13 of FTX Aust’s product disclosure statement dated 19 September 2022 (‘September PDS’)[11] stated that:

Fiat equivalent balances may be shown in your Digital Wallet with FTX Trading for convenience only. These represent stablecoins held by FTX Trading. Neither FTX Australia or FTX Trading hold Fiat Currency for clients and Fiat equivalent balances are only accessible as stablecoins. You can convert stablecoins to Fiat Currency and withdraw from your Account via the DCE Provider, subject to the relevant terms and conditions of the DCE Provider.

[11]A copy of the September PDS is at CB 630 to CB 677.

However, notwithstanding that several FTX documents indicated that fiat balances would be held in stablecoins, the Administrators say that this process does not appear to have actually occurred. Stablecoin is a type of crypto-asset that seeks to minimise volatility in value by being pegged to a fiat currency (such as USD or AUD) or a commodity (such as gold). According to the Administrators’ investigations:[12]
[12]1st Mouawad Affidavit, 159.

(a) Prior to 26 July 2022, no AUD stablecoin for FTX customers existed on any blockchain.

(b) On 26 July 2022, 33.8 million stablecoin tokens were “minted” or “created for internal use” within the FTX Group and were not able to be traded on the open market. That amount purportedly reflected the balance of AUD that FTX Trading held on that date (ie one stablecoin token for every AUD).

(c) After the tokens were minted, no adjustments were ever made to the number of tokens to reflect changes in the amount of AUD following transactions by customers (ie withdrawals or further deposits) and no transfers from the initial wallet holding the stablecoins are shown on the blockchain record.

(d) Neither FTX Express nor FTX Trading appear to have maintained any records reconciling the amount of AUD deposited by a customer with the number of stablecoins held for that customer against the tokens that were minted.

J.1.3 Possible claims available to customers

Based on the above information regarding stablecoin, the Administrators submit that customers may have claims against FTX Trading, FTX Aust or FTX Express for breach of contract and/or breach of statutory prohibitions against misleading and deceptive conduct. However, the Administrators submit that it would be difficult to quantify such claims and that customers would need to prove that they have suffered loss or damage as a result of the failure to convert AUD fiat deposits into stablecoin. Loss or damage would be difficult to prove, given that customers’ fiat deposits — despite not actually being converted to stablecoin — were credited to their Accounts on FTX.com and available to be used there.

The Administrators submit that customers might have a “no transaction” type claim, in that “but for” the representations pertaining to stablecoin conversions, they would not have deposited funds at all. However, it is unlikely that customers decided to transact on FTX.com based on a representation about the particular form in which their assets were to be held on the platform. Thus, according to the Administrators, there appears to be no merit in claims for breach of contract or misleading and deceptive conduct arising from the failure to convert AUD fiat deposits to stablecoin.

The Administrators submit that the answer to question 4 is complicated further by customers' entitlement to make claims in the Chapter 11 proceedings because:

(a) the revised Draft Plan of Reorganisation in the Chapter 11 proceeding contains an “anti-double dip” mechanism that provides not only that the plan administrator be satisfied that claimants have not requested or received compensation in other judicial or administrative proceedings but also that the plan administrator can require the claimants to assign any such claims to the plan administrator; and

(b) under the rule against double-proofs or the doctrine of election, any given customer’s claims against FTX Aust (if permitted at all) may need to be reduced by the amount of their recovery in the Chapter 11 proceedings.

J.2 Digital Surge’s submissions

Digital Surge’s submissions rest on the premise that a positive AUD balance on the customer’s FTX.com Account represents an AUD fiat balance. In summary, Digital Surge submits that customers of FTX Aust and/or FTX Express who deposited AUD fiat currency prior to the Appointment Time and who had a positive AUD balance in their Account on the FTX.com platform as at the Appointment Time should be treated as creditors of FTX Aust and/or FTX Express regardless of whether they had made a fiat withdrawal request prior to the Appointment Time. Digital Surge submits that Questions 4.3 and 4.4 should be answered as ‘Yes’.

J.2.1The contractual arrangements between Australian customers, FTX Express and FTX Aust

Digital Surge submits that Australian customers dealt with each of FTX Express and FTX Aust as principal, not as agent for FTX Trading. For example, clause 8 of the FTX Tripartite Agreement states that “The parties are not principal and agent, partners, trustee and beneficiary, or employer and employee.” Furthermore, clauses 4.2(f) and (g) provided that for buy and sell orders for digital currency, FTX Express was deemed to have entered into a corresponding buy or sell order with FTX Trading. Digital Surge submits that this indicates that FTX Express and FTX Aust were dealing with Australian clients as principals by entering into “back-to-back” arrangements on materially the same terms with FTX Trading, rather than as agents for FTX Trading.

Digital Surge submits that clause 38.6 of the FTX Trading Terms confirms this conclusion as it disclaims any partnership, association, joint venture, fiduciary relationship or other cooperative entity between the parties for any purpose whatsoever.

During oral submissions, Counsel for Digital Surge submitted that the FTX Express Terms contain no provision stating that FTX Express contracts with Australian customers as agents for FTX Trading and not as principal. Counsel submitted that, in these circumstances, FTX Trading is merely a custodian over the wallets of Australian customers. It is not the principal Australian customers are dealing with as far as AUD balances are concerned.

Digital Surge submits that the FTX Australia Terms, FTX Express Terms and FTX Trading Terms also made it clear that:

(a) FTX Aust dealt with Australian clients as principal in the trade of over-the-counter cryptocurrency derivative products;

(b) FTX Express was under obligations to convert fiat AUD into digital assets, failing which they would be automatically converted to stablecoins by default;

(c) FTX Express received substantial customer deposits, in exchange for which customers received digital assets when they were credited to the digital wallet that was operated by FTX Trading, and such assets were to be held by FTX Trading;

(d) FTX Trading would not hold fiat balances on behalf of Australian customers;

(e) FTX Trading could only hold digital assets and the representation was made to clients that it would hold stablecoins representing AUD fiat balances in their digital wallets; and

(f) only FTX Express, and not FTX Aust or FTX Trading, was entitled to hold AUD fiat on behalf of clients or as client money.

J.2.2 The conversion of AUD fiat into stablecoins

Digital Surge submits that the conversion of AUD fiat to stablecoins that was promised in the user documentation did not take place, and no AUD fiat deposits left Australia. In this regard, Digital Surge adopts the Administrators’ submissions at paragraph 84 above which detail how no AUD stablecoin were converted from AUD fiat currency after an initial 33.8 million AUD stablecoin tokens were minted on 26 July 2022. In its written submissions, Digital Surge emphasises the Administrators’ submission that there is no evidence that FTX Trading allocated AUD into a separate bank account to “back” the AUD stablecoin.

Digital Surge submits that it deposited and withdrew no fiat currency from FTX.com other than AUD and that the balance displayed on its user account was denominated in AUD, and not in an AUD stablecoin.

During oral submissions, counsel for Digital Surge took me to screenshots of a customer account balance as displayed on the FTX.com trading platform. Under a column titled “Coin” were various currencies such as “USD (USD)”, “Bitcoin (BTC)”, “USD Tether (USDT)”, “Litecoin (LTC)”, Dogecoin (DOGE)”, etc. Counsel drew the Court’s attention to the fact that the “destination” for a withdrawal of stablecoin or cryptocurrency as it appeared in a customer’s Account was a long string of alpha numeric characters representing a blockchain address. Meanwhile, the destination description for a withdrawal of “USD (fiat)” was simply “ftx”. Counsel submitted that although it could not be known, on the evidence available, exactly what this destination description meant, it was clearly not a blockchain address. Counsel then submitted that while USD fiat was clearly distinguished from USD stablecoin on FTX.com, there was no such delineation of AUD fiat and AUD stablecoin. Instead, only “AUD” appeared in a customer’s account balance under the column titled “Coin” and, like USD fiat, the withdrawal destination contained a narrative description rather than a blockchain address, in this case “Bank transfer”. Counsel for Digital Surge therefore invited the Court to conclude that no AUD stablecoin was held in customer Accounts on FTX.com and that, instead, the account balance of any customer who had made a deposit in AUD fiat was at all times held on FTX.com in AUD fiat.

Digital Surge submits that there is no evidence that any AUD fiat deposits received by FTX Express or FTX Aust ever left Australia. Despite inquiries made by the Administrators, no evidence has been adduced of any conversion of AUD fiat to AUD stablecoins after 26 July 2022. As such, Digital Surge submits that AUD deposits likely remained with FTX Express and that, while AUD balances were shown to customers on FTX.com, there is no evidence of corresponding AUD (or other assets) being held by FTX Trading.

During oral submissions, counsel for the Administrators submitted that if Australian customers who deposited AUD fiat were not credited with AUD stablecoin in their account on FTX.com, they may have instead received E-Money. However, as counsel for Digital Surge points out, clause 1 of Schedule 13 to the FTX Trading Terms clearly states that “FTX Trading does not hold client money or E-Money for clients of FTX Australia” and that “All such balances are held by FTX Trading in stablecoins”. Therefore, Digital Surge submits, FTX Trading could not have been holding AUD deposits as E-Money of FTX.com.[13] Counsel for Digital Surge complained submitted that it had “bargained for a stablecoin” and instead received “a worthless credit on a broken-down exchange”.
[13]I note at this point that Digital Surge ignores the statement that FTX Trading does not hold client money.

J.2.3 Where was the “debt” held?

