Re FTX Australia Pty Ltd and FTX Express Pty Ltd (admins apptd) (No 2)
[2023] VSC 759
•19 December 2023
| 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 129 217 812)
(ADMINISTRATORS APPOINTED) AND FTX EXPRESS PTY LTD
(ACN 657 907 894) (ADMINISTRATORS APPOINTED)
BETWEEN:
| JOHN MOUAWAD in his capacity as Voluntary Administrator of FTX AUSTRALIA PTY LTD (ACN 129 217 812) (ADMINISTRATORS APPOINTED) and FTX EXPRESS PTY LTD (ACN 657 907 894) (ADMINISTRATORS APPOINTED) & ANOR (according to the attached Schedule) | Plaintiffs/ Applicants |
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JUDICIAL REGISTRAR: | Caporale JR |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 9 November 2023 |
DATE OF JUDGMENT: | 19 December 2023 |
CASE MAY BE CITED AS: | Re FTX Australia Pty Ltd and FTX Express Pty Ltd (admins apptd) (No 2) |
MEDIUM NEUTRAL CITATION: | [2023] VSC 759 |
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CORPORATIONS – Corporations Act 2001 (Cth) – s 60-10(1)(c) Insolvency Practice Schedule (Corporations) – Administrators appointed – Second application for remuneration determination – Sufficiency of material to enable Court to make determination – Necessary work properly performed – Timesheets – Matters to which the Court must have regard – remuneration reasonable.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs/Applicants | Ms V Bell of counsel | Piper Alderman |
TABLE OF CONTENTS
Introduction........................................................................................................................................ 1
Notification of the application........................................................................................................ 3
Legal principles.................................................................................................................................. 4
Background......................................................................................................................................... 5
The evidence....................................................................................................................................... 7
Sufficiency of evidence and prima facie case............................................................................. 24
Section 60-12 matters....................................................................................................................... 25
Determinations................................................................................................................................. 28
Disbursements.................................................................................................................................. 29
Confidentiality and costs orders................................................................................................... 29
JUDICIAL REGISTRAR:
Introduction
On 11 November 2022, the plaintiffs/applicants (‘plaintiffs’), who are partners of the firm KordaMentha, were appointed as the voluntary administrators of FTX Australia Pty Ltd (‘FTX Australia’) and FTX Express Pty Ltd (‘FTX Express’) (collectively, ‘Companies’).
By way of interlocutory process filed on 19 October 2023 (‘application’), the plaintiffs apply for the following orders:
(a) pursuant to s 60-10(1)(c) of the Insolvency Practice Schedule (Corporations) (‘IPS’)[1] being Schedule 2 of the Corporations Act 2001 (Cth) (‘Act’), determinations of remuneration that they are entitled to receive for necessary work performed by them in relation to the administration in the total amount of $518,700.00 (plus GST) for the period from 17 April 2023 to 15 October 2023, being $264,357.00 for FTX Australia and $254,343.00 for FTX Express;
[1]Corporations Act2001 (Cth) sch 2 (‘Insolvency Practice Schedule (Corporations)’).
(b) pursuant to s 90-15 of the IPS,[2] an order permitting the plaintiffs to draw their remuneration from funds recovered by them and held for the Companies in bank accounts controlled by the plaintiffs (‘funds’);
[2]Insolvency Practice Schedule (Corporations) (n 1) s 90-15.
(c) pursuant to s 90-15 of the IPS,[3] an order that the plaintiffs are entitled to draw from the funds their disbursements for the period 17 April 2023 to 15 October 2023, being $12,853.21 for FTX Australia and $300.00 for FTX Express;
[3]Ibid.
(d) pursuant to r 1.3 of the Supreme Court (Corporations) Rules2023 (Vic) (‘Corporations Rules’)[4] and r 2.04(1) of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (‘Civil Procedure Rules’),[5] an order dispensing with compliance with r 9.2(2) of the Corporations Rules;[6]
(e) pursuant to r 28A.06(1) of the Civil Procedure Rules,[7] an order that the confidential exhibit “JM-2” to the affidavit of John Mouawad sworn on 19 October 2023 is confidential and is to be held on the Court file on that basis and not be disclosed to any person without leave of the Court, sought upon five days’ written notice to the plaintiffs’ solicitors; and
(f) an order that the plaintiffs’ costs of and incidental to the application are to be costs in the administrations of FTX Australia and FTX Express.
[4]Supreme Court (Corporations) Rules 2023 (Vic) r 1.3 (‘Corporations Rules’).
[5]Supreme Court (General Civil Procedure) Rules 2015 (Vic) r 2.04(1) (‘Civil Procedure Rules’).
[6]Corporations Rules (n 4) r 9.2(2).
[7]Civil Procedure Rules (n 5) r 28A.06(1).
Section 60-10(1) of the IPS provides as follows:[8]
A determination, specifying remuneration that an external administrator of a company (other than an external administrator in a members’ voluntary winding up) is entitled to receive for necessary work properly performed by the external administrator in relation to the external administration, may be made:
(a)by resolution of the creditors; or
(b)if there is a committee of inspection and a determination is not made under paragraph (a)--by the committee of inspection; or
(c)if a determination is not made under paragraph (a) or (b)--by the Court.
[8]Insolvency Practice Schedule (Corporations) (n 1) s 60-10(1).
Section 90-15(1) of the IPS provides as follows:[9]
(1)The Court may make such orders as it thinks fit in relation to the external administration of a company.
[9]Ibid s 90-15(1).
In support of the application, the plaintiffs rely on affidavits sworn by the first plaintiff on 19 October 2023 and 8 November 2023, written submissions filed on 8 November 2023 and oral submissions made at the hearing on 9 November 2023.
The administrators have previously applied for determinations of their remuneration for the periods 11 November 2022 to 26 February 2023 and 27 February 2023 to 16 April 2023 (‘first and second periods’). On 25 May 2023, I made Orders determining the plaintiffs remuneration for the first and second periods in the total amount of $1,037,699.50 (plus GST), being $564,861.50 for FTX Australia and $472,838.00 for FTX Express. On 14 August 2023, I published my reasons for making those Orders in Re FTX Australia Pty Ltd and FTX Express Pty Ltd (admin apptd)[10]
(‘first FTX remuneration decision’).[10][2023] VSC 451 (‘First FTX remuneration decision’).
