Celsius Reclaims User Funds Subject to Withdrawal Preference Exposure

Bankrupt crypto lender Celsius has filed a notice concerning its intent to reclaim funds from those who withdrew a total amount greater than $100,000 in the 90 days before bankruptcy was registered on July 13, 2022. These clients are subject to preference exposure risk and have to settle preference liabilities before receiving any repayments, pursuant to the Account Holder Avoidance Action Settlement.

Those clients who withdrew $100,000 or less in this timeframe, who voted to reject the reorganization plan or opted out of releases, are excluded and do not need to take any further action.

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‘Avoidance action’ is a term for adversary proceedings that seek to cancel (avoid) transactions made in the period immediately before a bankruptcy filing. 'Preference exposure' refers to the risk that a withdrawal of assets within 90 days prior to bankruptcy could be considered a ‘preferential transfer’. The beneficiaries of these may be legally obliged to return some or all of those assets to ensure fair distribution among all creditors.

The affected customers will receive an email with an 'Election Form', which indicates the information and figures concerning the preference exposure and also reflects all previously settled amounts. Those creditors who wish to settle their Withdrawal Preference Exposure are to indicate this via the form before January 25, and make any settlement payment by January 31.

The payment is fixed at 27.5% of the total Withdrawal Preference Exposure amount. On payment they should receive a court order ruling that they have no preference liabilities. Only subject to completing all these steps, will the clients be released from Avoidance Action and become eligible to receive the distribution payments under the Plan.

According to the filing, there is no guarantee that the withdrawal preference exposure can be resolved after the deadline, but the notice does reference a possibility to “resolve withdrawal preference exposure with the litigation administrator after the effective date.”

Those creditors who abstained from voting on the reorganization plan remain eligible to participate in the Account Holder Avoidance Action Settlement. Those who opted out of the releases under the Plan won’t receive a request to return funds.

Celsius first started withdrawals for select users last March, allowing eligible owners of deposit accounts to get back some of their funds, with the maximum amount limited to $7,575. At the end of November, the company started withdrawals for some groups of creditors pursuant to Custody settlement, allowing them to retrieve 72.5% of their cryptocurrency holdings minus transaction fees.

At the beginning of this year, Celsius started “the process of recalling and rebalancing assets” and began to unstake its Ether holdings in preparation for “timely distributions to creditors.” According to the notice, the assets received on account of the settlement payments will also increase the amount to be distributed to creditors “on a dollar-for-dollar basis.”

At the moment, the forecast seems fairly positive for those customers who have been waiting a year and a half to get their funds back. We will continue to Observe.