During oral submissions, Counsel for Digital Surge took me to a summary spreadsheet prepared by the Administrators entitled “FTX customer balances” that summarises the data held by FTX Trading that the Administrators reviewed and rebuilt in relation to each Australian customer’s position as at the Appointment Time. This spreadsheet shows that Digital Surge is “owed” — as a sum of its outstanding withdrawal request as well as the balance of its Account — a total of AUD 34,336,771.90, said to be by FTX Aust. Counsel submitted that it is instructive that FTX Trading used the term “account balance” to describe the 34,336,771.90 AUD owed to Digital Surge, as it indicates that FTX maintained a balance, albeit through FTX Trading, and that Digital Surge had a current account with them.

J.2.4 Moneys held by FTX Aust

During oral submissions, Counsel for Digital Surge suggested that a question remains as to why over AUD2.5M was found in FTX Aust accounts when there is no evidence as to how it got there. Digital assets were posted with FTX Trading as collateral for the derivatives that FTX Aust facilitated, while fiat deposits and withdrawals went through FTX Express. As such, there is no discernible reason why FTX Aust retained so much fiat currency in its accounts.

J.2.5 Debtor–creditor relationship

Digital Surge submits that the proposed requirement as to the timing of withdrawal requests would shut out persons who were already creditors as at the Appointment Time, contrary to authority. It submits that the true nature of the relationship between FTX Express and FTX Aust on the one hand and Australian customers on the other, in respect of any AUD fiat deposits the FTX entities may have accepted, was that of debtor and creditor.

It submits that in the banking context, a credit balance reflecting deposits into an account places the banker and client in a debtor–creditor relationship from the time of the deposit. This type of debt does not become due and payable until a demand is made for it by the client. However, Digital Surge submits that the Administrators’ proposed orders proceed on a very different basis, namely that because the “debt” represented by the customer’s positive AUD balance does not become due and payable until demand is made for it, it is only upon a withdrawal request being made that the debtor–creditor relationship arises in the first place.

Digital Surge submits that the Court should reject such arguments as contrary to authority because:

(a) the aim of the liquidation provisions is to deal comprehensively with all the debts and liabilities of the insolvent company in order that the company’s affairs can be fully wound up;

(b) the wording of s 553(1) of the Act indicates an intention to define provable claims very widely; and

(c) a claimant is properly admitted as a contingent creditor of a company if it can be shown that the claimant had an arguable, potential or possible claim against the company for a debt, un-liquidated damages or otherwise as at the relevant date.

J.2.6 Unjust enrichment

Digital Surge submits that by allowing FTX Express and/or FTX Aust to retain the AUD deposits of customers who deposited AUD fiat currency by not admitting such customers as creditors, FTX Express and/or FTX Aust would be unjustly enriched.

Digital Surge submits that unjust enrichment occurs where there is an enrichment, obtained at the plaintiff’s expense, in circumstances where a principled ground of recovery exists which would make it unjust for the defendant to retain the enrichment, and no defence is available.

Digital Surge submits that FTX Express was enriched at the expense of Digital Surge by Digital Surge depositing with FTX Express the deposits totalling 4,001,000 AUD and that, therefore two of the three factors are present.

Furthermore, FTX Express or FTX Aust would be unjustly enriched if permitted to retain such balances, on one of three alternative bases or “unjust factors”:

(a) the AUD fiat balances held by FTX Express represent money paid under a mistake, the mistake being the mistaken belief that conversion of AUD to stablecoins would take place and those stablecoins would be held by FTX Trading in a digital wallet;

(b) the AUD fiat balances represented the payment by customers of consideration in circumstances where there was a total failure of consideration in respect of the conversion, being a severable part of the contractual promises of FTX Express; or

(c) the AUD fiat balances held by FTX Express represented consideration retained in circumstances where the customer would be justified in seeking rescission of the contract for misrepresentation at general law.

J.2.6.1 Mistake

Digital Surge submits that a mistake of any type can ground recovery in restitution provided that the mistake caused the payment:

(a) The onus rests with the plaintiff to prove both the existence of the mistake and causation.

(b) A less stringent test of causation will apply where the mistake was induced by a fraudulent misrepresentation by the defendant.

Digital Surge submits that a sufficient causal nexus exists between the FTX Express Terms, the FTX Aust Terms and the deposits made by Australian customers of AUD fiat, in that such terms were a cause, if not the primary cause, of Australian customers making such deposits.

J.2.6.2 Total failure of consideration

Digital Surge submits that a failure of the consideration for a payment occurs where the basis or reason for the payment being made has failed to materialise. The qualifying factor giving rise to a prima facie obligation on the part of the enriched party to make restitution is a total failure of the consideration or of a severable part of the consideration.

During oral submissions, counsel for Digital Surge submitted that it is clear from clause 1 of Schedule 13 to the FTX Trading Terms that FTX Trading doesn’t hold client money or eMoney but instead only holds customer balances in stablecoins. Counsel submitted that what was promised to Australian customers was conversion of their fiat deposits into stablecoin However, according to the evidence collected by the Administrators, that is not what was provided. No conversion of AUD fiat to AUD stablecoin occurred after 33.8 million stablecoins were minted on 26 July 2022 for internal use and were not able to be traded on the open market. Therefore, Digital Surge submits, there has been a total failure of consideration.

Digital Surge submits that:

(a) the obligation to convert AUD deposits into stablecoin by default was severable from other obligations of FTX Express and FTX Aust;

(b) the basis for its payments to FTX Express — ie the conversion of AUD fiat to stablecoin — failed to materialise because the conversion never occurred; and

(c) the so-called stablecoins, if they existed, could not be traded, were not backed by real assets held by FTX Trading — such as AUD or USD fiat balances — and are now valueless.

During oral submission, counsel for Digital Surge submitted that all Digital Surge received was “a notional stablecoin only or a stablecoin in name only”.

J.2.7 Rescission for misrepresentation

Digital Surge submits that rescission at common law is available to the innocent party where a contract has been procured by a fraudulent misrepresentation. Rescission in equity is also available as a remedy of the court to the innocent party who has been induced to enter a contract through a non-fraudulent or innocent misrepresentation. It is not necessary for the plaintiff to establish loss or damage as a prerequisite to rescission in either of the above senses.

J.3 Ebonex and Ms Chen’s submissions

Ebonex and Ms Chen take no position in relation to Question 4. However, during oral submissions, counsel for Ebonex and Ms Chen submitted that it was not clear to Ebonex or Ms Chen how any amount left over in Australian customers’ accounts on FTX.com could be anything other than stablecoin.

J.4 Ms Hong’s submissions

Ms Hong takes no position in relation to Question 4.

J.6 The Administrators’ submissions in reply
J.6.1 Conversion of AUD fiat to stablecoins

The Administrators submit that Digital Surge has failed to identify how they might have a claim against FTX Aust for the failure by FTX Express to convert deposits of AUD fiat to stablecoins.

The Administrators submit that Digital Surge’s argument concerning the failure by FTX Express to convert deposits of AUD fiat to stablecoins is not supported by the evidence. Specifically, the evidence shows (and Digital Surge appears to accept) that Digital Surge’s deposits of AUD were credited to — and accessible from — its Account on FTX.com and used by Digital Surge to trade. The Administrators submit that none of this would have been possible if a customer’s deposit of AUD fiat remained with FTX Express (as Digital Surge contends).

The Administrators submit that the likelihood AUD fiat deposits were not converted into stablecoins does not mean that such deposits were not converted to and held in some other form of digital asset, such as a virtual currency or other form of electronic money.

In response to Digital Surge’s submission that all it received in return for its deposits of AUD fiat was “a worthless credit on a broken-down exchange”, the Administrators submit that:

(a) stablecoins can be issued for the purpose of being traded on the open market or for internal use within an organisation’s systems, and nothing in the FTX terms applicable to Australian customers required AUD stablecoins to be tradeable or for them to be objectively worth anything; and

(b) the value of Digital Surge’s deposits, once credited to its Account on FTX.com, allowed Digital Surge to:

(xii) use the credit to trade on FTX.com;

(xiii) withdraw from the credit in AUD;

(xiv) trade in derivative products; and

(xv) engage in margin lending.

J.6.2 Debtor–creditor relationship

The Administrators submit that Digital Surge’s contention that there is a debtor-creditor relationship between FTX Express/FTX Aust and its customers cannot be sustained for the reasons that follow.

First, the relationship between FTX Aust and customers who deposited AUD fiat cannot be categorised as one of debtor-creditor because FTX Aust was not involved in receiving customer deposits or in the conversion process.

Second, the relationship between FTX Express customers who deposited AUD fiat cannot be categorised as one of debtor-creditor because:

(a) the relevant contractual terms were expressed in terms of “buying” and “selling” digital assets and, thus, the relationship is one of buyer-seller; and

(b) FTX Express’ only role was to convert (by buying or selling digital assets) fiat currency into digital assets and vice versa. Once the relevant sale transaction had occurred, there is no factual basis — and no legal or commercial reason —for imputing a debtor-creditor relationship between FTX Express and the customer.

Third, if one to were accept (if only for the sake of argument) that the relationship is one of debtor-creditor (akin to a relationship between banker and customer), that relationship is between the customer and FTX Trading. But even in this scenario, Digital Surge accepts that there is no debt until a demand has been made. Here, there has been no such demand.