As referred to above, this application is for the period 17 April 2023 to 15 October 2023 (‘third period’).
Notification of the application
Rule 9.2(2) of the Corporations Rules[11] provides a process for notifying certain persons of an application for a determination of an administrator’s remuneration and the provision to those persons of material in support of any such application. Rule 9.2(3)[12] provides that any of those persons may object to the remuneration sought.
[11]Corporations Rules (n 4) r 9.2(2).
[12]Ibid r 9.2(3).
Given the very large number of creditors in these administrations, the plaintiffs did not follow the notification process provided for in r 9.2(2).[13] Instead, they provided, in an update on the administration of the Companies sent to all known customers of the Companies on 20 October 2023 (‘October update’), notice of the application and a link to the documents filed with the Court. The update was sent by email, which included instructions that any objections to the orders sought by the plaintiffs should be provided in writing to the plaintiffs by 6 November 2023.
[13]Ibid r 9.2(2).
A copy of the October update and the documents filed with the Court, which included the interlocutory process and the affidavit in support, were also placed on the KordaMentha website.
No objections were received by the plaintiffs – nor did the Court receive any requests by any person (apart from persons associated with the plaintiffs) to attend the virtual hearing of the application on 9 November 2023.
Notice of the application was also given to the Australian Securities and Investment Commission (‘ASIC’).
In circumstances where all creditors have been given adequate and timely notice of the application, I will make an order dispensing with compliance with r 9.2(2) of the Corporations Rules[14] and the application will be considered in the absence of any objections being made to the remuneration claimed.[15]
[14]Ibid.
[15]A similar order was made in relation to the remuneration claimed for the first and second periods.
Legal principles
In the first FTX remuneration decision, I set out the legal principles to be applied to applications made pursuant to s 60-10(1)(c) of the IPS.[16] I will repeat them here:
In Re Pluton Resources Ltd,[17] I set out the principles that apply when the Court is tasked with determining the remuneration an external administrator is entitled to receive and, for convenience, repeat them here:
The principles concerning applications for approval of remuneration incurred by insolvency practitioners are well established and have been referred to in many decisions of this Court. These principles were developed when previous statutory provisions of the Corporations Act 2001 applied. However, the matters contained in s 60-12 of the IPS are materially the same as the matters that were set out in s 449E(4) of the Act (now repealed). Accordingly, the authorities that deal with the now repealed provisions concerning Court approval of a liquidator’s remuneration remain relevant.
Gardiner AsJ summarised the relevant principles in Re Traditional Values Management Limited (in liq) at paragraphs [18] to [25].[18] For convenience I adopt his Honour’s summary, which referred to the principles identified by Davies J in Thackray v Gunns Plantations.
I summarise those principles as relevant to the application as follows: (a) a summary procedure was involved, not unlike that applicable to the taxation of a solicitor’s costs, where not all the rules that normally apply to an action are applicable; (b) the initial task of the Court is to consider whether the liquidator has made out a prima facie case on the evidence before the Court that the remuneration claimed is fair and reasonable, bringing an independent mind to the assessment procedure. If a prima facie case is established, the Court must then consider the validity of any objections; (c) there is no absolute rule regarding the amount of detail required to support a remuneration claim but the evidence relied on should be sufficient to enable potential objectors to review the claim and decide if any objection should be taken, and for the Court and any objector to have a clear view about what was done so that an assessment can be made about the reasonableness of the claim; and (d) there is no universal approach applicable in all circumstances by which the ‘reasonableness’ of remuneration claimed or expenses incurred should be measured. The size, importance and complexity of the tasks performed are all factors to be taken into account.[19]Black J also summarised the applicable principles in Re Sakr Nominees Pty Ltd, where his Honour stated at [23] that: [T]he Court will generally need to be provided with an account in itemised form, setting out at least the details of the work done; the persons who did the work; the time taken to perform the work; the remuneration claimed; and, to the extent relevant, the expenses incurred by the liquidator. Proportionality is an important matter in considering the question of whether remuneration is reasonable, and the ‘value’ of a liquidator’s work can include the benefit of resolving the position of creditors and beneficiaries, the benefit to the community of not permitting assets to remain unproductively in the hands of a defunct company for a long period; and can include work that was required to be done, although it did not result in a return to creditors.[20]
[16]First FTX remuneration decision (n 10) [6].
[17][2023] VSC 160, [15]–[17].
[18][2012] VSC 650, [18]–[25].
[19](2011) 85 ACSR 144, [60] (‘Thackray’)
[20][2017] NSWSC 668, [23] (‘Re Sakr Nominees’).
As I did in the first FTX remuneration decision, I will apply those principles when determining this application.
Background
I will also repeat the background to the administrations as set out in the first FTX remuneration decision.[21]
[21]First FTX remuneration decision (n 10), [7]-[15].
The shares in FTX Express are wholly owned by FTX Australia. The shares in FTX Australia comprise various classes and are held by FTX Trading Ltd (‘FTX Trading’), a company incorporated and registered in Antigua and Barbuda, and IFS Group Ltd, a company having its address in the Cayman Islands.
FTX Express and FTX Australia are part of the ‘FTX Group’. FTX Trading has entered formal bankruptcy protection under Chapter 11 of the United States Bankruptcy Code.
FTX Express was a digital currency exchange (‘DCE’), registered with the Australian Transaction and Analysis Centre (‘AUSTRAC’). FTX Express was used by Australian customers depositing fiat currency to acquire digital assets (or cryptocurrency such as Bitcoin) which were held in the custody of FTX Trading, or disposing of digital assets in return. FTX Express does not hold an Australian Financial Services Licence (‘AFSL’) as it does not deal in financial products.
FTX Australia operated an ‘online’ trading platform hosted at ‘ for ‘over the counter’ derivative financial products primarily connected with various digital assets and related financial instruments (‘FTX.com platform’). Put simply, a customer wishing to participate in derivatives trading via the FTX.com platform would open an account with FTX Australia and then proceed to enter financial trades with FTX Australia using cryptocurrency via the platform provided by FTX Trading.
FTX Australia held an AFSL which was suspended by ASIC on 14 November 2022.
