Voyager Digital, a CeFi company, filed for bankruptcy on July 5th, 2022. Voyager is a cryptocurrency company that provides services like broking, which involves locating the cheapest rates for cryptocurrencies that clients want to buy or sell, as well as borrowing customers’ digital assets in exchange for yields of up to 12% and then lending them out.
The publicly-traded cryptocurrency bank became involved in making enormous uncollateralized loans of $660M to the “too-big-to-fail” cryptocurrency hedge fund 3AC, which in turn was engaging in various risky leveraged bets of its own. As a result of failing to meet margin calls, 3AC is on the verge of insolvency after incurring at least $400 million on liquidations. On the other hand, Voyager still has $110M in cash and $1.3B in assets. However, due to the bankruptcy filing, Voyager clients’ assets might not be fully repaid.
An important point of note is that, unlike 3AC, Voyager filed for Chapter 11 bankruptcy, which is governed by the US Bankruptcy Code. So, what is the Chapter 11 bankruptcy and how does it work as a shield for Voyager?
In this blog post, we will deep dive into how Voyager did not fall into an insolvency position like 3AC by filing Chapter 11 bankruptcy.
Voyager will continue to operate as a business
Not all bankruptcy procedures are the same, and Chapter 11 differs significantly from insolvency procedures in other top jurisdictions, which frequently take their cues from English law. For instance, Voyager will continue to operate as a business after exiting the Chapter 11 procedure, in contrast to 3AC, which will cease to exist (as it filed for Chapter 15 bankruptcy) after the British Virgin Islands (BVI) liquidation process is over.
Chapter 11 is a little different because it is such a “debtor-friendly” procedure, i.e., without a court’s approval, no creditor can pursue their debt claims or enforce against any collateral or security.
Restructuring plan to the rescue
A company’s management has 120 days to develop a restructuring plan after filing for Chapter 11 bankruptcy. Voyager has already submitted a proposal of rearrangement, moving exceptionally swiftly! Users will only receive a portion of Voyager’s assets under the recovery plan. It follows that some users will probably receive less money than what is in their account, though it is unclear whether the company plans to reinstate standard withdrawals. On the contrary, the standard order of priority in a bankruptcy proceeding would be as follows:
- Administrative fees
- a few “priority claims,” such as tax and employee claims like pension claims
- Secured and unsecured creditors.
‘Impaired’ class votes to pass the plan
Currently, ‘impaired’ class votes are used to pass the plan. Being ‘impaired’ means you are being urged to compromise on your claim. For instance, if you owe $5000 and receive $5000 as payment due to a priority claim, you are not eligible to vote because you have been paid in full. However, you are able to vote if you are not paid the total outstanding amount, and you are being compromised.
Classes are created based on the priority, and “kind” of claims for a Chapter 11 plan to be approved. Additionally, the plan must receive approval from at least one impaired class, which requires that at least 2/3 of the class’s claims and at least half of its members vote in favor. So, who are the eligible voting impaired classes listed in the Voyager filing?
Only two of the nine categories identified by Voyager have voting privileges. These are account holders and unsecured claimants. According to the plan, account holders would get a combination of cryptocurrency, Voyager shares, Voyager tokens, and 3AC recoveries. In addition, account owners will have the option of receiving either additional cryptocurrency or more Voyager equity. The so-called “unsecured claimants” are probably lenders, trade creditors, etc. (excluding Alameda Research), who will receive a pro-rata portion of a “Claims Allocation Pool.”
Nevertheless, as Voyager would undoubtedly prefer that both classes approve, it only needs one vote from each class to use a cramdown. As long as one impaired class has voted in favor, the court may approve the plan. Therefore, the proposed strategy eliminates all Voyager equity investors. Due to the fact that the recovery risk of the 650 million 3AC Loan is transferred to the account holders (which could be the cause of 3AC’s impending insolvency), Voyager can exist without the need for an exogenous infusion of capital.
Voyager can stand alone, but it does seem like it is also looking for outside funding. However, most third parties appear to have withdrawn since investing in an unstable platform is risky, and the Chapter 11 proposal is intended to offer a more stable foundation from which negotiations may begin.
Moreover, it is impossible to ignore the need for risk management, careful preparation, and vigilance when dealing with a volatile market like the one for cryptocurrencies. Instead of acting on conviction and belief in a project, both small and major investors should conduct proper due diligence before making informed selections.