J.6.3 Unjust enrichment

The Administrators submit that a claim in restitution cannot be made where an existing, enforceable contract still governs the right sought to be enforced by the claim.[14] Because the contracts between Digital Surge and FTX Trading, FTX Express and FTX Aust remain on foot — with Digital Surge having taken no steps to terminate these contracts — its claims for restitution or unjust enrichment cannot arise.
[14]Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221, 256; see also Baltic Shipping Co v Dillon (1993) 176 CLR 344 at 355-6 (Mason CJ), 385 (Gaudron J); Foran v Wight (1989) 168 CLR 385, 413 (Mason CJ), 432 (Brennan J); Lumbers v W Cook Builders Pty Ltd (in liq) (2008) 232 CLR 635.

On the topic of mistake, the Administrators submit that the authorities require that the relevant mistake must have been causative of the payment,[15] but that Digital Surge has failed to identify what the relevant mistake was.
[15]Citigroup Pty Ltd v National Australia Bank Ltd [2012] NSWCA 381, [54].

On the topic of failure of consideration, the Administrators submit that the evidence shows that Digital Surge’s Account on FTX.com not only received the relevant credit of AUD fiat but also that Digital Surge traded on the platform with those funds. Accordingly, there can be no failure of consideration, as Digital Surge got what it bargained for.

Lastly, the Administrators submit that there is no basis for Digital Surge’s contention that a claim in restitution gives rise to a proprietary remedy because:

(a) the issue of equitable proprietary remedies to restitutionary claims is controversial;

(b) Digital Surge has not explained how a resulting trust, constructive trust, or equitable lien might arise in the present circumstances; and

(c) in circumstances where Digital Surge has had the benefit of the conversion, it is difficult to see how such an equitable proprietary claim could arise, either on an institutional or a remedial basis.

J.6.4 Rescission for misrepresentation

The Administrators also submit that Digital Surge is unable to rescind the relevant contracts for misrepresentation because rescission is not available to a party that is not able to make restitutio in integrum, that is, to restore the parties to their antecedent position. Here, Digital Surge cannot make restitutio in integrum because, as explained above, it has had the benefit of conversion and traded on the FTX.com platform.

J.7 Analysis and Consideration
J.7.1 Conversion of AUD fiat to stablecoins

Under Schedule 13 of the FTX Trading Terms, FTX Express — as the nominated DCE for deposits and withdrawals of AUD — was to convert AUD fiat deposits to crypto-assets, and to AUD stablecoins automatically by default. This obligation was reflected in clause 4.2(e) of the FTX Tripartite Agreement as well as clause 5 of the FTX Aust Terms. However, I accept the submissions of both the Administrators and Digital Surge that this did not occur. Although 33.8 million AUD stablecoin tokens were “minted” on 26 July 2022, it is unclear what these were intended to be used for by the FTX Group. I also accept there is no evidence that FTX Trading allocated any amount of AUD to “back” the AUD stablecoin.

Digital Surge submits that because USD fiat was clearly distinguished from USD stablecoin on FTX.com, but that there was no such differentiation of AUD fiat and AUD stablecoin, the Court should conclude that no AUD stablecoin was held in customer Accounts on FTX.com and that, instead, the Account balance of any customer who had made a deposit in AUD fiat was at all times held on FTX.com in AUD fiat. However, this conclusion is not supported by the evidence, on the balance of probabilities.

It is clear from the suite of contractual documents as well as the practices described by Mr Mouawad that a customer’s Account on FTX.com did not hold AUD fiat currency. Rather, it recorded a balance of value, calculated in AUD fiat, available to the customer for use on the platform or able to be withdrawn.

Furthermore, I do not consider that anything turns on whether a customer who had made a deposit of AUD fiat was credited with AUD fiat or AUD stablecoin on FTX.com. The evidence shows, as the Administrators submit, that Digital Surge’s deposits of AUD were credited to — and accessible from — its Account on FTX.com and used by Digital Surge to trade. This would not have been possible if the value of the AUD fiat deposits remained with FTX Express.

J.7.2 Status of customer deposits

The Administrators submit that once a customer’s AUD fiat deposit with FTX Express was credited to their account on FTX.com, the customer had received equivalent value in the form a form of digital, electronic or other form of non-fiat currency that was then available to be used to buy, sell or trade crypto-assets. I accept these submissions.

Clauses 4.2(f) and (g) of the FTX Tripartite Agreement provided that when buy and sell orders were made through FTX Express, FTX Express was deemed to have entered into a corresponding buy or sell order with FTX Trading. The fact that a corresponding amount was credited to a customer’s Account following a deposit of AUD fiat indicates that this process occurred at least in some way, shape or form. As such, it would appear that Australian customers received what they bargained for even if FTX Express failed to convert their AUD fiat deposits into AUD stablecoin. To my mind, a customer who had made a deposit of AUD fiat would only have a claim against FTX Express if the deposit was not converted and was never credited to their Account on the FTX.com platform.

J.7.3 Representations made by FTX

The Administrators submit that customers may have claims against FTX Trading, FTX Aust or FTX Express for breach of contract and/or breach of statutory prohibitions against misleading and deceptive conduct arising from the failure by FTX Express to convert deposits of AUD fiat to AUD stablecoin. However, none of the Contradictors press such a claim. Digital Surge makes various submissions on the topic of misrepresentations made by FTX Aust, to the effect that Digital Surge was dissuaded from making further withdrawal requests for AUD fiat in the lead up to the collapse of FTX. However, to my mind, these submissions are better addressed under Question 6, which relates to claims based on unfulfilled requests to withdraw AUD fiat.

J.7.4Were FTX Express and FTX Aust acting as principals, or as agents of FTX Trading?

Digital Surge submits that Australian customers dealt with FTX Express and FTX Aust as principal entities and not as agents of FTX Trading. I accept that this is likely the case. Clause 8 of the FTX Tripartite Agreement makes it clear that the parties to the agreement are not acting as principal and agent. Clause 38.6 of the FTX Trading Terms confirms this disclaimer and the FTX Express Terms contain no provision indicating otherwise.

However, the conclusion I was invited to draw from Digital Surge’s submissions was that FTX Trading was merely acting as a custodian over the wallets of Australian customers. I have difficulty accepting these submissions. An Australian cryptocurrency investor became a customer of the FTX Group by first opening an account on FTX.com. The buying, selling and trading of crypto-assets then took place exclusively on FTX.com. As such, Australian customers were primarily customers of FTX Trading as the operator of FTX.com. Furthermore, there were many ways for Australian customers to trade on FTX.com that would never have involved them interacting with either FTX Aust or FTX Express. For example, crypto-assets could be moved across from accounts on other trading platforms and subsequently used for trading purposes. Likewise, deposits could be made by Australian customers in currencies other than AUD, a process that would not have involved FTX Express. It seems clear to me that FTX Express was merely acting as a service provider for the processing of deposits and withdrawals of AUD fiat.[16] I do not consider that anything turns on whether an agent-principal relationship did or did not exist between FTX Trading and FTX Aust or FTX Express existed in order for FTX Express to perform this role.
[16]This is subject to Question 9, which concerns withdrawals of fiat currency in other than AUD.

J.7.5 Where was the “debt” held?

Digital Surge submits that data held by FTX Trading shows that Digital Surge is owed a total of AUD34,336,771.90 by FTX Aust.[17] It was unclear what I was expected to make of this submission. However, I do not consider the summary spreadsheet prepared by the Administrators to be determinative of which entity owes a debt to Digital Surge. No other evidence was adduced to indicate that the AUD34,336,771.90 said to be owed to Digital Surge is owed by FTX Aust. Many of Digital Surge’s submissions did no differentiate between FTX Aust and FTX Express, and the Companies were sometimes referred to interchangeably.
[17]This amount comprises crypto-asses and approximately AUD 3.6m. It is not a fiat amount of AUD 34,336,771.90 and so it is difficult to see how it is said to be owed, and owed by FTX Aust.

J.7.8 Moneys held by FTX Aust

Digital Surge submits that a question remains as to why over AUD2.5M was found in FTX Aust accounts when there is no evidence as to how it got there. I am unsure what Digital Surge would have me make of these submissions. In circumstances where FTX Aust had employees and other commitments, it is hardly surprising that it would have its own bank accounts. There is no evidence to suggest that there is anything untoward in terms of FTX Aust having cash in its bank accounts. It does not assist the Court for such matters to be raised without a submission (based on evidence) as to what is sought to be made of it. In my view, nothing turns on Digital Surge’s submissions in this regard and I give them no weight.

J.7.9 Debtor–creditor relationship

Digital Surge submits that the true nature of the relationship between FTX Express / FTX Aust and Australian customers who had made deposits of AUD fiat was that of debtor and creditor. Digital Surge uses the analogy of a customer entering into a debtor-creditor relationship with their bank once they make a deposit into their bank account. These submissions are misconceived for the reasons that follow.

In terms of Digital Surge’s claim against FTX Aust, I accept the Administrators’ submissions that the relationship between FTX Aust and customers who had made deposits of AUD fiat cannot be categorised as one of debtor-creditor because FTX Aust was not involved in receiving customer deposits or in the conversion process.

In terms of Digital Surge’s claim against FTX Express, it cannot be ignored that AUD deposits made through FTX Express were subsequently credited to customers’ Accounts on FTX.com. None of the Contradictors have adduced evidence that any such deposits were not credited to the corresponding customer’s Account. FTX Express’ only role was to convert (by buying or selling digital assets) fiat currency into digital assets and vice versa. I accept the Administrators’ submissions in this regard. Once the deposit appeared in the customer’s Account on FTX.com, the contractual obligation of FTX Express to process the deposit was fulfilled. In this way, each and every deposit or withdrawal request can be seen as creating a separate contract between the customer and FTX Express. The obligation of FTX Express was then fulfilled once either the customer’s deposit was credited to their Account on FTX.com or their withdrawal request was deducted from their Account on FTX.com and credited to their chosen bank account.