Customers of FTX Australia were required to open an account with FTX Trading which held digital assets as collateral in respect of financial trades made with FTX Australia. Customers of FTX Australia could deposit digital assets directly with FTX Trading, or convert fiat currency into digital assets via FTX Express for deposit with FTX Trading.
As at the date of the appointment of the plaintiffs, FTX Express had 17,888 customers with trading accounts and FTX Australia had 11,364 customers with trading accounts.
The plaintiffs estimate that there are 29,234 separate customers that had investments in cryptocurrency or fiat that may have lost significant property in using the FTX Trading platform to buy and sell cryptocurrencies. Those customers do not fall within obvious categories and are likely to have a unique claim.
In addition to the customers, the plaintiffs estimate that there are 12 trade creditors and that the Companies employed five employees.
Since the first FTX remuneration decision, the plaintiffs have issued an application for directions from the Court in respect of, first, the identity of the creditors of FTX Express and FTX Australia and the quantum of their claims, and, secondly, who is entitled and has priority to the funds recovered by the administrators (‘Judicial Directions Application’).
The evidence
Rule 9.2(6) of the Corporations Rules[22] provides that in support of an application seeking determination of remuneration, the affidavit in support must cover a number of matters, including evidence of the matters referred to in s 60-12 of the IPS,[23] the nature of the work performed or likely to be performed by the administrator, and the amount of remuneration claimed.
[22]Corporations Rules (n 4) r 9.2(6).
[23]Insolvency Practice Schedule (Corporations) (n 1) s 60-12.
For this application, this affidavit is the one sworn by the first plaintiff on
19 October 2023 (‘19 October affidavit’).
The first plaintiff is a registered liquidator and a member of the Institute of Chartered Accountants Australia and New Zealand who has practised in the areas of restructuring, corporate recovery and insolvency for approximately 18 years. Mr Mouawad is also a member of the Australian Restructuring Insolvency and Turnaround Association (‘ARITA’), which represents the majority of registered liquidators and trustees, and the organisation promotes best practice in the conduct of personal and corporate insolvency in Australia. ARITA has produced a Code of Professional Practice (‘ARITA Code’) which is designed to set standards of conduct for insolvency practitioners. Relevantly, the ARITA Code comprises the Code of Ethics, the Code of Professional Practice: Insolvency Services, and is supported by practice statements which provide further explanation to support the ARITA Code. The first plaintiff deposes that he has had regard to the ARITA Code and observed its principles and standards of conduct in his practice, and has regard to and observed the principles and standards set out in the code in respect of determining the remuneration claim in relation to the Companies.
During the third period, the plaintiffs have undertaken a number of tasks which are listed in detail in the 19 October affidavit and summarised as follows:
(a) significant work has been performed in preparing for and commencing the Judicial Directions Application, which was heard before Justice Matthews on 28 and 29 November 2023. This work included:
(i) investigating how the FTX.com platform, which was owned and operated by FTX Trading, operated, as well as how Australian-based customers interacted with the FTX.com platform, including the deposit of AUD fiat currency[24] by Australian customers and the conversion of customers’ fiat currency into crypto-assets;[25]
[24]‘Fiat currency’, ‘fiat money’ or ‘fiat’ is money that a government has declared to be legal tender, such as the Australian dollar (AUD) or the United States dollar (USD).
[25]‘Crypto-assets’ are assets that are variously described as cryptocurrencies, digital currencies, virtual currencies, crypto-assets and digital assets.
(ii) investigating where crypto-assets on the FTX.com platform were held;
(iii) investigating the operations and transactions of FTX Express;
(iv) analysing the source of deposits made into bank accounts in the name of FTX Express;
(v) analysing withdrawals made from bank accounts in the name of FTX Express;
(vi) investigating the entities, Hive Empire Trading Pty Limited
(ACN 624 470 417) (In Liquidation) (‘Hive Empire Trading’) and OmiPay Pty Ltd, which previously acted as the DCE to facilitate the conversion of AUD fiat currency to crypto-assets on the FTX.com platform (and vice versa). For customers to convert fiat currency into crypto-assets available to use on the FTX.com platform, they needed to transfer fiat to an entity that could accept the fiat and convert it to a crypto asset. Under Australian law, an entity that performs this function for Australian domiciled customers is required to be registered with AUSTRAC as a DCE;
(vii) investigating the operations and transactions of FTX Australia, including the products offered by FTX Australia (including options contracts and futures contracts) and the calculation of the positions of FTX Australia customers who traded their derivatives;
(viii) analysing the agreements governing Australian-based customers with accounts on the FTX.com platform;
(ix)investigating the Companies’ dealings in stablecoin;
(x) liaising with the four employees and one contractor of FTX Australia who have assisted the plaintiffs in their investigations;
(xi)categorising Australian customers according to the customers’ dealings with the Companies;
(xii) meetings with Piper Alderman, the solicitors acting for the Administrators, and senior and junior Counsel, and responding to information requests in respect of the preparation of advice about the categories of customers likely to be creditors of the Companies and whether any customers may have priority claims over the funds the Administrators have recovered;
(xiii) preparation of the first plaintiff’s affidavit, sworn on 4 September 2023 (‘4 September affidavit’), which is 49 pages excluding exhibits; and
(xiv) preparation of lengthy affidavits filed in support of the Judicial Directions Application.
