Corporate Bankruptcy Procedure | Completion of the Winding-Up of a Corporation with Approximately 300 Million Won in Unpaid Taxes and Wages Through the Assistance of an Attorney Specializing in Bankruptcy

In a corporate bankruptcy procedure, the parts on which the court places the greatest emphasis are as follows.

(1) Proof of the state of insolvency

It must be objectively proven that the company is in a state of being “generally unable to pay,” rather than merely operating at a loss. Bankruptcy is possible only where the company is, continuously and objectively, unable to pay its debts.

(2) Proof of the state of excess of liabilities

It is necessary to make clear the structure in which liabilities exceed assets and to reassess the actual value of the assets. In particular, because the trustee in bankruptcy appointed by the court recalculates the company's assets at their liquidation value, even a machine recorded on the books at 1 billion won will be reflected by the court in determining whether there is an excess of liabilities if it is worth only 20 million won when sold secondhand right now.

(3) Showing the absence of any prospect of rehabilitation

Because a bankruptcy may be dismissed if there is a prospect of rehabilitation, it must be shown that there is no prospect of rehabilitation. It must be clearly demonstrated that the going-concern value is lower than the liquidation value, so it must be possible to show, through quantified materials, that losses accumulate the more the business operates or that there is no prospect of generating revenue because the main sales channels have been cut off.

✔ Detailed analysis of the financial structure

• Analysis of the account flow over the most recent 1 year
• Structuring of unpaid debts to business partners
• Organizing the records of the representative's provisional payments injected into the company
• Organizing the history of tax demands and attachment notices

✔ Reassessment of the actual value of the assets

• Conservative estimation of the realizable value of inventory assets
• Reflecting depreciation
• Excluding uncollectible accounts receivable
• Confirming whether a security right has been established

Because overvaluing the assets creates a risk that the bankruptcy will be dismissed, the attorney specializing in bankruptcy organized the client company's assets on the basis of their actual realizable value.

In corporate bankruptcy proceedings, the petition serves as the court's first basis for assessment.

The bankruptcy attorney designed the petition as follows.

• Explanation of the company's founding history and business structure: demonstrating that the client company, which had previously generated legitimate economic value, had unavoidably reached insolvency, and establishing the integrity and moral credibility of the representative's management
• Specification of the point at which losses arose: clearly identifying the specific point at which the company's deficits deepened to the extent that debt repayment became impossible, thereby proving that this was not fraudulent bankruptcy
• Analysis of the causes of declining revenue: demonstrating that the sharp drop in revenue did not result from the management's negligent operation, intentional concealment of assets, or evasion
• Attachment of materials on attempts at management normalization: obtaining and attaching data proving that the company's self-rescue measures, such as workforce restructuring, asset sales, attempts to attract new investment, and negotiations with financial institutions to extend maturities, had failed
• Clarification of the business suspension status: blocking the accumulation of unnecessary public-interest claims (additional wages, severance pay, rent, and the like) that could arise after the bankruptcy filing, thereby fixing the scale of the corporation's debt

If supplementation orders are repeated during the court examination, the proceedings may be delayed.

The bankruptcy attorney swiftly concluded the examination through submission of objective evidence of insolvency, organization of a comparative table of excess liabilities, demonstration of the absence of any prospect for rehabilitation, and proof of the client's efforts to improve management.

Wage arrears owed to employees may later expand into the personal criminal liability of the representative.

The bankruptcy attorney concurrently determined the arrears amount for each worker, submitted the basis for calculating severance pay, and designed the legal reasoning to block the spread of criminal liability, thereby preventing the expansion of the representative's personal criminal risk.

The bankruptcy attorney proceeded with the organization of the tax arrears structure as follows.

• Classification of value-added tax arrears
• Confirmation of withholding tax arrears
• Analysis of the possibility of local tax attachment
• Organization of items subject to priority repayment

Corporate Bankruptcy: Requirements to Verify Until the End

• Verification of the representative's integrity: Preferential repayment is prohibited, as is disposing of company assets at a price significantly below market value immediately before bankruptcy, and the personal use of company funds by the representative is strictly forbidden.
• Ability to pay the advance deposit: A corporate bankruptcy filing also requires minimum prerequisites. The advance deposit is the cost of conducting the bankruptcy, including the bankruptcy trustee's remuneration and publication expenses, and it may be set at anywhere from several million to several tens of millions of won. Without the advance deposit, the court may determine that conducting the corporate bankruptcy proceedings is impossible, and the bankruptcy petition may be dismissed.
• Status of other public-interest claims, such as overdue taxes and wages: Employees' wages and severance pay are repaid first, and national and local taxes are also subject to review.
  

• Excessive financing costs
• Increase in short-term borrowings
• Arrears of taxes and the four major insurance contributions
• Wage arrears
• Decline in revenue turnover
• Successive defaults of business partners

If no response is made at this stage, the situation is likely to lead ultimately to corporate bankruptcy proceedings.

Corporate bankruptcy proceedings constitute a complex matter that requires the simultaneous design of responses to criminal liability risk, tax risk, labor disputes, and the personal liability of the representative, as well as a strategy for future recovery.

Daeryun provides an integrated response through the organic collaboration of bankruptcy attorneys, criminal law attorneys, tax law attorneys, labor consultants, accountants, and tax accountants.

If debt structure redesign, negotiations with financial institutions, and a review of internal controls are carried out at the early stage of financial deterioration, there is a possibility of averting the crisis without reaching corporate bankruptcy proceedings.

In practice, blocking all risks that may arise in operating a corporation before they occur is advantageous in every respect, including cost, reputation, and management stability.

That said, if there are warning signs in the company's financial condition, having an assessment conducted at this stage may also be a prudent choice.

If insolvency is suspected, please have the current corporate situation accurately diagnosed.