Celsius (CEL) filed for Chapter 11 Bankruptcy in New York, the US, on July 13, 2022. Celsius was already under regulatory scrutiny and public pressure after it had paused all withdrawals, deposits, and swaps last month, and there was speculation that it might file for bankruptcy soon.
However, the finer details and its future intentions can be judged by the Bankruptcy Chapter under which it filed for bankruptcy. There are six chapters of bankruptcy in the US, and Celsius chose Chapter 11. There is an important fact which Chapter 11 covers, and that is the probable reason why Celsius chose it over Chapter 7.
Why Does It Matter What Chapter Celsius Chose To File For Bankruptcy?
In the US, Chapter 7 and Chapter 11 bankruptcies are common with companies. But Celsius chose Chapter 11 to file for bankruptcy, and not Chapter 7.
Chapter 7 Bankruptcy is also called ‘Liquidation’ bankruptcy. This means that when a business files for bankruptcy under Chapter 7, they are way past the ‘reorganisation’ stage, and the only way to repay creditors and others is to sell their assets and gather money.
It essentially means that the business has ceased to be a going concern, and hence, the bankruptcy court will appoint a trustee to make sure the creditors are paid off in their absolute priority after the cash from selling of assets is gathered.
Secured debt has more priority than unsecured debt in this type of bankruptcy (Chapter 7).
Elsewhere, Chapter 11 Bankruptcy is also called ‘rehabilitation’ bankruptcy and is generally more complicated and expensive. Chapter 11 Bankruptcy also gives the opportunity for a second chance to the business owner to get its affairs right and try to start again as before.
This process involves the creditors and the business owner striking a court-approved deal to resume business and restructure the debt, renegotiate fees, take proactive cost cutting measures and other necessary actions to stabilise the business situation.
Both Chapter 7 and Chapter 11 require the company to appoint a trustee, but in Chapter 7, the trustee will work to sell the assets and distribute cash according to absolute priority, and in Chapter 11, the trustee will supervise the company’s assets and allow the business to continue as a going concern.
Bankruptcy under Chapter 11 doesn’t mean that the entire business debt is absolved, but rather that the debt is structured and an arrangement of paying it back with future earnings has to be made.
Why Celsius Filed Chapter 11?
According to a report from Wall Street Journal, Celsius has $162.547 million in cash and short term investments, and its bad debts amounts to $800,000.
Recently, Celsius repaid its loan from AAVE and freed up its crypto assets pledged there. Hence, Celsius has some cash and some assets, and if it can provide a solid restructuring plan, it might emerge as a successful crypto decentralised finance company again. As such, Celsius filed for Chapter 11 Bankruptcy to get a second chance in running its business, rather than shutting shop and selling whatever assets they have, and paying creditors in their absolute priority, which is what Chapter 7 Bankruptcy does.