(b) preparing updates to creditors dated 20 July 2023 and 5 September 2023 (‘updates’);
(c) preparing for and attending the first and second directions hearings in the Judicial Directions Application before Justice Matthews on 7 September 2023 and 13 October 2023;
(d) identifying and meeting with potential contradictors for the Judicial Directions Application and also with their lawyers;
(e) corresponding with the US Advisors on various matters including attending regular meetings to obtain updated information about the FTX Trading bankruptcy, the submission of non-customer proof of claims and data requests;
(f) attending to various statutory matters in the ordinary course of their engagement as administrators;
(g) responding to over 1,450 individual creditor enquiries via email and over 100 by telephone regarding the administration of the Companies;
(h) preparation of two affidavits filed in support of the application for orders extending the convening period for the second meetings of the Companies’ creditors until 11 December 2023. The application was made primarily because, until the directions sought in the Judicial Directions Application were made, the Administrators were unable to confirm which customers were creditors of the Companies, as well as the amount of their claims, for the purposes of determining their entitlement to vote at the second meetings. That application was heard by Justice Matthews on 16 August 2023 and on the same day
Justice Matthews made Orders extending the convening period for the second meetings of the Companies’ creditors until 11 December 2023;
(i) preparation of an affidavit filed in support of the application seeking orders extending the convening period for the second meetings of the Companies’ creditors from 11 December 2023 until 12 March 2024. That application was heard and determined by Justice Matthews on 13 October 2023 and on the same day Justice Matthews made Orders extending the convening period for the second meeting of the Companies’ creditors until 12 March 2024;
(j) preparing and issuing a cybersecurity notice dated 28 August 2023 regarding a cybersecurity incident experienced by Kroll (one of the parties administering the FTX Trading bankruptcy proceedings) on or around 19 August 2023;
(k) drafting the Administrators’ s 439A report to creditors, which will be finalised after the Judicial Directions Application has been determined, and provided to creditors ahead of the second meetings of creditors. Preparation of the report to creditors has involved the following work:
(i) reviewing Slack[26] data used by FTX Australia’s employees to communicate with the FTX Group to understand the operations of the Companies. Slack data reviewed covered the time frame from one month prior to the appointment date, with over 1,000 Slack data documents reviewed;
[26]Slack is a cloud-based team communication platform.
(ii) reviewing the Companies’ accounting systems;
(iii) reviewing the Companies’ bank accounts to understand the flow of funds;
(iv) preparing comparative financial statements of the Companies, including balance sheet, profit and loss and cash flow statements;
(v) reconciling financial numbers in the Report on company activities and property (‘ROCAP’) to the Companies’ accounting system and bank accounts;
(vi) preparing a timeline of the Companies’ history to understand events that took place leading to the administration of the Companies;
(vii) drafting statutory investigation report;
(viii) attending meetings internally and with their lawyers to discuss progress and findings of investigations conducted to date; and
(ix)organising meetings with FTX Australia staff to discuss their preliminary views and findings;
(l) reviewing proofs of debt lodged by over 50 customers who claimed to be creditors of the Companies;
(m) corresponding with customers regarding confirmation of receipt of proof of debt and appropriate documentation to be provided as supporting documentation to proof of debt claims;
(n) meetings with ASIC to discuss investigations undertaken to date regarding the Companies and their affairs, preparation of a statement of facts and a further affidavit in relation to the Judicial Directions Application;
(o) reviewing data set of Australian customers to understand their composition of crypto-assets and fiat currency held on the FTX.com platform, including pending crypto-asset and fiat withdrawal requests; and
(p) corresponding with insurance brokers regarding potential claims and notifications under policies of insurance held by the Companies prior to the administrators’ appointment.
The investigations and work that has been performed in preparing the Judicial Directions Application is set out in detail in the 4 September affidavit which is exhibited to the 19 October affidavit. It is clear from the 4 September affidavit that the plaintiffs and their staff have undertaken a lot of complex and novel work investigating the operations of the Companies in preparing for the Judicial Directions Application.
The plaintiffs have, for the purpose of recording time for work performed on the administrations of the Companies, opened two files, being:
(a) a file in the name of FTX Express; and
(b) a file in the name of FTX Australia.
The plaintiffs and their staff have allocated the time spent on work undertaken in the administrations of the Companies to those files as set out below:
(a) work undertaken solely in relation to FTX Express has been recorded under the file in the name of FTX Express;
(b) work undertaken solely in relation to FTX Australia has been recorded under the file in the name of FTX Australia; and
(c) work undertaken for the benefit of both the Companies has been recorded on each of the files by allocating 50% of the time spent on each task to each file. By way of example, the applications to extend the convening period for the second meetings of creditors of the Companies was a joint application undertaken for the benefit of the creditors of both Companies. Accordingly, the time spent on each task in relation to that category of work was apportioned equally between both Companies.
The first plaintiff deposes that he is conscious to ensure that the plaintiffs’ remuneration and costs incurred in the conduct of the administrations of the Companies are fairly apportioned to the appropriate funds. In this regard, the plaintiffs and their staff have undertaken an exercise of apportioning their remuneration so as to allocate each entry to the correct relevant files and workstreams.
The plaintiffs have prepared a schedule summarising the work performed by them and their staff during the third period in respect of the administration of the Companies (‘WIP Schedules’). The plaintiffs have produced a WIP Schedule for each of FTX Australia and FTX Express and one combined for both Companies. The WIP Schedule provides a summary of the name and position of each person who has performed a task and the total amount charged by that person in respect of each task category.
The WIP Schedules reveal that the bulk of the work has been undertaken in the ‘administrative, legal issues and risk mitigation’, ‘statutory compliance’ and ‘creditors’ task areas. They also reveal that a lot of work has been undertaken by personnel at the senior level (partner and executive director) and mid-level (executive analyst).
The plaintiffs have produced a detailed summary of the major tasks performed by them and their staff working on the administration of the Companies during the third period. A summary of those tasks and the remuneration sought in relation to each task area is as follows:
(a) (Assets): $12,542.00 (excluding GST) ($5,348.50 for FTX Australia and $7,193.50 for FTX Express) in respect of work performed in relation to identification, preservation and realisation of assets owned by the Companies.
(b) (Creditors): $130,227.00 (excluding GST) ($58,589.00 for FTX Australia and $71,638.00 for FTX Express) in respect of work performed in relation to general correspondence to creditor queries, preparing and issuing notices and reports to creditors and updates on the status of the administration.
(c) (Employees): $492.50 (excluding GST) for FTX Australia (there were no employees of FTX Express) in respect of work performed in relation to general correspondence to employee enquiries and calculation of employee entitlements at appointment date.
(d) (Statutory Compliance): $136,044.50 (excluding GST) ($83,610.00 for FTX Australia and $52,434.50 for FTX Express) in respect of work performed in relation to Administrators complying with the regulations as outlined in the Act and IPS.
(e) (Trading): $26,346.00 (excluding GST) ($19,824.00 for FTX Australia and $6,522.00 for FTX Express) in respect of work performed in relation to
trade-related activities of the administration.
