Liquidation case

A liquidation case (청산/淸算 사례) may be rarely found in Korea. This is one of such liquidation case of the Korea Integrated Chemical Inc.("Korea Chemical" 한국종합화학).

Background
Throughout the 1970s since its establishment in 1974, Korea Chemical had carried out its mission as a holding company in the public sector fully committed to implement the core economic development plan with regard to petro-chemical projects.

But quickly changing economic circumstances in the 1980s and the on-going privatization program of the government-invested corporations drove Korea Chemical to divest itself of most subsidiaries except only one downstream product-using company. Several times of restructuring programs were implemented in vain because of price hike of raw materials and low productivity. The more products Korea Chemical manufactured, the more deficit it generated.

Consequently, the government and the major shareholder, the Korea Development Bank ("KDB") concluded that Korea Chemical and its subsidiary should be wound up as soon as possible.

Going concern value v. Liquidation value
If the going concern value (계속기업가치/繼續企業價値) of an insolvent company is greater than the liquidation value (청산가치/淸算價値), the company would have a chance to be reorganized. Otherwise, no one would hesitate to wind it up and liquidate the remaining assets. 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 revenue and future interest rates would be stable and constant.

Going concern value
When a company continues to stay in operation, its market value of all the tangible and intangible assets, as if sold in aggregate, is called as going concern value. The value is calculated from discounted cash flows (DCF 현금흐름할인법) of the company. In this case, going concern value is the sum of the present value of future cash flows and the proceeds of non-business purpose assets.

Liquidation value
When an insolvent company is dissolved, its liquidation value is calculated by assessing the value of the total assets of the company based on the liquidation balance sheet. In other words, it is assumed as if the assets are sold at once under current market conditions. In this case, tangible fixed assets are assessed on a discounted basis by applying the average successful auction ratio of the real estate of the competent bankruptcy court (관할법원의 부동산 입찰절차의 평균낙찰률).

Problems
What was wrong with Korea Chemical? Was the financial distress caused by operational problems or debt/equity structure? Then the appropriate solutions could be adopted for the purpose of corporate turnaround or financial restructuring.

As for Korea Chemical, in a simulation of legal matters, the following problems should be addressed to put aside the question of business operations or financial management at the moment:
 * Generally speaking, why and how could Korea Chemical be wound up and liquidated?
 * What was the best way to sell the properties of Korea Chemical and its subsidiary?
 * How could Korea Chemical negotiate with employee strikers and the trade union which demanded continual employment?
 * By what means, could Korea Chemical soothe and overcome the objections and discontent of community neighborhood?
 * How could Korea Chemical treat any tax or other contingent liabilities which occurred in the course of liquidation?
 * How could the residual properties of the liquidated company be distributed among its shareholders?

Solution
As far as Korea Chemical was concerned, it was the failure of M&A with a productive fertilizer company and the malfunction of the newly started project company that made irrepairable financial trouble.

Finally, the management and major shareholders of Korea Chemical decided to wind up the affairs of the company and dissolve it. Voluntary liquidation began when the special meeting of shareholders of Korea Chemical passed the resolution, and the company generally ceased to carry on business at that time. If the liquidation proceeded as a voluntary winding-up, the general meeting of shareholders appointed the liquidators. The liquidators handled the corporate affairs only to complete liquidation work in a given time period.