Digital Surge submits that under an ordinary debtor-creditor relationship, a debt owed becomes due and payable once a demand for repayment is made, but that the relationship exists as soon as the deposit is made. Digital Surge submits that the Administrators’ proposed orders depart from this in that a debtor-creditor relationship would only arise once a withdrawal request was made. Again, these submissions are misconceived. It was possible for customers on FTX.com to make a withdrawal of AUD without ever having deposited AUD through FTX Express in the first place. For example, customers could have deposited other fiat currencies through other DCEs, or they could have transferred crypto-asset into their FTX.com account from other trading platforms, before requesting a withdrawal of AUD fiat into a chosen bank account. In such circumstances, it could not be said that a debtor-creditor relationship existed between these customers and FTX Express prior to the withdrawal request. However, FTX Express would certainly have been obliged to process the AUD fiat withdrawal.

Digital Surge submits that the Court should deal comprehensively with all the debts and liabilities of the Companies and that provable claims should be defined widely. While I accept the authorities relied upon for these submissions, I do not believe that the submission go anywhere, at least in so far as they relate Digital Surge’s attempt to classify the relationship between FTX Express / FTX Aust and Australian customers who had made deposits of AUD fiat currency as that of debtor-creditor.

Much of Digital Surge’s submissions on this topic are based on an analogy with the banker-customer relationship. However, that relationship is not analogous with the relationship between FTX Express and its Australian customer. Customers deposited AUD fiat into FTX Express’ bank account for the provision of a service, that service being the conversion of AUD fiat into crypto-assets. That is nothing like a banker-customer relationship.

J.7.10 Unjust enrichment

Digital Surge submits that FTX Express and/or FTX Aust would be unjustly enriched if the Administrators allowed FTX Express and/or FTX Aust to retain the AUD deposits of customers who deposited AUD fiat currency by not admitting such customers as creditors. I do not accept these submissions. I will address, in turn, each of the three alternative bases or “unjust factors” that Digital Surge submits would result in FTX Express and/or FTX Aust being unjustly enriched.

However, it should first be noted that the assets of FTX Express or FTX Aust — after subtracting payments to creditors as well as the cost of the administration and/or liquidation — would pass to FTX Trading. These assets would then be subject to the Chapter 11 bankruptcy proceedings. As such, neither FTX Express or FTX Aust would be unjustly enriched. Instead, the assets would be recoverable from FTX Trading by creditors with a valid claim against that entity.

J.7.10.1 Mistake

Digital Surge submits that AUD fiat balances held by FTX Express were paid under the mistaken belief that they would be converted to AUD to stablecoins to be held by FTX Trading. However, I agree with the Administrators’ submission that Digital Surge has failed to identify what, if any, loss or damage flows from that, since customers clearly had the value of that deposit credited to their Account and available for use on the platform.

J.7.10.2 Total failure of consideration

Digital Surge submits that AUD fiat balances represented the payment by customers of consideration in circumstances where there was a total failure of consideration in respect of the conversion to AUD stablecoin. I do not accept these submissions. After opening an account with FTX.com, Australian customers wishing to buy and sell crypto-assets on the platform then made a deposit of AUD fiat. After making such a deposit through FTX Express, an equivalent value was credited to the customer’s Account on FTX.com. Customers received what they bargained for. If a total failure of consideration had occurred, customers of FTX.com who made a deposit of AUD fiat would not have been able to trade with those funds.

J.7.11 Rescission

Digital Surge submits that AUD fiat balances held by FTX Express represent consideration retained in circumstances where the customer would be justified in seeking rescission of the contract for misrepresentation. While I accept that there is no evidence that the deposits of AUD fiat were converted to stablecoin, what was credited to customers’ accounts on FTX.com was functionally the equivalent of what they bargained for. Therefore, I do not accept that Digital Surge could validly rescind the contract for misrepresentation.

J.7.12 Conclusion as to Question 4

It follows from the above analysis that I accept the Administrators’ submissions in respect of Question 4 and that I do not accept Digital Surge’s submissions. Accordingly, Questions 4.3 and 4.4 are each answered ‘No’.

K Question 5: Treatment of claims falling within question 4

Question 5 provides as follows:

If the answer to question 4.3 or 4.4 is “yes”:
5.1How should the Administrators treat the claim(s) of the customer?
5.2For what amount should the customer be admitted to vote at the second meeting of creditors of the relevant company?

K.1 The Administrators’ submissions

The Administrators submit that question 5 will only require consideration if either of questions 4.3 and 4.4 is answered ’Yes’. Because both those questions should be answered ’No’, the Administrators submit that it is unnecessary to answer questions 5.1 and 5.2.

K.2 Digital Surge’s submissions
K.2.1 Proposed form of order

Digital Surge submits that by reason of its position regarding Question 4, the Court should make orders (‘AUD Positive Balances Order’) to the effect that:

1.The applicants admit as creditors of [FTX Express] or [FTX Aust] customers of FTX Express and/or FTX Aust (as the case may be) who deposited AUD fiat currency with FTX Express and/or FTX Aust (as the case may be) prior to 11:05 am AEDT on [the Appointment Time] (‘AUD Depositors’), if they had a positive AUD balance as at the Appointment Time in their favour (‘AUD Positive Balance’), and whether or not those customers had made a withdrawal request at the Appointment Time via the ftx.com platform or otherwise.
2.The applicants admit the claim of an AUD Depositor as a claim against FTX Express (rather than FTX Aust), except to the extent that such claim can be demonstrated to relate exclusively to a liability of FTX Aust (for example, cash margin posted with FTX Aust, or a realised AUD profit on a derivative issued by FTX Aust and closed prior to the Appointment Time), notwithstanding that the customer may have been identified as a customer of FTX Aust in the spreadsheet at Supplementary Court Book pp. 4247–4731 (‘Exhibit JM-8’).
3.The applicants admit AUD Depositors to vote at the second meeting of the relevant Company in the amount of the relevant AUD Positive Balance.
4.The applicants administer the procedure for notifying and resolving claims (as mentioned in paragraph 4 of the Interlocutory Process), insofar as it applies to AUD Depositors, as follows:
(a)the applicants shall supplement the information contained in Exhibit JM-8 (or any substitute or update of that document) with a notice or list setting out each AUD Depositor’s AUD Positive Balance as at the Appointment Time, and identifying the source(s) of information relied on in calculating that balance;
(b)having regard to [paragraph 2 above], the applicants shall allocate the AUD Depositor’s claim to FTX Express, to FTX Aust, or partly to one and partly to another, and shall identify the basis on which that is done; and
(c)the procedure applicable to AUD Positive Balances shall otherwise be the same, with any necessary or convenient adjustments, as applies to other claims falling within [order(s) corresponding to paragraph 3 of the interlocutory process filed 4 September 2023].

5.It is declared that funds that the Administrators have recovered from bank accounts held by FTX Express or FTX Aust are assets of the respective Company, without prejudice to any valid proprietary claim of a customer of the respective Company relating to an AUD Positive Balance that may be upheld.

K.2.2 Conforming with the Chapter 11 bankruptcy proceedings

Digital Surge submits that treating depositors of AUD fiat with positive AUD fiat balances remaining as creditors of FTX Express and/or FTX Aust would be fully in line with the treatment of fiat currency account balances in the draft plan of reorganization in the Chapter 11 bankruptcy proceedings of FTX Trading.

In particular, the treatment of USD balances in the Illustrative Preference Scenarios defined in that plan show that full value is intended to be accorded in the valuation of claims to USD fiat account balances.[18]
[18]Exhibit JM-10 to the 5th Mouawad affidavit.

Digital Surge submits that it would be a common-sense approach to treat Australian customer balances in the same way as global customer balances.

K.2.3 Size of the class of creditors

Digital Surge submits that the size of the class of creditors sought to be shut out is likely large relative to those that would be admitted and that this is contrary to the policy of s 553(1) of the Act. Referring to the evidence of Mr Mouawad, Digital Surge highlights that 24,656 customers of the Companies have been identified yet only 747 of those customers have a pending AUD withdrawal request. Digital Surge submits that the practical effect of the Administrators’ proposed requirements as to the timing and method of withdrawal requests with regard to Australian customers with positive AUD account balances would be to substitute their local claim against a limited but clear pool of AUD fiat assets with an uncertain, foreign claim in the Chapter 11 Bankruptcy Proceedings, whose deadline has already passed.

During oral submissions, counsel for Digital Surge submitted that AUD deposits placed in an Australian company held in Australia in an Australian bank account should be returned to Australian investors. Counsel further submitted that to force Australian investors to go off to the U.S. Chapter 11 bankruptcy proceedings, with a much lower potential payout and much more complicated proceedings, would not be treating Australian investors fairly.

K.3 Other Contradictors’ submissions

Ebonex and Ms Chen, along with Ms Hong, agree with the Administrators that it is unnecessary to answer questions 5.1 and 5.2.