(f) (Administration & Risk Mitigation): $213,048.00 (excluding GST) ($96,493.00 for FTX Australia and $116,555.00 for FTX Express) in respect of work performed in relation to job administration, risk mitigation, legal issues and correspondence with stakeholders of the Companies.
Although many parts of these reasons make reference to these task areas, I think it is important to set out some of those tasks in detail, as they set out the work that was required to be undertaken in these administrations, reveal the complexity of that work, and the requirement that it often be performed by more senior and mid-level staff.
In the ‘Administration and Risk Mitigation’ task area, some of the details of the tasks undertaken include filing of documents received including from creditors in relation to proof of debts and US Advisors regarding the bankruptcy proceedings of FTX Trading, updating of work programs for the Companies in relation to statutory obligations e.g. reporting to creditors and ASIC Insurance, review of insurance policies existing prior to the Administrators appointment and determining if potential claims exist, correspondence with directors regarding insurance notifications and potential claims, correspondence with insurance brokers regarding potential claims, bank account reconciliations for the Companies’ bank accounts held with NAB, finalising second application to the Court for the approval of remuneration for the period 27 February 2023 to 16 April 2023 including, review of professional fee narrations, summary of work performed and preparation of remuneration schedules, attending to questions raised by the Court for the approval of remuneration for the first and second periods, preparing the application to the Court for the approval of remuneration for the period 17 April 2023 to 15 October 2023 including, review of professional fee narrations, summary of work performed and preparation of remuneration schedules, development of security notice regarding the cyber security incident at Kroll that could impact creditors and customers of the Companies, preparation of media releases and responding to media requests, updating the creditor page with creditor update documents, correspondence with the US Bankruptcy Trustee and its advisors on various matters, correspondence and discussion with legal advisors regarding the administration, correspondence and finalising the Court application regarding extending the convening of the Second Meeting of Creditors in August 2023, discussing strategy and process for submitting a non-customer Proof of Claim for FTX Trading, including confirming customer data at appointment date, indemnities arising from FTX Tripartite Agreement and Administrators/advisors’ fees, discussing strategy and process to apply to Court with Counsel and legal advisors to seek directions on various matters such as the classification of creditors and distribution of assets, review and correspondence with legal advisors regarding submission of affidavit dated 9 August 2023 regarding the extension of the Second Meetings of Creditors, discussing structure and information required for statement of facts with legal advisors, preparing and drafting information for counsel to review in preparation of the statement of facts, meetings with internal team and FTX Australia staff to help prepare information, reviewing Counsel’s advice, discussions with legal advisors and staff (including FTX Australia staff) regarding investigations undertaken and information for affidavits in support of Judicial Directions Application, updating affidavits where required and returning to legal advisors to finalise, reviewing and attending to questions asked by Counsel, correspondence and meetings with customers and creditors seeking to contradict the view of the Administrators in relation to the Judicial Directions Application, attending directions hearing before Justice Matthews on 7 September 2023, reviewing submissions of contradictors and correspondence with legal advisors, reviewing US Court documents regarding FTX Trading, including the First Interim Report, Second Interim Report, Draft Plan of Reorganisation, proceedings between FTX Trading and FTX Digital Markets, Customer Proof of Claims deadlines and other bankruptcy updates, reviewing and corresponding with legal advisors regarding submission of affidavit dated 6 September 2023 regarding notifying creditors and customers of that affidavit and discussions with potential contradictors, reviewing and corresponding with legal advisors regarding submission of affidavit dated 9 October 2023 concerning the extension of convening period for Second Meetings of Creditors until 12 March 2024, meetings with Counsel and legal advisors regarding tasks to be completed in time for a directions hearing before Justice Matthews on 13 October 2023, reviewing and corresponding with legal advisors regarding submission of affidavit dated 12 October 2023 regarding information about the transfer of funds from other companies in the FTX Group to FTX Express, a summary of discussions held with potential contradictors prior to the hearing on 13 October 2023, attending Court on 13 October 2023 to make applications to Justice Matthews regarding extending the convening period for the Second Meetings of Creditors and identifying customers who wish to be heard on, or to oppose, the directions sought by the Administrators in the interlocutory process dated 4 September 2023, reviewing and corresponding with legal advisors and relevant employees of FTX Australia regarding submission of an affidavit regarding the process undertaken to obtain and reconstruct customer balances at appointment date, and discussions with legal advisors regarding the assignment of creditors’ claims.
In the ‘Statutory Compliance’ task area, some of the details of the tasks undertaken include administration in relation to storage of books and records, filing of information received from FTX Australia employees, notifications to ASIC regarding the resignation of Mr Kennedy as director of the Companies, meetings with ASIC to discuss investigations undertaken to date regarding the Companies, preparing a statement of facts and affidavit in relation to Court applications, notifications to ASIC regarding the resignation of Rahul Goyal as Administrator, general correspondence with ATO, including requesting access to lodge outstanding pre-appointment returns and GST credits being claimed for the Companies, correspondence and meetings with directors regarding various matters throughout the duration of the engagement, including the operations of the Companies and the relationship between the Companies and FTX Trading, correspondence with the US Bankruptcy Trustee and its advisors on various matters of FTX Trading bankruptcy, including, attending regular meetings for updates on the administration of the Companies and FTX Trading bankruptcy, submission of non-customer Proof of Claims, updates on the FTX Trading bankruptcy and data requests, correspondence with Liquidators and Director of Hive Empire Trading requesting information in relation to its former role as the DCE for the FTX Group in Australia, in relation to the s 439A Report, the Administrators and its staff performed the following tasks - reviewing Slack data used by FTX Australia employees to communicate with the FTX Group to understand the operations of the Companies, with over 1,000 Slack data documents reviewed, reviewing Companies’ accounting systems, reviewing Companies’ bank accounts and preparing documents to explain the flow of funds for the Companies, preparing comparative financial statements of the Companies, including balance sheet, profit and loss and cash flow statements, reconciling financial numbers in ROCAP provided by directors to the Companies accounting system and bank accounts, preparing timeline of the Companies’ history to understand events that took place leading up to the administration of the Companies, drafting and preparing statutory investigation report, attending meetings to discuss progress and findings of investigations conducted to date, organising meetings with FTX Australia staff to discuss findings, meetings with FTX Australia employees to discuss drafted statement of facts and affidavits for the Court applications to verify information, analysing the agreements entered into by the Companies with FTX Trading including the FTX Tripartite Agreement dated 10 September 2022 and the different versions of the FTX Trading Terms, reviewing data set of Australian customers to understand their composition of crypto-assets and fiat currency held on the FTX.com platform, including pending crypto-asset and fiat withdrawal requests, conducting further reviews of the data set to analyse cancelled transactions and applied exchange rates and discussions with FTX Trading regarding non-customer Proof of Claims recoverability following reorganisation plan.
