Crypto lender Celsius Network has found itself embroiled in a court battle involving allegations of a “sham” corporate structure. The firm is seeking to merge its US and UK entities as court filings suggest that the difference between the two was merely a façade.
Background and Allegations
According to a Coindesk report, Celsius Network Limited, the UK arm of the company, received a warning from the Financial Conduct Authority (FCA) to cease its UK operations back in 2021. However, the company continued to operate and has defiantly set up a Limited Liability Company in Delaware. It then sought to transfer assets through a series of financial transactions in an apparent attempt to circumvent the rules.
Per court filings, the migration resulted in “intercompany chaos,” with internal records that are “sorely lacking.” Regular customers were misled by management and did not understand the implications of the transfer. However, the more sophisticated Series B investors allegedly had prior knowledge of the deficiencies in terms of the company’s record-keeping. Now, parties in the case are arguing as to whether or not the two entities should be treated as one for bankruptcy purposes.
Meanwhile, corresponding filings by a committee of Celsius’ creditors say that the restructuring was a “sham” and a “facade,” with billions of dollars transferred between the two entities that were deemed to be fraudulent. This implies that these transfers should be disregarded by the New York court attempting to restore funds to creditors.
Implications of Allegations
Two months ago, Judge Martin Glenn released an opinion that favored limiting the customers’ rights to file claims against the Delaware LLC entity only. However, this decision could also benefit Series B preferred equity holders, who now have a chance to recover some of their investment that would otherwise have been diminished under bankruptcy law.
Celsius has an upcoming hearing in July where its legal team can present its case to Judge Glenn for merging the assets and customer claims of both its UK and US entities. The company believes that this action would be advantageous for its customers and investors alike. By “substantively consolidating” the two entities, the troubled lender hopes to improve its chances of saving itself from bankruptcy and protecting the interests of its investors.
Celsius Network filed for bankruptcy protection in July 2022, and an auction of its assets is scheduled to continue on Wednesday this week. Favored bidder NovaWulf is now facing competition from Fahrenheit LLC and the Blockchain Recovery Investment Committee.
From the events that unfolded, it should be noted that several insights can be gleaned from the Celsius controversy. First, it highlights the risks associated with investing in emerging technologies and the lack of clear regulatory oversight in the industry. Second, it emphasizes the importance of due diligence and understanding the legal and financial structures of companies before investing in them. Third, it showcases the complexities of bankruptcy proceedings and the impact they can have on different stakeholders, including investors and customers. Lastly, it demonstrates the significance of transparency and communication from companies during times of crisis to maintain the trust of their customers and investors.
Overall, the allegations against Celsius Network have brought its corporate structure into question, with court filings suggesting that the distinction between its US and UK entities was a façade. The court battle currently pits customers against Series B investors, with the former being misled by management and the latter well aware of the deficient record-keeping. Celsius Network is now seeking to merge its US and UK entities in an apparent attempt to save its investors, and a decision is expected in the week of July 24.
Giancarlo is an economist and researcher by profession. Prior to his addition to Blockzeit’s dynamic team, he was handling several crypto projects for both the government and private sectors as a Project Manager of a consultancy firm.