By George WardCelsius is making moves to merge its UK and US units amidst accusations in court documents that the supposed differentiation between them was a fraudulent pretense. The bankrupt crypto lender has been suffering turbulence for some time, and the latest event is another blow to the embattled digital asset firm.
Celsius Faces Fresh Court Battle
In a legal battle that pits the firm’s customers against its Series B investors, the insolvent crypto firm is the latest platform accused of inadequate record-keeping in its corporate framework. In 2021, Celsius’ parent company, Celsius Network Limited, was reportedly warned by the UK’s Financial Conduct Authority (FCA) to cease operations in the country.
In response, the company established a Limited Liability Company in the United States and began moving assets using a sequence of transactions. According to a recent filing by Celsius on May 1, the company’s migration resulted in significant disarray among its intercompany operations.
The filing also notes that the lack of detailed internal records has made it extremely difficult to accurately separate the affairs of each entity involved. The transfer of assets between two entities went unnoticed by most regular customers who were not privy to the behind-the-scenes happenings.
Nonetheless, the Series B investors better understand the business environment. The filing added that these investors, in connivance with the firm, quickly pointed out the inadequate record-keeping practices that left the entities vulnerable to bankruptcy.
Consequently, the investors suggested that the two entities should be treated as a single entity in the event of bankruptcy proceedings. Also, creditors of Celsius have filed similar claims stating that the reorganization was a facade and a fraudulent ploy to deceive them.
According to the creditors’ committee, the billions of dollars transferred between the two companies were done to defraud them. As a result, they are urging the New York court to disregard the transfers and take necessary steps to restore the funds to the rightful creditors.
The FTX Comparison
Furthermore, similar allegations have been made against FTX, where the legal team representing the exchange claimed that it was a “digital Potemkin village.” They argued that the exchange’s sophisticated interface concealed a chaotic and poorly managed backend.
According to the opinion of Judge Martin Glenn, which he released on March 9, customers of the company in question were found to have claims solely against the Delaware LLC entity. This ruling could increase the chances of Series B preferred equity holders being able to recover a portion of their investment.
Typically, under bankruptcy law, such investors would have their investments downgraded. During the week of July 24, 2022, Judge Glenn reviewed Celsius’ argument and advocated for the “substantive consolidation” of the two entities, which would merge assets and customer claims.
After filing for bankruptcy in July 2022, Celsius is now going through the process of auctioning off its assets. The auction, which is currently underway, is expected to continue on Wednesday, May 3.
Meanwhile, NovaWulf, the leading bidder, now has competition from both Fahrenheit LLC and the Blockchain Recovery Investment Committee.