One of the biggest themes in Korea's capital market this year is "corporate rehabilitation." Homeplus Co., whose valuation once topped 7 trillion won, has been navigating turbulent waters as it proceeds with rehabilitation, and recently affiliates of JoongAng Group also entered corporate rehabilitation. Judging by the size of the corporations and of employees and stakeholders, these are cases with significant social repercussions.
The scale of Homeplus Co. and JoongAng Group is so large that others draw less attention by comparison, but the number of corporations knocking on the courthouse door has been rising rapidly every year. According to the Monthly Court Statistics, a total of 731 rehabilitation agreement cases were filed with 14 courts in Korea in the first half of this year. That is a 14% increase from the same period last year (642 cases). Since rehabilitation filings are no longer an exceptional option only for a handful of distressed corporations, both corporations and creditors need to accurately understand the essence of rehabilitation proceedings and the criteria courts prioritize, and respond proactively.
Kim Sang-gyu, managing partner at Law Firm Robex who served as chief judge of the Suwon Bankruptcy Court until February this year, met with ChosunBiz on the 15th and said, "Neither controlling shareholders nor secured creditors have any legal duty to inject new funds into a rehabilitating corporation," and added, "Because secured creditors decide based on the likelihood of recovering claims and shareholders decide based on investor interests, the success or failure of rehabilitation depends less on assigning blame to a particular party and more on how incentives are designed for each stakeholder to participate in funding." In the recent rehabilitation of Homeplus Co., the tug-of-war between controlling shareholder MBK Partners and the largest secured creditor, Meritz Financial Group, over raising 200 billion won in new funds could fit this case.
Kim also explained about JTBC's ongoing Autonomous Restructuring Support program (ARS), saying, "Even if final agreement with creditors is not reached within the ARS period, if the parties clarified their positions and organized the issues in the process, preparing a pre-packaged plan (P-plan) thereafter can be a big help in bringing the rehabilitation proceedings to a swift and smooth close."
Below is a Q&A with Kim.
─ How recent corporate rehabilitation proceedings differ from the past.
"In the past, after the court decided to commence rehabilitation and approved the rehabilitation plan, the corporation went through a long process of repaying debt according to the plan. Often, M&A or new investment was pursued only as an exit after it became difficult to carry out the plan.
Now the focus has moved forward. Before plan approval, M&A is pursued, and from the early stage of proceedings, work proceeds in parallel to sell necessary assets or raise new funds through DIP financing. From the debtor's standpoint, debt adjustment and business restructuring can start earlier, and from the creditor's standpoint, there is a chance of higher recovery rates and earlier repayment. I see rehabilitation shifting in a more market-friendly direction than in the past."
─ In Homeplus Co.'s case, securing 200 billion won in operating funds was key, but the court ultimately ruled the feasibility was low and decided to dismiss the rehabilitation (on the 17th, two days after this interview, Meritz decided to provide 200 billion won, dramatically reversing the situation). What standards do courts use to judge the feasibility of raising rehabilitation funds?
"Naturally, it must be objectively and sufficiently proven that funding is likely to be actually raised. It is not enough to say simply 'we are willing to lend' or 'we can invest if certain conditions are met.'
The court does not automatically recognize funding feasibility just because a letter of intent to lend or an investment commitment letter is submitted. It must examine what conditions are attached, whether the person issuing the document actually has authority to decide on lending or investment execution, whether the precedent conditions can realistically be met, and whether the funds actually exist. Even if the document is titled a commitment letter, if its content is effectively closer to a conditional letter of intent, its probative value can be weak.
Materials that show the substance of funds and feasibility of execution—such as bank balance certificates, securities account balance certificates, or loan confirmations issued by financial institutions—are important. Evidence of holding the funds and the legal binding force to actually inject those funds into the rehabilitating corporation must both be confirmed.
Such issues also arise in M&A of rehabilitating corporations. In particular, when an overseas investor emerges as an acquirer of a rehabilitating corporation, one must closely examine whether the funds are real and whether those funds can be deployed in a domestic transaction. I recall cases where proof of funds was requested but it turned out there was no substance at all, leading to the cancellation of the preferred bidder's status."
─ In Homeplus Co.'s case, there was contention over who should bear the new funding between controlling shareholder MBK Partners and secured creditor Meritz Financial Group. Is there a party that bears legal responsibility?
"A secured creditor has no obligation to provide additional loans to a rehabilitating corporation. A secured creditor provides funds when it judges, after weighing the possibility of claim recovery and the risks of additional lending, that it is economically advantageous.
The same goes for controlling shareholders. Because shareholders and the company are legally distinct, there is no automatic obligation for a shareholder to bear company debt beyond the shareholder's equity or to inject new funds. Issues of social or moral responsibility may be raised, but they must be distinguished from legal responsibility. Each stakeholder cannot help but act according to its legal position and economic interests. It is hard to say unilaterally that one side is responsible just because the situation is unfortunate.
The role of rehabilitation proceedings is not to assign responsibility to a specific stakeholder, but to align the interests of existing shareholders, secured creditors, and new money providers to create incentives for them to participate in normalizing the company."
─ For corporations like Homeplus Co. with many employees and partner companies, bankruptcy would have major social repercussions. To what extent do courts consider such public-interest factors when deciding whether to continue rehabilitation?
"Courts place great importance on the impact on employment, partner companies, in-store tenants, and the local economy. When determining whether a large corporation with many stakeholders like Homeplus Co. can be rehabilitated, the social ripple effects cannot be ignored. The fact that Homeplus Co. was given multiple chances can be seen as the court doing its best to rehabilitate the corporation in any way possible.