K.4 The Administrators’ submissions in reply
K.4.1 Conformity with the Chapter 11 proceedings

The Administrators rejects Digital Surge’s submissions that treating depositors of AUD fiat with a positive AUD fiat balance in their Account as creditors of FTX Express and/or FTX Aust would be in line with the treatment of fiat currency account balances in the draft plan of reorganization in the Chapter 11 bankruptcy proceedings of FTX Trading for the following reasons:

(a) the draft plan of reorganization filed in the Chapter 11 bankruptcy proceedings (‘draft reorganization plan’) remains a draft and is yet to be approved by creditors or the U.S. Bankruptcy Court;

(b) the draft reorganization plan provides that Australian customers who are not creditors of FTX Express or FTX Aust will be able to prove in the Chapter 11 bankruptcy proceeding; and

(c) it is difficult to understand how the treatment of USD balances in the draft reorganization plan advances matters.

K.4.2 Size of the class of creditors

The Administrators submit that the relative numbers of customers who will be affected by the Administrators’ position is irrelevant. Pursuant to s 553 of the Act, whether or not a person is a creditor of a company under external administration depends on whether the person has a debt payable by, or a claim against, the company in question. This question is answered by way of legal analysis, not by the number of persons involved.

K.5 Analysis and Consideration
K.5.1 Conformity with the Chapter 11 proceedings

I agree with the Administrators’ that it is difficult to understand how the treatment of USD balances in the draft reorganisation plan informs how the claims of Australian customers should be treated. FTX Express and FTX Aust, as companies based in Australia, are subject to Australian laws and their customers contracted with them for reasons that are different to people who were only customers of FTX Trading.

Furthermore, as the Administrators submit, the draft reorganization plan:

(a) remains a draft and is yet to be approved by creditors or the U.S. Bankruptcy Court; and

(b) would in any event allow Australian customers who are not creditors of FTX Express or FTX Aust to make a claim against the FTX Group in the Chapter 11 bankruptcy proceeding if they have claims against FTX Trading or other entities involved in that proceeding.

As such, I do not place much weight on Digital Surge’s submissions that treating depositors of AUD fiat with positive AUD fiat balances remaining as creditors of FTX Express and/or FTX Aust would conform with the U.S. Chapter 11 bankruptcy proceedings.

K.5.2 Size of the class of creditors

Pursuant to s 553(1) of the Act, in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company. As such, whether or not a customer of FTX Express and/or FTX Aust is a creditor of FTX Express and/or FTX Aust will depend on whether the customer has a debt payable by, or a claim against, FTX Express and/or FTX Aust. I accept the Administrators’ submission on this topic. The classification of FTX customers as creditors of FTX Express and/or FTX Aust must be determined by way of legal analysis, not by the number of persons involved.

During oral submissions, counsel for Digital Surge submitted that AUD fiat deposits placed in an Australian company held in Australia in an Australian bank account should be returned to Australian investors. I consider this submission to be little more than proselytizing and have afforded no weight to it.

K.5.3 Conclusion regarding Question 5

For these reasons, Questions 5.1 and 5.2 are answered ‘Unnecessary to answer’.

L Question 6: Claims based on unfulfilled requests to withdraw AUD

Question 6 provides as follows:

Where a customer of FTX Aust or FTX Express requested – prior to the Appointment Time – a withdrawal of fiat currency in AUD from the customer’s account on the FTX.com platform, which request had not been fulfilled at the Appointment Time, does the customer have a claim arising from the request against:
6.1 FTX Aust?
6.2 FTX Express?

L.1 The Administrators’ submissions

The Administrators submit that the following terms and conditions were relevant to withdrawal requests:

(a) Schedule 13 to the FTX Trading Terms provided:

If you are depositing fiat currency, or instructing the conversion of Digital Assets to fiat currency, the conversion of:
a) your deposit of fiat currency to Digital Assets; and
b) your withdrawal of Digital Assets to fiat currency,
will be processed by a third-party DCE provider. The name of the DCE provider is provided on the FTX Website at the time you enter into any transaction.
You agree that you only place orders to convert fiat currency to Digital Assets (and vice versa) with the DCE provider. You do not place orders with FTX Trading or FTX Australia for the conversion of fiat currency to Digital Assets or vice-versa.

(b) Clause 3.2 of the FTX Express Terms provided:

We will direct debit your bank account within a reasonable period following our sale of Digital Currency to you under your Standing Order.

(c) The FTX Tripartite Agreement relevantly provided:

(xvi) by clause 4.1:

The DCE will facilitate the conversion of fiat currency to Digital Currency and from Digital Currency to fiat currency for Customers (Transaction) using the Website in accordance with the requirements of the AML/CTF Laws.

(xvii) by clause 4.2(g):

For each Transaction involving a sell order for Digital Currency, the DCE:
(1) is deemed to have entered into a corresponding sell order with FTX Trading at the same price offered to the Customer for the Transaction (less any FTX fees); and
(2) to have directed FTX Trading to remove the Digital Currency provided by the Customer for conversion from the Customer’s Digital Wallet.

(d) Clause 5 of the FTX Aust Terms dealt withdrawals in fiat currency:

If you wish to make a withdrawal from your Digital Wallet into a Fiat Currency, the particular Digital Asset will be converted by the DCE Provider to the Fiat Currency after being withdrawn from your Digital Wallet.

The Administrators submit that from these provisions, it is apparent that, as of September 2022 (when the FTX Tripartite Agreement took effect):

(a) FTX Express (as the provider of DCE services) was responsible for the “conversion” of crypto-assets into AUD; and

(b) FTX Trading and FTX Aust had no role in that process.

The Administrators submit that once a customer made a request to withdraw AUD fiat from the customer’s account on the FTX.com platform, FTX Express became subject to an obligation to pay the amount requested to the customer. Because the obligation was to pay a sum certain, it gave rise to a debt. If the obligation had still not been performed at the Appointment Time, it subsisted. Accordingly, the customer is a creditor of FTX Express for the amount the subject of the withdrawal request. However, because FTX Aust had no role or responsibility – factual or legal – in the withdrawal process, no claim lies against it for unperformed withdrawal requests.

The Administrators submit that accordingly, question 6.1 should be answered ‘No’ and question 6.2 should be answered ‘Yes’.

L.2 Digital Surge’s submissions

Digital Surge submitted that both Questions 6.1 and 6.2 should be answered ‘Yes’. Even where Digital Surge’s answer to a question on this topic coincided with that of the Administrators’, its reasoning involved alternative and additional issues and so it is necessary to set this out in some detail.

Digital Surge submits that to accede to the Administrators’ position would be contrary to authority and would not be just and equitable for the following reasons:

(a) the proposed requirement as to time of making the withdrawal request would shut out persons who were already creditors as at the Appointment Time, contrary to authority;

(b) the proposed requirements as to the (i) timing and (ii) method of making the withdrawal request would not reflect the poor availability of the FTX Trading Platform in the lead-up to the collapse of FTX, and would not reflect common practices for communicating with crypto-asset exchanges;

(c) its effect would be to punish those who relied on misrepresentations of FTX as to its financial health and the safety of customer assets;

(d) the size of the class of creditors sought to be shut out is likely large relative to those that would be admitted.

Essentially, Digital Surge submitted that:

(a) It was not necessary for a customer to have made a withdrawal request prior to the Appointment Time for it to be treated as a creditor;

(b) A customer who made a withdrawal request prior to the Appointment Time by means other than the FTX.com platform should be treated as a creditor of FTX Aust and/or FTX Express;

(c) Further, Digital Surge asserted that it had been dissuaded from making a withdrawal request in the period leading up to the Appointment Time by reason of the conduct of FTX Trading and/or FTX Aust and the availability of the FTX.com platform which, as I apprehend it, means that it contends that it ought to be treated as having made a withdrawal request prior to the Appointment Time;

(d) In addition, Digital Surge submits that customers in these three situations or who had made a withdrawal request via the FTX.com platform prior to the Appointment Time should be treated as creditors of FTX Aust as well as FTX Express. This was said to be on the basis that while they are two different entities, they “work hand in glove”, they were essentially all mixed up together, and FTX Aust had AUD fiat bank accounts.[19] This submission was not further developed.

[19]T108.17-21, T113.2-19.

Below, I will summarise Digital Surge’s submissions on the first three of these in turn. In essence, Digital Surge submits that imposing the Administrators’ proposed requirements on the cut-off time (ie prior to the Appointment Time) and the method (ie via the FTX.com platform) of making fiat withdrawal requests would be contrary to authority and would not be just and equitable.

Digital Surge’s submission based on the number of creditors who may be shut out if the Administrators’ position is accepted are also relevant to Question 6.

L.2.1Is it necessary for customers to have made a withdrawal request prior to the Appointment Time for them to be treated as creditors of FTX Aust or FTX Express?

Leaving aside the issue raised by Digital Surge regarding stablecoin as dealt with in Question 4 above,[20] Digital Surge submits that if a customer had a positive AUD balance on the FTX.com platform as at the Appointment Time, then it should be treated as a creditor of FTX Aust or FTX Express on the basis that the relationship was a debtor-creditor one, albeit that the debt may not have been due and payable until a withdrawal request was made.
[20]I assume for these purposes that Digital Surge’s position regarding the stablecoin issue is also deployed in respect of Question 6.

Digital Surge’s submissions on this issue are set out in paragraphs 100 to 102 above, so that there is no need to repeat them here. I have mentioned it here, however, as it is relevant to Question 6 as well as to Question 4.

L.2.2Should customers who made a withdrawal request other than via the FTX.com platform prior to the Appointment Time, which was not met, be treated as creditors of FTX Aust or FTX Express?