In the ‘Creditors’ task area, some of the details of the tasks undertaken include responding to over 1,500 individual customer/creditor enquiries from over 750 customers and creditors via email and telephone regarding assistance to understand how the Administrators’ Update Reports impacted their potential claim with the Companies, timing and steps in the Australian court process, the Proof of Claim process being run by FTX Trading, (specifically submitting their Proof of Claim by 29 September 2023), assisting to understand which FTX entity they are a potential creditor of and therefore submit a claim with, queries regarding timing and quantum of a dividend within the Companies’ administrations, queries regarding specific elements of customers’ accounts at the appointment date, i.e. whether there was a pending withdrawal request, queries regarding the 4 September affidavit concerning the Administrators investigations regarding which customers are creditors of the Companies and could be entitled to the funds recovered, assisting customers submit their proof of debt for the Companies through the online creditors portal, queries regarding the supporting documentation required for claims with the Companies, specifically requesting examples of acceptable documentation, maintaining the creditor request log, considering the reasonableness of and responding to creditors’ formal requests for information, compiling information requested by creditors, to help prepare standard responses to generic questions asked by numerous creditors, preparing and issuing April Update Report on 20 April 2023, which included updates on correspondence from FTX Trading to Australian customers, FTX Trading recovery of funds and next steps in the bankruptcy process, the Court application for the Companies to identify creditors, entitlements and priority of funds recovered and the Administrators remuneration and legal fees, preparing and issuing July Update Report on 20 July 2023, which included updates on timelines to submit a Proof of Claim in the FTX Trading bankruptcy, Court applications, cancellation of FTX Australia’s AFSL by ASIC, investigations on the Companies, submission of
non-customer Proof of Claims in FTX Trading bankruptcy, Second Meetings of Creditors, Administrators first and second remuneration application and receipts and payment of the Companies, preparing and issuing September Update Report on 5 September 2023, which included a reminder on the deadline date for submitting a Proof of Claim in the FTX Trading bankruptcy, affidavit in support of the Judicial Directions Application, summary of facts, summary of relief sought and contradictors for Court application, further extension of Second Meetings of Creditors and administrators remuneration and receipts and payments of the Companies, emails to creditors informing them of Update Reports and Court applications, preparing and issuing cybersecurity notice dated 28 August 2023 regarding the cybersecurity incident experienced by Kroll on or around 19 August 2023, preparation of s 439A Report to Creditors, including background of Companies, review of First Meetings of Creditors, progress of administrations of the Companies, industry overview and statutory company information, receipt and review of proofs of debt, maintenance of proof of debt register, correspondence with creditors regarding confirmation of receipt of proof of debt and appropriate documentation to be provided as supporting documentation to proof of debt claims, preliminary analysis of estimated outcome statements for creditors for both Companies and potential impact of pooling of funds.
Remuneration has been calculated in accordance with KordaMentha’s schedule of hourly rates (‘Schedule of Rates’). The first plaintiff deposes that in his opinion and experience the Schedule of Rates is reasonable because:
(a) the rates are in line with market rates for firms of similar size and capability of KordaMentha; and
(b) accurately reflect the experience, seniority and capability of each staff member. Mr Mouawad considers time charging to be the most appropriate basis of calculating the remuneration in this matter because time-based charging results in remuneration that accurately reflects the actual time spent on the administrations at an hourly rate applicable to staff experience.
Those rates appear to be at the higher end of rates charged by liquidators according to the fee schedules I have seen which are annexed to some ‘consents to act’ filed by liquidators in winding up applications in this Court. Despite being at the higher end, they are still within the range of what one might describe as the ‘market’. These administrations were not standard administrations and necessitated a high degree of experience, judgement and responsibility.
Over the course of the administrations, timesheets were prepared for work performed in relation to each of the task areas that record the total amount of work undertaken by the plaintiffs and their staff by reference to the employee hourly rates referred to in the Schedule of Rates (‘timesheets’). A copy of the timesheets has been produced by the first plaintiff with respect to both FTX Australia and FTX Express. Work undertaken for the benefit of both the Companies has been recorded on each of the files by allocating 50% of the time spent on each task to each file.
The timesheets record the date the information was posted on the timesheet, the person who undertook the work, the task area, the task description, a detailed narration of the work undertaken, how much time was spent on the task, the relevant hourly rate and the amount charged. For FTX Australia there are approximately 754 entries, and for FTX Express approximately 572, making a total of about 1,326 entries which provide information about the work undertaken by the plaintiffs and their staff.
In reviewing the timesheets, I did not examine each and every entry. Instead, I selected each entry of, or greater than, $500.00 and examined these closely to determine if the task being performed was undertaken by a person of the appropriate level of responsibility, whether the time taken was reasonable and whether the task performed was necessary in the conduct of the administration. This entailed a close examination of approximately 252 entries, 128 for FTX Australia and 124 for FTX Express.
On the whole I was satisfied that the task being performed was undertaken by a person of the appropriate level of responsibility, the time taken was reasonable and the task performed was necessary in the conduct of the administration. However, there were a small number of entries where the description of the work undertaken was limited and it was difficult to determine if it was performed at the appropriate level, especially if that person was at a senior level – for example, work described as ‘applications to court’, ‘calls and application process’, ‘investigations’, ‘emails; updates; rem reportings’, ‘review various elements of statutory compliance‘, ‘creditor correspondence’ and ‘filing emails - uploading documents to share drive etc’ (the latter being performed by a person whose hourly rate was $795.00[27]).
[27]Exhibit JM-1 to affidavit of John Mouawad sworn 19 October 2023, 247 (line 327), 254 (line 450) (’19 October affidavit’).
