The collapse of FTX has highlighted issues with insolvency laws, particularly when applied to volatile digital assets. The company's bankruptcy proceedings have resulted in creditors being paid based on the value of their cryptocurrency at the time of the company's bankruptcy, rather than its current worth.
This has led to some customers feeling 'short-changed' by being repaid on a lower basis. In contrast, the FTX estate has become rich enough to offer extraordinary recoveries, with 98% of creditors set to receive at least 118% of their allowed claims in cash.
Similar issues are observed in South Africa's business rescue system, where companies often remain in prolonged proceedings, benefiting lawyers and consultants more than creditors. The Post Office is a notable example, with over R207.4m spent on the business rescue process, despite the entity still asking for further state support to implement the plan.
The phenomenon of business rescue being used as a means to profit rather than revive companies has been observed in several high-profile cases, including Comair and Mango. This raises questions about the effectiveness of insolvency laws in protecting stakeholders and reviving financially distressed companies.