However, the top criteria must be the feasibility of carrying out the rehabilitation plan and going-concern value. If a lack of operating funds makes it hard to continue business itself, and the feasibility of fundraising is not objectively confirmed, extending rehabilitation proceedings can further damage corporate value. Then not only creditors but also employees and partner companies may suffer even greater harm."
─ While other affiliates of JoongAng Group entered rehabilitation, JTBC is proceeding with ARS.
"A group-wide liquidity crisis does not mean every affiliate must follow the same procedure. Each affiliate differs in its assets and liabilities, creditor composition, business structure, and rehabilitation prospects. For some affiliates, court rehabilitation may be suitable, while for others, it may be more efficient to adjust debt autonomously with creditors through ARS or a workout.
However, in cases like JoongAng Group, where inter-affiliate payment guarantees, intercompany lending, and business transactions are intricately intertwined, one cannot view each company's procedure in complete isolation. This is because the way one company's debt is adjusted can directly affect another affiliate's financial condition and rehabilitation prospects.
While choosing the procedure suitable for each company, when ultimately drawing up a rehabilitation plan or a debt adjustment plan, the group's overall cash flows and interests must be reviewed in an integrated manner. Burdens must not be shifted in a way that is unilaterally unfavorable to the stakeholders of any one affiliate. I believe the court, the debtor, and advisors will proceed with restructuring bearing this in mind."
─ Which corporations are suited for ARS, and what conditions are needed for ARS to deliver results?
"ARS is a system that gives a rehabilitating corporation time to escape the risk of enforcement through a comprehensive stay order, while allowing the debtor and key creditors to autonomously negotiate restructuring measures during that period. It is by no means an easy procedure because agreement with creditors typically needs to be reached within a short time.
ARS is more likely to succeed when there are not many creditors and interests are relatively simple. If there is a concrete plan to sell core assets or pursue M&A, and if new investors or funders are secured to some extent, you can persuade creditors that "with just a little time, we can close the transaction."
Conversely, if there are many creditors, if collateral status or repayment priority varies, or if each creditor's interests are sharply at odds, it is difficult to reach agreement in a short period. If plans to sell assets or attract new funds are not concrete, there is less justification for creditors to wait.
JTBC has the business-specific characteristics of a broadcaster, and its asset and creditor structure may differ from other affiliates of JoongAng Group. If there is room to negotiate with key creditors based on the potential for independent investment attraction or sale, ARS can be effective. However, given the complexity of the entire JoongAng Group's interests and the large sums involved, a very meticulous negotiation process will be necessary."
─ What happens if agreement is not reached within the ARS period?
"If ARS does not reach a final agreement, the court generally decides to commence rehabilitation and proceeds with ordinary rehabilitation. Conversely, if agreement is reached, the debtor may withdraw the rehabilitation filing after completing a voluntary debt adjustment with creditors.
However, ARS is not meaningless just because agreement fails. If the debtor and creditors confirmed each other's positions and organized key issues during the negotiations, that can have a positive effect on preparing a rehabilitation plan or obtaining creditor consent thereafter.
In particular, based on the consultations conducted in ARS, a pre-packaged plan, or P-plan, can be prepared. A P-plan is a method where the debtor consults the contents of the rehabilitation plan with key creditors and secures certain consents before commencement, then submits the plan to the court. It can proceed much faster than ordinary rehabilitation."
─ In cases like Contentree JoongAng and SLL JoongAng, where only the parent company enters corporate rehabilitation and the subsidiary does not pursue rehabilitation, what happens to the rights of SLL JoongAng investors?
"In principle, the effect of rehabilitation proceedings is limited to the company for which proceedings have commenced. The rights of a subsidiary's shareholders, creditors, or financial investors outside the proceedings are not automatically restricted just because the parent company has entered rehabilitation. They can exercise their rights based on the terms of their investment contracts and collateral agreements.
If an SLL JoongAng investor holds SLL JoongAng shares as collateral, that collateral right is, in principle, separate from the parent company's rehabilitation as long as SLL JoongAng itself has not entered proceedings. Of course, if the parent's crisis affects the subsidiary's operations and corporate value, collateral value may decline indirectly, but the rehabilitation proceedings themselves do not immediately restrict the collateral right.
By contrast, if the collateralized asset is shares of Contentree JoongAng, which has entered rehabilitation, the situation is different. When a listed company enters rehabilitation, its share price may fall, and capital reduction, new share issuance, or M&A may proceed according to the rehabilitation plan. As the value and equity ratio of existing shares are adjusted in this process, it can directly affect collateral value.
If the parent's equity stake in SLL JoongAng is the most important asset of the rehabilitating company, how to dispose of or utilize that equity can become a key issue in the plan. In that case, even if the rights of investors outside the proceedings are not directly stayed, the parent's equity sale or rehabilitation plan and the investor's contractual rights will influence each other. Ultimately, coordination and agreement among stakeholders are crucial."
─ What is the most urgent area to improve in Korea's corporate rehabilitation system?
"Negative perceptions and institutional disadvantages regarding rehabilitating corporations still remain. When a corporation enters rehabilitation, it faces restrictions in several respects, such as credit, lending, and transaction relationships. Because of these burdens, many corporations fail to seek restructuring early and only turn to the court after the situation has significantly worsened. Systems that impose uniform disadvantages solely because a corporation entered rehabilitation should be eased.
The DIP financing market also needs to be activated. No matter how competitive a corporation's business is, it cannot survive if it cannot secure the operating funds needed during rehabilitation. We must enhance legal stability so that new money providers are sufficiently protected, and create an environment where private financial firms and restructuring-focused investors can actively supply funds to rehabilitating corporations."