The number of these types of entries was small and I am, as I said above, on the whole satisfied that the entries revealed that the work and the corresponding charge was reasonable. However, remembering that in remuneration applications, ‘the court is looking for evidence of overcharging’,[28] administrators who rely on timesheets (or similar evidence) must realise that limited descriptions of the work performed are of little assistance and have the potential to infect the overall confidence one acquires, from the other entries, that the work was necessarily performed by the appropriate person. On this occasion I am prepared to see these small number of entries as anomalies in an application where the overwhelming evidence is that the work was necessary and performed by the appropriate individuals who completed tasks in a timely manner.
[28]Thackray (n 19), [64].
As I said in the first remuneration decision, my analysis of hundreds of entries in the timesheets is perhaps more than what was envisaged in some of the previous decisions that deal with remuneration applications, wherein it was decided that a summary procedure is to be adopted, not unlike that applicable to the taxation of a solicitor’s costs, and that the initial task of the Court is to consider if a prima facie case is made out. However, given the amount of remuneration sought by the plaintiffs for work done over a relatively short period of time, and the fact that the timesheets are, in my view, persuasive evidence of whether or not the work was necessary, performed by the right person and for the right amount of time, I think that a somewhat detailed analysis of the timesheets is required.
The first plaintiff deposes that he is conscious of minimising costs and, as a matter of standard practice, wherever possible directs that work be undertaken by a staff member of appropriate seniority depending on the complexity of the task that is to be performed. He sets out in the table below a summary table of the total value of work claimed by staff level.[29]
[29]19 October affidavit (n 27), 12 [30].
Staff Level Hours Hourly Rate (ex GST) $ Partner 156 795.00 124,020.00 Executive Director 179.5 795.00 142,702.50 Director 104.1 745.00 77,554.50 Associate Director 5.2 695.00 3,614.00 Manager 14.1 595.00 8,389.50 Senior Executive Analyst 1.5 545.00 817.50 Executive Analyst 207.6 495.00 102,762.00 Senior Business Analyst 109 425.00 46,325.00 Business Analyst 3.9 375.00 1,462.50 Client Accounting Administration 21.9 375.00 8,212.50 Administration 12.4 200.00 2,480.00 Undergraduate 1.8 200.00 360.00 Total 817 518,700.00
The first plaintiff deposes that the plaintiffs have tried to ensure a consistent team is assigned to work on the administrations and a few key individuals remain involved throughout so that knowledge gained about the complex matters involved is not lost or work duplicated. Having regard to the complexities of these administrations, the first plaintiff deposes that it has been necessary for a substantial portion of the work to be undertaken by more experienced staff members, particularly him, Scott Langdon and Paul Hewson. Given the nature and complexities of the work involved, the plaintiffs determined that it was not appropriate to delegate work that more senior staff have performed to more junior employees. I am of the view that this was the correct decision.
A substantial portion of the work undertaken during the third period was completed by Mr Hewson and Nikolai Paxton. Mr Hewson is KordaMentha’s Digital Asset Lead with over 14 years’ experience in informal and formal restructuring as well as distressed debt advisory and performance improvement. Mr Hewson’s experience has been critical in dealing with the US advisors and the investigations into the Companies’ involvement and interactions with FTX Trading, particularly in respect of how different types of customer transactions were dealt with on the FTX.com platform. Mr Paxton was a Senior Business Analyst who was promoted to Executive Analyst. He has three years’ experience. A large portion of Mr Paxton’s time was dedicated to the preparation of the Judicial Directions Application as well as the preparation of the s 439A report. The first plaintiff considers the time spent and the work performed by Mr Hewson and Mr Paxton was appropriate given the complexity of the investigations involved in these administrations. In the circumstances of these administrations, I think the allocation of a considerable amount of the work to staff at these levels was appropriate.
The first plaintiff also deposes that the remuneration sought is proportionate having regard to the significant issues and complexity of the administrations. Proportionality is an important consideration when reviewing claims for remuneration. It is difficult to argue against the first plaintiff’s contention about proportionality, which must be measured, in these administrations, in light of very complex administrations involving many thousands of potential creditors, the benefit of resolving the position of those creditors, unusual and complicated legal issues, associated overseas proceedings, a lack of books and records and many thousands of transactions.
The first plaintiff has reviewed the remuneration claimed in the application and has made adjustments to reassess and write off time where appropriate.
In the 19 October affidavit the first plaintiff confirms the amount of remuneration sought.
Sufficiency of evidence and prima facie case
I have considered all of the material relied upon by the plaintiffs in support of the application. In my view, this material complies with the requirement of r 9.2(6) of the Corporations Rules[30] and the standard described by previous decisions that have dealt with administrators’ remuneration. Having considered all of this material, I am of the view that this material establishes that the remuneration sought by the plaintiffs has been properly and necessarily incurred, has been appropriately allocated and is reasonable and proportionate given the size and complexities of the administrations. In those circumstances, I am satisfied that the remuneration sought is prima facie fair and reasonable.
[30]Corporations Rules (n 4) r 9.2(6).
Section 60-12 matters
Section 60-12 of the IPS[31] provides that in making a remuneration determination under s 60-10(1)(c),[32] the Court must have regard to whether the remuneration is reasonable, taking into account any or all of the matters set out in s 60-12.[33] I will now consider those matters relevant to the application. Many of these matters were considered by me in the first FTX remuneration decision and remain relevant considerations for the second and third periods.
[31]Insolvency Practice Schedule (Corporations) (n 1) s 60-12.
[32]Ibid s 60-10(1)(c).
[33]Ibid s 60-12.
As set out above, I am of the view that, first, the evidence filed in support of the plaintiffs’ application complies with the standard required by the Corporations Rules and previous remuneration decisions, and, secondly, demonstrates a prima facie case that the remuneration sought by the plaintiffs is fair and reasonable. In this respect, it also addresses the matters set out in s 60-12 (a) to (d)[34] which together amount to an evaluation as to whether the remuneration sought is fair and reasonable.
[34]Ibid s 60-12(a)-(d).
Sections 60-12(e) to (g)[35] oblige the Court to consider the complexity of the work performed, the extent to which the administrators were required to deal with extraordinary issues and the extent to which they were required to accept a higher level of risk or responsibility than what is usually the case.
[35]Ibid s 60-12(e)-(g).
