Hwaseung files for receivership with many bills unpaid

Korea’s first shoe company Hwaseung, which owns the sportswear brand Lecaf, filed for court receivership at the Seoul Bankruptcy Court on Jan. 31, creating shock waves among its suppliers.

Under court receivership, the company’s debt could be readjusted and it undergoes restructuring.

The court will make a decision on whether to enact rehabilitation procedures in a month.

Around 50 suppliers to Hwaseung were issued with five-month promissory notes from the company last August in return for supplied clothing and shoes.

On Wednesday, CEOs from 10 suppliers held an emergency creditor meeting in order to recoup the payments they are owed.

“Supply payments [that need to be paid] to the 10 companies for the last fall and winter season are at 60 billion won ($53.37 million),” said Gun Byun-jong, president of clothing company MSA.

“We haven’t received payment since last August,” he explained. “When considering products for this spring and summer, Hwaseung hasn’t made payments for nearly a year.”

Hwaseung’s court receivership application could not only impact direct suppliers but also their own suppliers.

“Payments are made to raw material suppliers after receiving payment for the winter season,” said the CEO of another clothing supplier. “This will surely lead to a domino effect [of failed payments].”

Hwaseung has reportedly also made payments through promissory notes for department store fees. According to the suppliers, those unpaid fees are worth 8 billion won.

“We applied for rehabilitation as debt repayment became difficult due to a lack of liquidity,” explained a spokesperson for Hwaseung. “As of now, we can only wait for a decision from the court.”

Hwaseung reportedly faced a liquidity crisis as sales dropped during the winter season, the most important business period for outerwear companies.

“There weren’t any promotions although down jacket sales were sluggish in November last year,” said the operator of another supplier. “I’m aware that there is a lot of inventory left compared to other companies.”

Hwaseung is currently owned by KDB KTB HS, established by the state-owned Korea Development Bank (KDB) and KTB Private Equity.

Suppliers are saying Hwaseung’s court receivership filing followed Chief Financial Officer Kim Gun-woo’s appointment as Hwaseung’s CEO last September.

“A financial specialist was appointed just before the business season, replacing a sales specialist,” said a Hwaseung supplier president who asked not to be named. “If they wanted to revive the brand, they would not have made that decision.”

The suppliers have formed a creditor group.

BY KIM YOUNG-JU, CHAE YUN-HWAN [chae.yunhwan@joongang.co.kr]