Digital Surge submits that the proposed requirement that withdrawal requests have to have been made through the FTX platform ignores common practices surrounding crypto-asset exchanges, which allow for certain transactions to be effected through direct channels.

By way of example it says that it assigns high value customers with account managers, who can perform actions on behalf of that Digital Surge customer as and when requested. If a high value customer of Digital Surge sent an email, SMS or other form of communication to their Digital Surge account manager asking for a withdrawal to be processed, that account manager could do so without it needing to be formally requested via the Digital Surge website.[21]
[21]2^nd Lehman Affidavit, [17], CB 1754C.

Mr Lehman’s evidence is that in his experience, when using other DCEs such as Kraken and Binance, the directors of Digital Surge had the ability to directly interact with an account manager via email, SMS or other forms of communication to provide instructions to make withdrawals or undertake trades on Digital Surge’s behalf.[22]
[22]2^nd Lehman Affidavit, [18], CB 1754C.

The issue of the amount for which they should be admitted to vote at the creditors’ meeting of FTX Aust therefore does not arise.

As both Question 11 and Question 12 have been answered as ‘No’, I agree with the Administrators that the answers to Questions 13.1 and 13.2 are ‘Unnecessary to answer’.

T Question 14: Closing out “open” derivative contracts

Question 14 provides as follows:

Would the administrators be justified and acting reasonably in treating derivative contracts or positions to which FTX Aust was a party that were not closed at the Appointment Time as closed with effect from the Appointment Time?

T.1 Administrators’ submissions

The Administrators submit that it is not uncommon for external administrators to seek directions about dealing with open derivative positions. In some cases, they have sought directions about closing out the positions;[116] in others, about refraining from closing out;[117] and in others, about how to deal clients’ entitlements.[118] Often, they do so because of difficulties involved in assessing the value of open claims or because they are concerned that they will be criticised if they do – or do not – close out the positions.
[116]Eg, Re BBY Ltd (in liq) (No 3) [2018] NSWSC 1718 (‘Re BBY’).
[117]Eg, Re Kelly, Re Halifax Investment Services Pty Ltd (in liq) (No 8) (2020) 144 ACSR 292 (Gleeson J).
[118]See eg, Re MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 (Black J) (‘Re MF Global’), where Black J gave a direction that liquidators were justified in treating clients’ entitlements under by reference to valuations based on mark-to-market prices as at the appointment date.

The Administrators submit that the derivative contracts to which FTX Aust was party were only traded on the FTX.com platform. The operation of the platform was essential to the parties’ exercise of their rights under those contracts. Further, there are no separate contract notes or confirmations that set out the terms of the derivative contracts. Once the FTX.com platform was shut down, it became impossible not only to transact but even to monitor the parties’ respective positions: customers could not monitor the trades or transact; nor could FTX Aust, not even to determine whether the value of customers’ collateral in their accounts was sufficient to meet their margin requirements imposed on customers. In short, without access to the FTX.com platform, none of the parties can exercise their rights or perform their obligations under the derivative contracts.

Shortly stated, the Administrators submit that the contracts have been frustrated as a result of the cessation of the FTX.com platform and the only date which is reasonably practicable to determine the value of the positions is the Appointment Time.

The Administrators submit that the authorities suggest that the appropriate date for valuing such claims is the Appointment Time. In Re BBY Brereton J observed:[119]

In my view, as is uncontroversial, it would be preferable to use a consistent date, and the appointment date is the obvious candidate. However, in circumstances where it is not reasonably practicable to determine the value, at that date, of positions which remained open but were closed out subsequently, their value when closed-out is the best available – and a very reasonable – proxy for their value at the appointment date. Accordingly, the Liquidators would be justified in adopting their value when closed out, derived from the ASX reconciliation of Returned Collateral, as their value for the purpose of determining entitlements.

[119][2018] NSWSC 1718, [4].

The Administrators submit that therefore Question 14 should be answered ‘Yes’.

T.2 Contradictors’ submissions

Digital Surge, Ebonex and Ms Chen take no position on Question 14. Ms Hong is the only contradictor on this question. Accordingly, the submissions summarised below were made solely by Ms Hong.

T.3 Ms Hong’s submissions

In addition to the submissions summarised regarding Question 11, which submissions also apply to Question 14, Ms Hong also submits as follows.

Ms Hong submits that the insolvency of a party to an OTC derivative contract (or even the insolvency of another entity through whom services were being supplied by that party) is not properly characterised as an ‘unforeseen event’ capable of invoking the doctrine of frustration. Neither the contractual counterparty’s insolvency (or a cessation of part of its business activities as a result of a third party’s insolvency) are typically seen as an unforeseen or supervening event.[120]
[120]For example, see Ezishop.Net Ltd (in liq) v Veremu Pty Ltd [2003] NSWSC 156 at [62] affirmed in Veremu Pty Ltd v Ezishop.Net Ltd [2003] NSWCA 317, which concerned an agreement to subscribe for shares in a company known to be in serious financial difficulty and was held not frustrated by the company's subsequent insolvency.

Ms Hong submits that a risk of counterparty insolvency and a potential cessation of its business (whether by reason of the insolvency or otherwise) is, of course, an ever-present risk in commercial dealings. It is said that here, whilst the risk of insolvency is not specifically addressed in the September PDS, it is arguably inherent in the ‘Counterparty risk’[121] which refers to FTX Aust’s financial resources. It follows that this risk was not unforeseen.
[121]Identified at CB 636.

Ms Hong submits that the cases referred to by the Administrators in respect of Question 14 do not directly support an approach to close out derivative contracts which are otherwise open. It is said that both the observations of Justice Brereton in Re BBY and Justice Black in Re MF Global are concerned with determining the quantum of a creditor’s entitlement by the best evidence available.

Ms Hong submits that there is also no legislative or regulatory basis on which derivative contracts would close out upon the appointment of an administrator. Rather, to do so would, in circumstances where such an event was not identified in the September PDS, be contrary to the policy that a product disclosure statement identify all material information concerning a financial product. Such information would be required to be disclosed in a product disclosure statement under s 1013E of the Corporations Act and failure to do so would likely cause a breach of the AFSL.[122]
[122]Ms Hong notes for completeness that any ipso facto clause (that is, the granting to Ms Hong a contractual right in the event of administrators being appointed) in a derivatives contract could have been included and would not have fallen foul of the prohibition in s 451E of the Corporations Act: Corporations Regulations, Reg 5.3A.50(2)(g).

Accordingly, Ms Hong’s position is that Question 14 should be answered as ‘No’.

T.4 Administrators’ reply submissions

The Administrators’ submissions in reply regarding Question 11 (see paragraphs 420 to 424 above) also apply in respect of Question 14.

T.5 Analysis and consideration

I accept the Administrators’ submissions set out at paragraph 457 above. Whether or not this amounts to a frustration of the derivatives contracts between FTX Aust and its customers (as submitted by the Administrators) is unnecessary for me to decide. Those contracts do not have to be frustrated in the legal sense for me to conclude that the Administrators would be justified and acting reasonably in treating derivative trades or positions with FTX Aust customers which had not closed at the Appointment Time as closed with effect from that time.

It seems to me that in circumstances where these derivatives could only be traded on the FTX.com platform, which has been shut down, the only realistic course is to treat the derivative trades or positions as closed.

The question then is from when should the derivative trades or positions be treated as closed. The only sensible answer here is that it is the Appointment Time. That is because the situation here is the opposite of what Brereton J described in Re BBY. Here, it is not possible to determine the value of the open positions when closed out at some future date, for the reasons already mentioned. Rather, determining the value of the open positions as at the Appointment Time is possible, given what I have described in paragraphs 398 and 433 above about how the FTX.com platform updated every 30 seconds, especially updating the value of the customer’s position in any derivative trades. This also supports the conclusion that the derivative trades or positions open as at the Appointment Time should be treated as closed.

Accordingly, Question 14 is answered as ‘Yes’. This means, in effect, that customers falling within Question 14 would be treated in the same way as customers falling within Question 12.

U Question 15: Funds in FTX Express’ bank accounts

Question 15 provides as follows:

Are funds that the administrators have recovered from bank accounts held by FTX Express assets of that company?

U.1 The Administrators’ submissions

The Administrators have recovered AUD39,311,480.31 from accounts held in the name of FTX Express.[123] The Administrators submit that, without more, these recoveries represent assets of FTX Express.
[123]1st Mouawad affidavit, para 177.1.

The Administrators submit that this conclusion might be different if the amounts in the accounts:

(a) were held on trust or under some other fiduciary obligation;

(b) constituted payments made for a particular purpose; or

(c) represented the traceable proceeds of assets in which others have an interest.

However, the Administrators submit that the evidence does not support the funds having any such character and that, therefore, there is no basis for concluding that the funds held in FTX Express bank accounts were not assets of the company.

During oral submissions, counsel for the Administrators submitted that even if Digital Surge is correct and a proprietary response arises in response to any claim in restitution against FTX Express, such a claim wouldn’t otherwise change the character of the moneys in the account as being property of the respective companies, subject to the scope of that proprietary response.

U.2 Contradictors’ submissions

Digital Surge agrees with the Administrators that funds held in FTX Express accounts were assets of the company, without prejudice to any valid proprietary claim of an FTX Express customer relating to an AUD positive balance that may be upheld.

Ebonex and Ms Chen agree with the Administrators that funds held in FTX Express accounts were assets of the company.

Ms Hong agrees with the Administrators that funds held in FTX Express accounts were assets of the company.