It is very clear that these administrations were extremely complex. The amount of work performed in the administrations by the plaintiffs and their staff was well above what is usually encountered in an unexceptional administration. Features of the administrations that meant that the work performed was complex, extraordinary issues had to be dealt with, and that the plaintiffs had to accept a higher level of risk or responsibility include the following:
(a) the Companies’ involvement with FTX Trading, domiciled in Antigua and Barbuda and part of US bankruptcy proceedings for the global FTX group, and their interaction with Australian users;
(b) the difficulty in properly identifying creditors, the quantum of their claims and the priorities of their entitlements (if any) to the assets of the administrations;
(c) the need to analyse the various types of user transactions so as to understand the facts and circumstances involved in the transactional chain of customers and creditors of the Companies;
(d) the seeking of legal advice as to the priorities of user claims and their entitlements, and the need for direction from the Court;
(e) the deficiency in the Companies’ records;
(f) the need to liaise with US counterparts, for reasons including the transacting of Australian domiciled users with the Companies using the FTX.com platform, being a platform controlled by FTX Trading, and the need to understand where the collateral is held and whether it still exists;
(g) rebuilding a database to enable information about each Australian domiciled user to be reviewed;
(h) reviewing this data which contains over 12 raw data sets, some of which have over 750,000 line items of user information;
(i) the many thousands of customers of the Companies who are potential creditors and dealing with queries from some of them;
(j) responding to ASIC notices to produce certain material;
(k) instituting legal proceedings in relation to funds held by FTX Express;
(l) the provision of more regular updates to creditors and customers than might occur in a typical voluntary administration;
(m) receipt, before the first meeting of creditors, of approximately 800 proofs of debt in a total amount of approximately $97,611,066.00; and
(n) the ambiguities between what is set out in the FTX Australia Trading Terms and what occurred in reality, which has added complexity to the plaintiffs’ investigations into determining which customers and creditors are entitled to funds held by the Companies.
I accept the plaintiffs’ submission that the Companies’ administrations involve issues of extreme complexity, including because the Companies engaged in complicated transactions involving digital assets across multiple jurisdictions, had just under 25,000 customers (and potential creditors) and maintained inadequate records.
I also accept the plaintiffs’ submission that the matters underpinning the need for the Judicial Directions Application are themselves extraordinary, with the Companies being part of a global corporate group which dealt with billions of dollars of customer funds without adequate records.
The complexity of these novel administrations meant that the matters set out in
s 60-12(e) to (g) of the IPS[36] clearly involved a high level of judgement, responsibility, accountability and skill.[36]Ibid.
In relation to s 60–12(h) of the IPS,[37] I have also taken into account the value and nature of any property dealt with by the plaintiffs, being approximately $42,000,000.00 recovered in the administrations to date.
[37]Ibid s 60-12(h).
Section 60–12(i) of the IPS[38] provides that the Court must have regard to the number, attributes and conduct, or the likely number, attributes and conduct, of the creditors. As referred to earlier in these reasons, the likely number of creditors is in the thousands, with the plaintiffs understanding that FTX Australia had 11,242 users and FTX Express had 13,812 users. I also accept the plaintiffs’ submission that the creditors’ attributes are complicated by virtue of the complex nature of the transactions they were engaging in and the lack of information available to the plaintiffs about these transactions.
[38]Ibid s 60-12(i).
Because the plaintiffs’ remuneration is worked out on a time cost basis, s 60–12(j) of the IPS[39] provides that the Court must have regard to the time properly taken by them and their staff in performing the work. A time cost basis was adopted as it fairly reflects the necessary work performed and ensures that creditors are only charged for work performed. The plaintiffs have, as described in these reasons, provided a detailed account of the time spent by them and their staff on the various tasks in the administrations. After considering and examining that material, I am satisfied that that time was properly taken by the plaintiffs and their staff in performing their work.
[39]Ibid s 60-12(j).
After considering the relevant matters set out in s 60–12 of the IPS,[40] I am satisfied that the remuneration sought by the plaintiffs is reasonable for necessary work properly performed and they are entitled to the amounts sought by them without reduction.
[40]Ibid s 60-12.
Determinations
I will make determinations specifying that the remuneration that the plaintiffs are entitled to receive for necessary work properly performed by them is $264,357.00 (plus GST) for FTX Australia and $254,343.00 (plus GST) for FTX Express. In those circumstances, I will also order that the plaintiffs are permitted to draw their remuneration from funds recovered by them and held for the Companies in bank accounts controlled by them.
Disbursements
The internal disbursements incurred by the plaintiffs relate to ASIC industry funding levies and data room fees in respect of a privilege document review for documents produced to ASIC by the plaintiffs. Those internal disbursements are $12,853.21 for FTX Australia and $300.00 for FTX Express, making a total of $13,153.21 (GST exclusive).
I am satisfied that the internal disbursements incurred in the conduct of the administration of the Companies were necessary and proper and reasonable costs. I will order that the plaintiffs are entitled to draw from the funds those disbursements for the period 17 April 2023 to 15 October 2023.
Confidentiality and costs orders
The plaintiffs have made some redactions to the timesheets which were exhibited to the 19 October affidavit for legal professional privilege purposes. Unredacted copies of the timesheets are contained in a confidential exhibit to that affidavit marked
“JM-2”. I will make an order that that exhibit remain confidential.
Lastly, it is appropriate that the plaintiffs’ costs of and incidental to the application are to be costs in the administrations of FTX Australia and FTX Express and I will make the costs order sought by the plaintiffs.
SCHEDULE OF PARTIES
| S ECI 2022 05010 | |
| BETWEEN: | |
| JOHN MOUAWAD in his capacity as Voluntary Administrator of FTX AUSTRALIA PTY LTD (ACN 129 217 812) (ADMINISTRATORS APPOINTED) and FTX EXPRESS PTY LTD (ACN 657 907 894) (ADMINISTRATORS APPOINTED) | First Plaintiff/ First Applicant |
| SCOTT DAVID HARRY LANGDON in his capacity as Voluntary Administrator of FTX AUSTRALIA PTY LTD (ACN 129 217 812) (ADMINISTRATORS APPOINTED) and FTX EXPRESS PTY LTD (ACN 657 907 894) (ADMINISTRATORS APPOINTED) | Second Plaintiff/ Second Applicant |
| | |
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