Time to overhaul the DIP system

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Time to overhaul the DIP system

Woongjin Holdings’ filing for court protection has raised questions across the board. Creditors accuse the parent company of a leading producer of water purifiers of intentionally going bankrupt by using loopholes in the court protection law. Financial lenders are suspicious of abuse in the debtor-in-possession (DIP) mechanism that allows the corporation filing for bankruptcy to maintain possession and operate businesses while under debt restructuring by its creditors. Woongjin is to receive debt relief and protection from creditors without losing management control after defaulting on their loans.

Creditors have grounds to raise suspicion against Woongjin. The company, however, explained that filing for bankruptcy protection was inevitable to prevent chain insolvencies of affiliated companies. But the case, however, underscored the loopholes and fallacies of the current debtor-in-possession arrangement. The system seemed right at the time when authorities introduced it in April 2006 because companies were scared of court receivership and protection. They feared their shares would be liquidated and that they would lose their management rights. Instead of trying to minimize damage and save their companies, owners and executives often opted to buy time, resulting in unnecessary losses and harmful social ramifications.

The DIP system helped to encourage corporations to file for court protection. But when abused, company owners who mismanaged their businesses are relieved of any liability, while the losses are dumped on subcontractors, creditors and investors.

The controversy over Woongjin’s bankruptcy derives from the system loopholes. There are numerous other companies that filed for bankruptcy protection, and the time has come for authorities to look into the problems. The management of troubled companies must be accountable for poor business operation. Instead of chucking the system, it is best to find ways to apply it rightfully and effectively.

The company owner or chief executive is not assured of retaining management after filing for protection. When creditors and courts find major fault with the CEO or main shareholder, they can be stripped of their posts. But it has been customary for the bankruptcy court to reappoint the current CEO and maintain management to facilitate recovery. The court should exercise more discretion and judgment to appoint the best person to resuscitate the troubled company.
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