[IB Tomato] (IB&People) Kim Won-sang, attorney at Daeryun Law Firm

Bankruptcy is a criminal risk, rehabilitation is key to securing sales.
Expanding the utility of rehabilitation through ‘Comprehensive Consideration Act’ and ‘Pre-ARS’

Bankruptcy procedures, which deal with corporate bankruptcy and rehabilitation, are an unfamiliar and difficult area to approach. Since it is a matter that depends on the survival of the company, the actual benefits must be comprehensively considered, from the debtor's debt settlement to the creditor's losses.

Practical experts advise that a quick decision is needed if a company is judged to have entered the bankruptcy stage. This is because the longer the situation is dragged out, the lower the realistic possibility of revival, and the individual representatives may also be exposed to legal risks. When a company has a certain amount of cash, it can handle issues such as tax issues, worker wages, and severance pay.

This year, as institutional changes related to bankruptcy procedures continued, the scope of use of the rehabilitation system also expanded. learns about advice, procedures, and systems in the field of rehabilitation and bankruptcy with Kim Won-sang, head of Daeryun Law Firm's Rehabilitation and Bankruptcy Center.

The following is a Q&A with Attorney Kim.

-Please introduce the work and field you are currently responsible for at Daeryun.

△Mainly responsible for corporate rehabilitation and bankruptcy. The field may be unfamiliar, but broadly it means restructuring, and narrowly it means corporate rehabilitation and bankruptcy as stipulated in the Debtor Rehabilitation Act.

-I am curious about the characteristics of advice in this field. What should I pay special attention to?

△Basically, bankruptcy proceedings are a matter of how to settle the debtor's debt. Bankruptcy and rehabilitation are similar but different paths. Bankruptcy is the process of destroying a corporation, while rehabilitation is the process of reviving it. There are two ways to dissolve a corporation: dissolution and liquidation and bankruptcy. When a corporation's assets are greater than its liabilities, shareholders also receive benefits through dissolution and liquidation procedures. Conversely, when liabilities are greater than assets, all creditors are paid and the corporation is dissolved. Corporate rehabilitation is the process of reviving a corporation by writing off some of its debt and allowing it to repay the remaining debt over 10 years. From a creditor's perspective, there may be a negative perception of rehabilitation and bankruptcy because it has the effect of extinguishing his or her claims. In addition, there is a possibility that fraud or a criminal offense may be committed, so it is important to proceed with the procedure while establishing a good relationship with the creditor.

-What is the role of a law firm in corporate bankruptcy? Is there a proper bankruptcy procedure?

△The role is to represent the debtor. File an application with the court and proceed with the litigation process according to the procedures. A company with more liabilities than assets can go bankrupt at any time. Since a company wishing to file for bankruptcy has no choice but to write off debts owed to customers from whom it has purchased, the debtor is at an advantage, but the creditor is at a disadvantage. During this process, there is a risk of being sued for criminal fraud, etc., so it is best to resolve the matter well in advance, build a good relationship, and enter the process. The most problematic thing when entering bankruptcy proceedings is the money that the representative has taken out of the company. In Korea, there are many single shareholders, so companies often identify shareholders and use company money as they please. A company going through bankruptcy proceedings is naturally going through difficult times, so this part of the process becomes a problem. It is also important that all creditors are paid equally. We must be wary of the possibility of biased repayment.

-What is the nature of rehabilitation advisory? Is there a key factor that separates success and failure?

△Recovery is largely influenced by accounting aspects. Sales must be good, so that surplus profits remain after deducting costs, which can be used to repay part of the debt. For example, if the debt is 10 billion won, only 30% will be repaid and 70% will be converted into equity. Since 3 billion won will be repaid over 10 years, the average is 300 million won per year. Sales are important because operating profit, excluding various expenses, must be greater than that amount. However, since companies that enter the rehabilitation process come from a state of declining sales, it is important to determine how to expand the number of customers in the future to sustain the company. If sales are down, you should look into whether the company can be a target for acquisition due to its strengths in intellectual property rights or patents. M&A is possible even during rehabilitation procedures.

-How about looking at the recent trends in corporate revival and bankruptcy?

△The number of corporate rehabilitation and bankruptcy cases increased significantly from 2023 to the second half of 2024. Most people predicted that the future economy would be bad and made preemptive preparations. From the most recent first half of this year, there was a slight decrease compared to the end of last year. Previously, it was difficult to extend the loan and the conditions were strict, but there seems to be an expectation that these issues will be eased. It is expected that this level will be maintained until the first half of next year.

-The ‘Comprehensive Consideration Act’ was introduced at the end of last year. What is the impact on the industry and prospects for future changes?

△When going into rehabilitation, both security rights and rehabilitation claims must be considered. The lien must be 100% repaid. On the other hand, approximately 30% of the bonds are repaid and the remaining 70% is converted into equity. Previously, this was calculated mechanically using the relative equity method. However, since there are many one-person companies or family companies in Korea, the representative's share of stock is often reduced, falling below the majority. In theory, creditors could dismiss the company, which could result in loss of management rights. The Comprehensive Consideration Act allows the person running the company to secure a majority stake. Representatives who have entered the rehabilitation process can also use the rehabilitation process effectively because they are free from the risk of loss of management rights. There are an increasing number of cases of establishing rehabilitation plans based on the Seoul Rehabilitation Court. If it spreads to other rehabilitation courts and local court bankruptcy departments and becomes established, many companies will be able to utilize the rehabilitation process more.

-Are there any other institutional issues you are specifically looking into? What is the issue or point of observation?

△The Seoul Rehabilitation Court recently introduced the Pre-ARS (Autonomous Restructuring Support) system. ARS is an adjustment procedure, and rather than having a company undergoing rehabilitation carry out the process until the end and get the plan approved, the period is shortened by smoothly reaching an agreement with creditors. Obtain the consent of all creditors and submit the plan in advance. The rehabilitation process usually takes 7 to 8 months, but in this case, it can be completed in 2 to 3 months. Pre-ARS allows a company to quickly obtain approval for rehabilitation by creating a plan and obtaining the consent of creditors through the rehabilitation court's mediation process without entering into rehabilitation procedures. It protects debtors by utilizing the adjustment process without presuming a rehabilitation process. If a rehabilitation process is initiated, all creditors will know about it and a sort of stigmatization effect may occur. This means that coordination can become meaningless. Pre-ARS reduces the stigma effect. Debt management is not easy, so if you work out what to reduce with creditors in advance, it can be much more advantageous than the adjustment process that takes place after entering the rehabilitation process. This is a groundbreaking system, but how to implement it in practice appears to be a separate issue. I think it can be recommended if you are considering rehabilitation due to sudden financial risk.

-What are your future plans for Daeryun?

△We would like to operate the part in the broader sense of restructuring rather than simply in the category of rehabilitation or bankruptcy. You may think that M&A is not possible for difficult companies, but there are some companies that do well. The goal is not just to cancel debtors' debts, but also to activate M&A means.

Reporter Hwang Yang-taek (hyt@etomato.com)

[View full article]
[IB Tomato](IB&People) Kim Won-sang, attorney at Daeryun Law Firm (Go here)