U.3 Analysis and consideration

I accept the Administrators’ submissions on this question. There is no evidence to suggest that the funds held in the FTX Express accounts were anything other than assets of the company. Given my answers in respect of Digital Surge’s contentions regarding an Australian customer’s AUD positive balance, there is no cause for qualifying that answer in the manner sought by Digital Surge.

Accordingly, the answer to Question 15 is ‘Yes’.

V Question 16: Funds in FTX Aust’s bank accounts

Question 16 provides as follows:

Are the funds that the administrators have recovered from bank accounts held by FTX Aust assets of that company?

V.1 The Administrators’ submissions

The Administrators have recovered AUD2,731,466.56 from various accounts held in the name of FTX Aust.[124] The Administrators submit that, for the same reasons as question 15, these recoveries represent assets of FTX Aust.
[124]1st Mouawad affidavit, para 177.2.

V.2 The Contradictors’ submissions

Digital Surge agrees with the Administrators that funds held in FTX Aust accounts were assets of the company, without prejudice to any valid proprietary claim of an FTX Aust customer relating to an AUD positive balance that may be upheld.

Ebonex and Ms Chen, along with Ms Hong, agree with the Administrators that funds held in FTX Aust accounts were assets of the company.

V.3 Analysis and consideration

I accept the Administrators’ submissions on this question. There is no evidence to suggest that the funds held in the FTX Aust accounts were anything other than assets of the company. Given my answers in respect of Digital Surge’s contentions regarding an Australian customer’s AUD positive balance, there is no cause for qualifying that answer in the manner sought by Digital Surge.

Accordingly, the answer to Question 16 is ‘Yes’.

W Question 17: Treatment of claims falling within questions 15 and 16

Question 17 provides as follows:

If the answer to question 15 or 16 is “No”:
17.1On what basis – and for whom – did the relevant company hold the funds?
17.2Specifically, does the person or persons for whom the funds were held have a beneficial or proprietary interest in the funds?

17.3 If so:
(a)How should the administrators treat the claim(s) of the person or persons?
(b)Specifically, for what amount should the person or persons be admitted to vote at the second meeting of creditors of the relevant company?

W.1 The Administrators’ submissions

The Administrators submit that Question 17 will only require consideration if Question 15 or 16 is answered ‘No’. Because each of those questions should be answered ’Yes’, the Administrators submit that it is unnecessary to answer Question 17.

W.2 The Contradictors’ submissions

The Contradictors agree with the Administrators that it is unnecessary to answer Question 17.

W.3 Analysis and consideration

I accept the Administrators’ submissions on this question. If an answer to Questions 15 or 16 is ’Yes’ then it is unnecessary to answer Question 17.

X Questions 18 and 19: Other customer claims

It is convenient to consider Questions 18 and 19 together.

Question 18 provides as follows:

Are there any other categories of customer of FTX Aust or FTX Express who have claims against:
18.1 FTX Aust?
18.2 FTX Express?

Question 19 provides as follows:

If the answer to either of question 18.1 or 18.2 is “yes”:
19.1What are the categories of customer?
19.2What is the nature of the claim(s)?
19.3How should the administrators treat the claim(s)?
19.4For what amounts should such a customer be admitted to vote at the second meeting of creditors of the relevant company?

X.1 The Administrators’ submissions

The Administrators submit that the evidence does not disclose any other category of customer. As such, Question 18 should be answered ‘No’. That being the case, the Administrators say that all of Question 19 is unnecessary to answer.

X.2 Digital Surge’s submissions

Digital Surge says that Questions 18.1 and 18.2 should be answered ‘Yes’. In respect of Question 19, Digital Surge submits that the other categories of customer who have claims against FTX Aust and/or FTX Express is the category defined by its proposed AUD Positive Balances Order, on the basis of a creditor-debtor relationship and they should be admitted for the face value of their AUD fiat balances.

I have described Digital Surge’s submissions in this regard when considering Questions 4 and 6, and it is not necessary to repeat them here.

X.3 Other Contradictors’ submissions

Ebonex and Ms Chen, along with Ms Hong, take no position in relation to Question 18 and say that Question 19 is unnecessary to answer.

X.4 Analysis and consideration

In effect, Digital Surge’s position regarding Questions 18 and 19 raises the same issues as considered in Questions 4 and 6.

Given my previous analysis of Digital Surge’s contentions regarding Australian customers with a positive AUD balance, I do not accept that another category of customer of either FTX Aust or FTX Express exists other than those identified by the Administrators. That is because the category sought to be identified by Digital Surge has been encapsulated within the answers already given.

Accordingly, Questions 18.1 and 18.2 are answered ‘No’ and Question 19 is answered ‘Unnecessary to answer’.

Y Questions 20 to 23 – additional questions

It is convenient to deal with these questions together.

Question 20 provides as follows:

On a proper construction of the terms between FTX Express and an Australian-domiciled person (‘Australian customer’), was FTX Express obliged to remit the amount requested to be withdrawn from the FTX.com platform (whether in AUD or another denomination offered by the platform) to the Australian customer?

Question 21 provides as follows:

Alternatively, is there to be implied into the terms between FTX Express and the Australian customer that FTX Express was obliged to remit the amount requested to be withdrawn from the FTX.com platform (whether in AUD or another denomination offered by the platform) to the Australian customer?

Question 22 provides as follows:

Alternatively, if FTX Express was not so obliged, whether by the terms between it and the Australian customer or pursuant to some other obligation, in the circumstances is FTX Express estopped and precluded from relying on its legal rights that it was only obliged to remit to Australian customers amounts requested to be withdrawn from the FTX.com platform in AUD?

Question 23 provides as follows:

If the answer to any of Questions 21, 22 or 23 is ‘Yes’, should the claims of the Australian customers be admitted as creditors of FTX Express?

Y.1 Administrators’ position

The Administrators say that it is unnecessary to answer Questions 20 and 21 because they are encapsulated by Questions 9.1 and 9.2. Otherwise, they say that the answer to each is ‘No’, as FTX Express was only obliged to remit to Australian customers amounts requested to be withdrawn from the FTX.com platform in AUD.

The Administrators say that Question 22 is inappropriate to answer. Otherwise, they say the answer to that question is ‘No’.

The Administrators say that Question 23 is ‘Unnecessary to answer’.

Y.2 Contradictors’ position

In respect of Question 20:

(a) Digital Surge says that the answer is ‘Yes’ insofar as the terms concerned AUD and that otherwise the answer is ‘No’.

(b) Ebonex and Ms Chen, along with Ms Hong, say that the answer is ‘Yes’.

In respect of Question 21:

(a) Digital Surge says that it is unnecessary to answer as to AUD and that otherwise the answer is ‘No’.

(b) Ebonex and Ms Chen, along with Ms Hong, say that the answer is ‘Yes’.

In respect of Question 22:

(a) Digital Surge says that it is unnecessary to answer as to AUD and that otherwise the answer is ‘No’.

(b) Ebonex and Ms Chen say that the answer is ‘Yes’.

(c) Ms Hong takes no position.

In respect of Question 23, all of the Contradictors say that the answer is ‘Yes’.

Y.3 Analysis and consideration

I accept the Administrators’ submissions in respect of Questions 20 to 23. They have been fully considered in answering other questions, particularly Questions 6.2, 9.1 and 9.2 and it is unnecessary to answer them again here.

Accordingly, the answers to Questions 20 to 23 are that those questions are ‘Unnecessary to answer’.

Z Conclusion

As stated earlier, the answers to each of the questions contained in the List of Issues is set out in the Annexure to these reasons. My reasons for reaching those answers are set out above. Generally speaking, the relief sought by the Administrators in their interlocutory process will be granted.

As can be seen from the above reasons, this application has required detailed consideration of quite complex questions. I have been greatly assisted by the submissions made by all participants, both in writing and at the hearing. They are all to be commended, along with their counsel and solicitors, for the conduct of this application.

The Administrators are requested to prepare a draft order and to confer with the Contradictors about it prior to providing it to my Chambers. It does not appear to me that there is any urgency in finalising the order; rather, I consider that there was some urgency in providing my reasons as soon as possible so that the Administrators can consider them in preparation of their report to creditors and the second meeting of creditors, hence the delivery of these reasons prior to the imminent holiday period. Accordingly, I am content for the proposed order to be sent to my Chambers after 22 January 2024 if that is convenient to the Administrators and the Contradictors.

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ANNEXURE[125]

[125]Unless otherwise stated, defined terms have the same meaning as set out in the Reasons.

