Starting next month, corporations facing temporary financial difficulties will be able to freeze assets and liabilities while entering into a voluntary agreement (workout) with creditors. The Seoul Bankruptcy Court announced that it will pilot the so-called 'K-Restructuring System,' which allows for simultaneous corporate rehabilitation and workout processes.
On the 16th, the Seoul Bankruptcy Court (Chief Judge Jung Jun-young) held a briefing on improvements to the corporate rehabilitation system and announced that it will pilot the hybrid restructuring system, also known as the K-Restructuring System, starting next month.
Currently, corporations in financial distress apply for a workout with creditors or a corporate rehabilitation application with the court. A workout involves a creditor committee composed of financial institutions extending maturities or providing debt relief and seeking management improvement plans together with the corporation. If a corporation has a large number of creditors or has incurred a significant amount of debt outside of financial institutions, it applies for corporate rehabilitation with the court.
Scholars have consistently pointed out the need to combine the advantages of the two systems. Many corporations entering a workout require freezing their assets and liabilities to continue normal operations. Such measures require court approval. However, the Corporate Restructuring Promotion Act (CRPA), which regulates workouts, stipulates that once rehabilitation proceedings begin, workout procedures are suspended.
In response, the court decided to utilize the ARS (Autonomous Restructuring Support) system introduced in 2018 to enable workout corporations to take advantage of rehabilitation benefits. ARS allows the court not to make an immediate commencement decision for corporations applying for rehabilitation, providing them with several months to seek voluntary restructuring solutions with creditors. During the ARS period, the court can issue comprehensive prohibition orders to freeze assets and liabilities of corporations and grant comprehensive operating permits.
Chief Judge Jung Jun-young said, "I hope that a more efficient and powerful K-Restructuring System will be born from the combination of workouts and rehabilitation procedures." He also noted, "This means that going forward, even if corporations apply for both workouts and rehabilitation simultaneously, the court will regard the workout as the main procedure and provide active support."
Meanwhile, the Seoul Bankruptcy Court announced that it will also pilot the pre-ARS system, a civil mediation system between corporations and creditors, starting next month. The pre-ARS targets corporations that can immediately repay debts but require debt adjustments, such as maturity extensions, to continue operations. While they are not eligible for rehabilitation applications, if corporations find it difficult to negotiate restructuring with creditors on their own, the court will play a mediation role.
Since the pre-ARS is not a rehabilitation application, it has the advantage of helping corporations escape the risk of events of default (EOD). An EOD occurs when a creditor demands the early repayment of a loan regardless of the contract due to certain circumstances. Domestic financial institutions immediately collect loans once they determine that an EOD has occurred after the rehabilitation proceedings begin.
A representative from the Seoul Bankruptcy Court stated, "We aim to find a way to resolve financial difficulties at an early stage when the corporate value or operational capacity has not been compromised, enabling corporations to prevent insolvency, and if restructuring is inevitably necessary, to negotiate with creditors on the timing and method to minimize confusion."