Corporate rehabilitation

Corporate rehabilitation (기업회생/企業回生) is a procedure available for a company regardless of its type facing financial distress under the Act on Debtor's Rehabilitation and Bankruptcy (hereinafter the "Act" 채무자 회생 및 파산에 관한 법률).

It aims at normalizing the business of a financially distressed but economically viable company by coordinating the interests of shareholders, creditors, and other interested parties. If the procedure works properly, companies that are under financial distress continue to operate, typically with debt rescheduling and other restructurings.

On the other hand, companies that are under economic distress would be liquidated.

Key words
rehabilitation, reorganization, liquidation, going concern value, automatic stay, M&A

Rehabilitation process
The procedure for corporate rehabilitation begins with a filing. Filing is normally done by the management of the debtor company but other stakeholders of the company are also allowed to file, including creditors and shareholders holding a value worth more than ten percent of the company’s equity shares. At the time of the filing, the debtor company may also file for a stay order of its debts and other obligations. If the application for a stay order is accepted, payments of debts are suspended and the creditors are not allowed to attach the assets of the company or engage in other preservative measures.

Once the court formally commences corporate rehabilitation proceedings, a creditors’ committee is created and a receiver is appointed. A main mandate of the creditors’ committee is monitoring the operation of the company during the bankruptcy procedure, and several explicit provisions were added in the new Act to bolster the role of the creditors’ committee.

Receivership
At the time when the court makes a decision to formally commence corporate rehabilitation proceedings, a receiver is appointed. The receiver performs various functions throughout the procedure, serving as a general manager and administrator for the debtor company. Prior to the enactment of the Act, the court practice was to dismiss the incumbent manager of the debtor company and to choose a receiver among independent, third-party candidates. With the enactment of the new Act, the incumbent manager of the debtor company is expected to be appointed as a receiver. This is a significant change. The major rationale for introducing this change was to encourage the incumbent manager of a debtor company to file for corporate rehabilitation at an early stage and to be able to fully utilize the business know-how and experiences of the incumbent manager during bankruptcy proceedings. After this change, replacing corporate managers during bankruptcy proceeding has become much more difficult.

The receiver plays a crucial role during rehabilitation proceedings, preparing a rehabilitation plan and serving as a general manager of the company. The rehabilitation plan, which should be prepared within a four-month period from the commencement of the rehabilitation procedure, would include the amount of debts to be written off, a new schedule for debt repayments, a plan for capital restructuring, and a plan for issuing new shares. The plan is a key determinant of the future viability of the company and, once the plan is approved and the company revives, stakes in the revitalized company are distributed pursuant to the plan. Thus the plan also functions as a key determinant of the ultimate allocation of future stakes of the revived company. Preparation of the plan often involves extensive negotiation among stakeholders and under the Act, the role of the creditors’ committee is particularly emphasized, ensuring that the interests of creditors are better reflected in the rehabilitation plan.

Previously, the court also appointed an examiner whose main task is to review the economic value of the company and analyze whether the going concern value of the company was greater than its liquidation value. The going concern value is calculated by discounting future cash flows of the company, while liquidation value is calculated by assessing the value of the total assets of the company if the assets are sold under current market conditions.

Going conern value v. Liquidation value
If a company’s going concern value is greater than its liquidation value, it can be argued that it would be more efficient to make an arrangement for the company’s continued operation. On the other hand, if liquidation value is greater than going concern value, the company should perhaps be liquidated.

Though this argument is conceptually appealing, in practice, it is not easy to calculate and compare going concern value and liquidation value since, among others, the calculation of going concern value depends on the assumption that the company’s future revenues and future interest rates would be stable and constant.

Under the Act, there is no statutory examiner who would calculate the going concern value and liquidation value of a distressed company. However, the court may still exercise its discretion and have these values calculated for reference. If the liquidation value is greater than going concern value, the court may determine not to proceed with the rehabilitation procedure and require liquidation of corporate assets instead.

M&A in insolvency proceedings
In preparing the rehabilitation plan, selling the company, in whole or in parts, can be considered as an option. In particular, in the Act, several explicit provisions were added to facilitate mergers and acquisitions (M&As) involving the debtor company.

For instance, the debtor company is statutorily required to supply requisite corporate information to a potential buyer of the company or of its assets. Also, the court may allow sales of important assets or divisions even before a rehabilitation plan is approved. Further, a planned sale of a company’s assets or divisions may explicitly be included in the rehabilitation plan. Once the rehabilitation plan is approved, the receiver executes the plan and manages the company in the interim under the court’s supervision.

See M&A in insolvency proceedings.