중앙데일리

How can a troubled company avoid liquidation?

It can apply for court receivership or enter a debt workout program.

Feb 24,2009
The term “court receivership” frequently appears in the news these days. Recently, for example, a Korean court was reported to have granted Ssangyong Motor’s request for court receivership.

But what is this system? To begin with, court receivership first appeared in 1962.

A company files for court receivership when top management believes it can no longer handle financial insolvency and tries to avoid seeing the company bankrupted.

Korean automaker Ssangyong Motor’s top management applied for court receivership on Jan. 9 after failing to receive financial aid from its largest shareholder, Shanghai Automotive Industry Corp.

Ssangyong, which specializes in sport-utility vehicles, saw its business seriously hurt from the sharp hikes in international oil prices last year and later by the global economic downturn that continues even today.

The company said it had no other choice but to apply for the court’s debt rescheduling program, although it has tried various routes to solve its worsening financial situation.

After reviewing such an application, the court has to decide whether to accept it. Just because a company is struggling doesn’t mean that the court will accept a request for debt rescheduling.

A company is liquidated - which means that its assets are sold to pay off its obligations - if the court decides not to accept the request.

If the court approves the company petition, its debt is put on hold for the time being, allowing the company to repay over an extended period.

The company, however, is not allowed to sell its assets without the approval of the court. In some cases, a company’s management applies for court receivership in a move to avoid paying debts.

To prevent such manipulations, the court makes its decision after studying the company.

Court receivership is granted to companies when the judge is convinced that the company’s business situation will improve and can be managed on its own after it is restructured under the court’s supervision.

In the case of Ssangyong, it took almost a month before the court decided to accept the petition. The court not only looked into the request very carefully, but the judge also visited the factories and met with Ssangyong employees before making the final decision to grant court receivership.

The court said the debt rescheduling of the automobile manufacturer has to start immediately because the company is short on cash.

It seems the decision to take Ssangyong into court receivership was due to a decision that shutting it down would have a massive impact on the domestic economy.

But just because a company is in court receivership does not necessarily mean that the company’s management will be normalized.

The court decides on whether the company will survive or not within one year. If there is no sign of restoration, the company is liquidated.

Once the court decides to manage a company’s debt rescheduling, it appoints a restructuring team that will run the company instead of the company’s previous management.

Additionally the court designates an investigation board that will continuously monitor the company’s management status as well as financial situation, which will be reported to the court.

A study is made within four months and once the report is complete the court holds a meeting of shareholders and creditors.

Here, shareholders and creditors will discuss whether it is worthwhile to keep the company alive or if it is better to sell whatever assets the company still has.

If shareholders and creditors think it is better to liquidate the company, its assets are evenly divided. The company’s future prospects are once again evaluated four months after the court’s initial acceptance.

The company is ordered to turn in a company restoration plan once the shareholders and creditors decide to keep the company alive.

The overall manager appointed by the court to steer the company has to come up with plans within four months. The court once again calls in the shareholders and creditors, and the group votes on whether it agrees to the plan or not. If the plan is accepted the work on helping the company normalize begins.

Generally, from the time the initial receivership application is turned in, it takes about a year before the restructuring program begins.

Once the process starts, management has to frequently report back to the court and seek supervision.

If the company does not follow the plan it has submitted, the court declares the company bankrupt.

If the process goes as planned, the company graduates from court receivership. It generally takes around three to four years. Jinro, the leading soju manufacturing company, graduated from court receivership in September 2005 after filing for the program in May 2003.

It took the soju maker two years and four months.

The reason Jinro could graduate from the program so early is because Hite Brewery bought Jinro and the company’s debt. The court concluded that Jinro’s books would improve thanks to Hite.

There’s another system other than court receivership that an insolvent company could choose - a “workout.”

As the term indicates, in a workout, a company entirely reshapes itself and throws away unnecessary parts.

Jack Welch, General Electrics’ chairman, is famous for strengthening the company through restructuring of insolvent GE subsidiaries as well as cutting back on workers.

Korea adopted the workout system in the late 1990s after the country suffered from the Asian financial crisis. Like court receivership, the purpose of a workout is to revive the company and reduce the economic loss.

But unlike court receivership where the court is involved, a workout is a program that is made in agreement between the company in dire straits and its creditors, which are the financial institutions that the company borrowed money from.

The workout is proposed by either the company or the financial institutions and the final decision is made by the creditors’ group.

Once the workout begins, both the companies and lenders must accept a certain amount of loss.

For the creditors, the time when they recover the loan that they had made to the company will miss its repayment deadline. Also the interest on the loan would have to be lowered.

Additional financial aid would have to be made out to the company.

A company that is under a workout program would have to sell its assets as well as restructure insolvent subsidiaries.

The company would have to cut back the number of its employees as well as salary packages. The workout efforts are to prevent larger losses.

The company would survive its current critical situation but could also achieve a surplus if the workout program is properly executed.

For the lenders, they could recover the money that they had loaned to the company. Furthermore, it would contribute to the country’s economy.

However, if the workout program fails, major financial losses will be made. Therefore, creditors, when deciding on whether to give a green light to a workout program, carefully review the situation before making their final call.


By Moon Byeong-joo JoongAng Ilbo [ojlee82@joongang.co.kr]


Workers walk past the entrance to Ssangyong Motor, which has been granted a request for court receivership. [JoongAng Ilbo]



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