A Japanese court has rejected Bitcoin exchange Mt. Gox's bid for revival and appointed a provisional administrator as a prelude to the opening of bankruptcy proceedings.
Tokyo-based Mt. Gox, once the world's largest trading place for the digital currency, collapsed in February with liabilities of ¥6.5 billion ($63.6 million), saying nearly half a billion dollars worth of bitcoin was unaccounted for and that hackers had exploited a software problem.
It had asked the Tokyo District Court on Feb. 28 to open a "civil rehabilitation procedure" allowing it to seek a buyer with a view to resuming operations.
However on Wednesday, Mt. Gox posted a letter from its CEO Mark Karpeles on its website, indicating that the court had dismissed its bid for rehabilitation and ordered the bankruptcy examiner to take over as provisional administrator, pending an order for liquidation.
Karpeles "has lost his authority to administer the company's assets" as a result of the order, the provisional administrator wrote in a separate document posted to the site. The amount of cash and bitcoins held by Mt. Gox is still subject to investigation, he wrote, adding that while the company continues to provide a service showing how many bitcoins customers have deposited, it is unable to return the bitcoins because of the court-controlled bankruptcy proceedings.
The Tokyo District Court is expected to order bankruptcy proceedings for Mt. Gox, and anyone wishing to file claims against the company should wait for that order, the administrator wrote.
There are no prospects for restarting the business while the administrator's investigation into past events continues, Karpeles wrote, and while the company continues negotiations with potential buyers, no deal is in sight. Given that, and the company's inability so far to draft a workable rehabilitation plan acceptable to the court, the court put an end to the rehabilitation request, he wrote.
The exchange is still holding out hope of finding a buyer for the business, allowing future earnings to be used to repay creditors, the CEO said in his letter.
If Mt. Gox goes into liquidation, the process will likely be slow and messy, according to bankruptcy lawyer Kazuaki Nagai.
In usual bankruptcy cases, the court would first appoint a bankruptcy trustee in a period of a few days and then allow creditors to file their claims. The trustee would then dispose of the firm's assets and distribute the cash to creditors according to examinations of the claims.
But the Mt. Gox case is nothing if not unusual. For one thing, it may have had as many as 1 million customers before it went bust Feb. 28 with 850,000 bitcoin missing. It later said it had found about 200,000 bitcoins in an old-format online wallet.
"I'm not sure if bitcoin owners would actually be regarded as creditors or not," said Nagai, a partner at law firm Anderson Mori & Tomotsune in Tokyo. "In Japan, there have been no similar cases to this one."
The cash value of bitcoin transactions in Mt. Gox is another major question mark, he added.
Normal bankruptcy cases in Japan take three to six months, Nagai said, adding that Mt. Gox could take much longer due to its complexity. In March, the court granted bankruptcy examiner Nobuaki Kobayashi a six-week extension in his probe of the situation surrounding the exchange.
Karpeles has kept a low profile since apologizing for "weaknesses in the system" at a press conference on Feb. 28.
He was due to appear in the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division, this week to answer questions in connection with Mt. Gox's filing for bankruptcy protection in the U.S. His lawyers filed an emergency motion to postpone his deposition until May 5.
But if the Tokyo court orders the liquidation of Mt. Gox, under Japanese law Karpeles would have to remain in Japan until the proceedings are complete, according to Nagai.
Karpeles might remain CEO of the company but would lose control of its management in a liquidation since the trustee would be in charge, he added.
The Wall Street Journal also cited an unnamed person as saying lawyers for Mt. Gox were concerned that Karpeles could be arrested in connection with fraud allegations, or as part of an investigation into online market place Silk Road, if he goes to the U.S.