Holding an account on the FTX.com platform	Administrators	Digital Surge[126]	Ebonex & Ms Chen	Ms Hong	Court’s Answer
1. Is the fact that an Australian-domiciled person had an account on the FTX.com platform, into which crypto-assets had been transferred that were still held in the account at the time of the administrators’ appointment (Appointment Time), sufficient to make the person a creditor of:
1.1 FTX Express?	No	No	No position	No position	No
1.2 FTX Aust?	No	No	No position	No position	No
2. Is the fact that an Australian-domiciled person had an account on the FTX.com platform, in which account crypto-assets were held (at the appointment time) that had been purchased following a deposit of AUD fiat by or on behalf of the person, sufficient to make the customer a creditor of:
2.1 FTX Express?	No	No	No position	No position	No
2.2 FTX Aust?	No	No	No position	No position	No
3. If the answer to any of questions 1.1, 1.2, 2.1 or 2.2, or is “yes”:
3.1 How should the administrators treat the claims of the person?	Unnecessary to answer (N/A)	N/A	N/A	N/A	N/A
3.2 Specifically, insofar as such a claim arises from holding crypto-assets that is, it does not arise from (a) an “open” derivative contracts to which the person was party as at the appointment time or (b) any withdrawal requests the person made), for what amount (if any) should the person be admitted to vote at the second meeting of creditors of FTX Express and/or FTX Aust (as the case may be) in respect of the claim?	N/A	N/A	N/A	N/A	N/A
Deposits of AUD fiat with FTX Express (or its predecessors as a provider of DCE services)	Administrators	Digital Surge	Ebonex & Ms Chen	Ms Hong	Court’s Answer
4. Where a customer of FTX Aust or FTX Express: 4.1 deposited AUD fiat with FTX Express (or one of its predecessors as a provider of digital currency exchange services) for use on the FTX.com platform; and 4.2 the amount of the deposit was credited to the customers’ account on the FTX.com platform (following conversion into stablecoin or otherwise), is the fact that the customer deposited the AUD fiat sufficient to make the customer a creditor of:
4.3 FTX Aust?	No	Yes	No position	No position	No
4.4 FTX Express?	No	Yes	No position	No position	No
5. If the answer to question 4.3 or 4.4 is “yes”:
5.1 How should the administrators treat the claim(s) of the customer?	N/A	Per the proposed AUD Positive Balances Order (ie, at face value of AUD fiat balances falling within the proposed order)	N/A	N/A	N/A
5.2 For what amount should the customer be admitted to vote at the second meeting of creditors of the relevant company?	N/A	Per the proposed AUD Positive Balances Order (ie, at face value of AUD fiat balances falling within the proposed order)	N/A	N/A	N/A
Withdrawal requests in AUD fiat	Administrators	Digital Surge	Ebonex & Ms Chen	Ms Hong	Court’s Answer
6. Where a customer of FTX Aust or FTX Express requested – prior to the appointment time– a withdrawal of fiat currency in AUD from the customer’s account on the FTX.com platform, which request had not been fulfilled at the time of the administrators’ appointment, does the customer have a claim arising from the request against:
6.1 FTX Aust?	No	Yes	No position	No	No
6.2 FTX Express?	Yes	Yes	Yes	Yes	Yes
7. If the answer to either question 6.1 or 6.2 is “yes”:
7.1 Would the administrators be justified and acting reasonably in treating the claims of such customers in the manner set out in paragraph 4 of their interlocutory process dated 4 September 2023?	Yes	No	N/A	Yes	Yes
7.2 If the answer to question 7.1 is “no”, how should the administrators treat the claims?	N/A	In accordance with the proposed AUD Positive Balances Order and ancillary orders.	N/A	N/A	N/A
Deposits or withdrawal requests in currencies other than AUD	Administrators	Digital Surge	Ebonex & Ms Chen	Ms Hong	Court’s Answer
8. Is the deposit, by a customer of FTX Aust or FTX Express, of fiat currency, other than AUD with a banking partner of FTX Trading or its affiliates that was credited into the person’s account on the FTX.com platform sufficient to make the person a creditor of:
8.1 FTX Aust?	No	No	No position	No position	No
8.2 FTX Express?	No	No	No position	No position	No
9. Where a customer of FTX Aust or FTX Express requested – prior to the appointment time – a withdrawal of fiat currency other than AUD from the customer’s account on the FTX.com platform, which request had not been fulfilled by the appointment time, does the customer have a claim arising from the request against:
9.1 FTX Aust?	No	No	No	No	No
9.2 FTX Express?	No	No	Yes	Yes	No
10. If the answer to any of question 8.1, 8.2, 9.1 or 9.2 is “yes”:
10.1 How should the administrators treat the claim(s) of the customer?	N/A	N/A	Admit	Admit	N/A
10.2 For what amount should the customer be admitted to vote at the second meeting of creditors of the relevant company?	N/A	N/A	For the amounts set out in the affidavit of Jenny Wei affirmed on 9 November 2023 and affidavit of Xiaohua Chen affirmed on 7 November 2023 (and any further affidavits of Ebonex or Ms Chen)	As per Exhibit JM-8	N/A
Customers with derivative trading positions	Administrators	Digital Surge	Ebonex & Ms Chen	Ms Hong	Court’s Answer
11. Does a customer of FTX Aust who had entered a derivative trade or position with FTX Aust, which trade or position had not closed at the appointment time, have a claim against FTX Aust in relation to the trade or position?	No	No position	No position	Yes	No
12. Does a customer of FTX Aust who had entered a derivative trade or position with FTX Aust, which trade or position had closed before the appointment time, but the customer had not made a withdrawal request from the FTX.com platform before the appointment time, have a claim against FTX Aust in relation to the trade or position?	No	No position	No position	No position	No
13. If the answer to either question 11 or 12 is “yes”:
13.1 How should the administrators treat the claim(s) of the customer?	N/A	No position	No position	Admit	N/A
13.2 For what amount should the customer be admitted to vote at the second meeting of creditors of the relevant company?	N/A	No position	No position	Just estimate of value or nominal $1	N/A
14. Would the administrators be justified and acting reasonably in treating derivative contracts or positions to which FTX Aust was a party that were not closed at the appointment time as closed with effect from the appointment time?	Yes	No position	No position	No	Yes
Funds recovered by the administrators	Administrators	Digital Surge	Ebonex & Ms Chen	Ms Hong	Court’s Answer
15. Are funds that the administrators have recovered from bank accounts held by FTX Express assets of that company?	Yes	Yes, without prejudice to any valid proprietary claim of an FTX Express customer relating to an AUD positive balance that may be upheld.	Yes	Yes	Yes
16. Are the funds that the administrators have recovered from bank accounts held by FTX Aust assets of that company?	Yes	Yes, without prejudice to any valid proprietary claim of an FTX Aust customer relating to an AUD positive balance that may be upheld.	Yes	Yes	Yes
17. If the answer to question 15 or 16 is “No”:
17.1 On what basis – and for whom – did the relevant company hold the funds?	N/A	N/A	N/A	N/A	N/A
17.2 Specifically, does the person or persons for whom the funds were held have a beneficial or proprietary interest in the funds?	N/A	N/A	N/A	N/A	N/A
17.3 If so:
(a) How should the administrators treat the claim(s) of the person or persons?	N/A	N/A	N/A	N/A	N/A
(b) Specifically, for what amount should the person or persons be admitted to vote at the second meeting of creditors of the relevant company?	N/A	N/A	N/A	N/A	N/A
Alternative customer categories	Administrators	Digital Surge	Ebonex & Ms Chen	Ms Hong	Court’s Answer
18. Are there any other categories of customer of FTX Aust or FTX Express who have claims against:
18.1 FTX Aust?	No	Yes	No position	No position	No
18.2 FTX Express?	No	Yes	No position	No position	No
19. If the answer to either of question 18.1 or 18.2 is “yes”:
19.1 What are the categories of customer?	N/A	The category defined by the proposed AUD Positive Balances Order	N/A	N/A	N/A
19.2 What is the nature of the claim(s)?	N/A	Creditor-debtor relationship	N/A	N/A	N/A
19.3 How should the administrators treat the claim(s)?	N/A	Admit	N/A	N/A	N/A
19.4 For what amounts should such a customer be admitted to vote at the second meeting of creditors of the relevant company?	N/A	Per the proposed AUD Positive Balances Order (ie, at face value of the AUD fiat balances falling within the proposed order)	N/A	N/A	N/A
Funds recovered by the administrators	Administrators	Digital Surge	Ebonex & Ms Chen	Ms Hong	Court’s Answer
20. On a proper construction of the terms between FTX Express and an Australian-domiciled person (Australian customer), was FTX Express obliged to remit the amount requested to be withdrawn from the FTX.com platform (whether in AUD or another denomination offered by the platform) to the Australian customer?	Unnecessary to answer because the question is encapsulated by questions 9.1 and 9.2 above. Otherwise, no. FTX Express was only obliged to remit to Australian customers amounts requested to be withdrawn from the FTX.com platform in AUD	Yes (insofar as the terms concerned AUD) No (otherwise)	Yes	Yes	N/A
21. Alternatively, is there to be implied into the terms between FTX Express and the Australian customer that FTX Express was obliged to remit the amount requested to be withdrawn from the FTX.com platform (whether in AUD or another denomination offered by the platform) to the Australian customer?	Unnecessary to answer because the question is encapsulated by questions 9.1 and 9.2 above. Otherwise, no. FTX Express was only obliged to remit to Australian customers amounts requested to be withdrawn from the FTX.com platform in AUD	N/A (as to AUD) No (otherwise)	Yes	Yes	N/A
22. Alternatively, if FTX Express was not so obliged, whether by the terms between it and the Australian customer or pursuant to some other obligation, in the circumstances is FTX Express estopped and precluded from relying on its legal rights that it was only obliged to remit to Australian customers amounts requested to be withdrawn from the FTX.com platform in AUD?	Inappropriate to answer. Otherwise, no.	N/A (as to AUD) No (otherwise)	Yes	No Position	N/A
23. If the answer to any of questions 20, 21, or 22 is “yes”, should the claims of the Australian customers be admitted as creditors of FTX Express?	N/A	Yes	Yes	Yes	N/A

[126]Answers are given subject to the terms of the proposed AUD Positive Balances Order and ancillary orders proposed by Digital Surge.

[2023] VSC 788

22 December 2023