Crypto Exchange Risks Running Out of Money During Restructuring

(Bloomberg) -- Quadriga Fintech Solutions Corp. is in danger of running out of cash to cover the cost of its restructuring unless the Vancouver-based crypto exchange can retrieve money from banks and payments processors, according to the firm overseeing the process.

Quadriga owes about 115,000 clients some C$260 million ($197 million) and has been going through a restructuring since Feb. 5 with Ernst & Young Inc. as monitor under Canada’s Companies’ Creditors Arrangement Act. The company sought help after suspending operations in January, saying it was unable to retrieve funds owed to account holders after the death of founder Gerald Cotten. Cotten, who ran the digital exchange off his laptop, died while traveling in India in December and no one knows how to recover the C$190 million in cryptocurrencies held for clients.

Cotten’s widow, Jennifer Robertson, initially provided retainers of C$50,000 to both law firm Stewart McKelvey and Ernst & Young, and on Feb. 6 provided an additional C$150,000 to the monitor, Ernst & Young said in its second monitor report, filed Wednesday in Nova Scotia Supreme Court. That’s in danger of running out.

“The applicants currently have no accessible funds to fund the CCAA proceedings, other than the interim financing provided by Ms. Robertson which will be exhausted in the near term," according to the Feb. 20 report.

Ernst & Young identified three “immediate sources” of funds available to fund the court proceedings: some C$25.3 million in Bank of Montreal bank drafts held by Costodian Inc., another 1,004 “bulk drafts" totaling C$5.84 million that were delivered to Stewart McKelvey before proceedings began, and undisclosed amounts held by nine third-party payment processors on behalf of Quadriga.

Costodian released four drafts, representing C$20.3 million, on Feb. 15 though it still holds one draft representing C$5 million and a U.S. draft for $70,000 that it won’t deliver without order of the court. The payments firm says its entitled to about C$778,000 for unpaid processing fees owed by Quadriga, according to the monitor’s report.

Confounding the issue is hesitation from Royal Bank of Canada, which Ernst & Young is using for the court process.

“RBC has been cooperative," the monitor said in its report. “However, as a stranger to the CCAA proceedings, RBC has expressed hesitation to accept and disburse the BMO drafts, bulk drafts and future amounts, without direction and relief from the court."

The monitor urges in its report that bank drafts be deposited in “a timely manner such that they become accessible to fund these CCAA proceedings and ultimately distributions to creditors."

The report was filed a day after Supreme Court Justice Michael Wood selected Canadian law firms Miller Thompson LLP and Cox & Palmer to represent account holders of Quadriga. The law firms, which have support of 252 creditors with claims of approximately C$15 million, proposed an initial cap on fees of C$250,000 “with an ongoing budgeting process".

A hearing is scheduled Friday in Nova Scotia Supreme Court in Halifax to deal with the bank drafts issue.

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