Workout

Unlike court bankruptcy or rehabilitation proceedings, a workout is a private restructuring method carried out through consultation between creditor financial institutions and the company.

Its purpose is to reduce the burden arising from legal proceedings while enabling the company to maintain its business activities and improve its financial structure through financial support or debt adjustment from financial institutions.

It is operated mainly for companies that are experiencing a temporary shortage of funds but have business competitiveness and a possibility of rehabilitation.

While it is similar to corporate rehabilitation proceedings in that it aims at the management normalization of a distressed company, there are differences in how the procedure proceeds and in the parties involved.

Corporate rehabilitation proceedings are a public procedure that legally adjusts the rights relationships of stakeholders such as creditors and shareholders under the supervision of the court.

By contrast, a workout is a private restructuring method operated centered on consultation among creditor financial institutions without court intervention.

In addition, restructuring generally proceeds within a scope that maintains the management control of the existing management.

The deferral, reduction, and debt-to-equity conversion of obligations are carried out, in principle, according to the principle of freedom of contract under the Civil Act and the provisions governing claims and obligations.

In addition, when new shares are issued or assets are sold for the debt-to-equity conversion, the provisions of the Commercial Act on the operation of stock companies and changes in capital must be observed.

In this process, the interests of shareholders and the rights of creditors may affect one another, so sufficient legal review beforehand is necessary.

Where the Corporate Restructuring Promotion Act does not apply, the procedure may proceed based on corporate restructuring agreements concluded among major financial institutions.

Such agreements set out procedural matters, including the voting standards required when creditor financial institutions jointly pursue restructuring, the period for deferring the exercise of claims, and the method of providing new funds.

In particular, when several financial institutions jointly hold claims, the restructuring procedure often proceeds according to such agreements.

When a company that has recognized signs of insolvency applies for a workout procedure to its main transaction bank, the bank convenes a council of creditor financial institutions to discuss whether to commence the procedure.

Major decisions may require consent based on a certain threshold of claim amounts, and the specific standards may vary depending on the applicable statutes and the consultation structure.

After the decision to commence, an external specialized institution conducts a detailed due diligence on the company's assets, liabilities, cash flow, going-concern value, and similar matters.

Based on the due diligence results, the creditor financial institutions and the company establish a management normalization plan (MOU), which includes the following items.

Once the management normalization plan is finalized, the company must faithfully implement the agreed plan, and the creditor financial institutions continuously monitor whether the plan is being carried out.

When the company achieves the planned goals and restores its financial soundness, the workout procedure is terminated.

However, if the plan is not carried out or the company's prospects for recovery are judged to be low, the procedure may be suspended and may be converted into a court-led restructuring procedure such as corporate rehabilitation or bankruptcy.

Reviewing the procedure and applying proactively before liquidity problems worsen can be helpful.

Before applying, it is advisable to assess the financial condition objectively in-house and to prepare feasible self-rescue measures that can be discussed with creditor financial institutions.

For example, reviewing measures such as the sale of non-core assets or cost reductions can enhance the credibility of the plan.

Such preparation helps lay the groundwork for the management normalization plan to proceed as intended.

During the due diligence process, it is necessary to report assets and liabilities accurately and to submit relevant materials in an organized manner.

Providing incomplete or inaccurate materials may make it difficult to secure the trust of creditor financial institutions and may also affect the progress of the procedure.

In addition, if a separate unlawful act becomes an issue during the deterioration of the business, civil and criminal liability may be raised together.

It is also advisable to review measures for defending management control in connection with the debt-to-equity conversion carefully in advance.

For sole proprietors or managers of small and medium-sized enterprises, there may be limits to judging and responding to such complex situations alone.

In particular, determining which procedure is appropriate between a workout and corporate rehabilitation, and how to defend rights in negotiations with the creditor group, is directly linked to the company's survival.

Daeryun Law Firm provides the initial financial diagnosis and creditor negotiation strategy required for conducting a workout procedure, tailored to the size and circumstances of each company.

From the early stage, it analyzes the company's asset and liability structure, cash flow, and similar factors, and supports the establishment of a feasible management normalization plan so that a reasonable agreement with creditor financial institutions can be reached.

We invite you to review a strategy suited to your company's situation, including conducting the workout procedure, negotiating with the creditor group, and establishing a management normalization plan, together with a 🔗corporate rehabilitation attorney.