With the Recovery Advisers’ Seoul office seeing a rise in the number of bankruptcy and restructuring cases being handled, we take a look at the possible reasons behind the increase in insolvencies in South Korea and the options available to creditors.
Why the increase in South Korean insolvencies?
Firstly, it should be said that it’s not just South Korea that has seen a spike in insolvencies. For the majority of countries, insolvencies have been rising and globally are predicted to increase by between 9% and 23% in 2024.
The increase can still in part be attributed to post-pandemic adjustments following the withdrawal of large-scale government support. Any cash reserves built up by companies after the pandemic have since come under pressure due to reduced profit margins and difficult funding conditions.
Challenges this year have included geopolitical risks and associated disruptions, stricter credit environments, tight monetary policies amid inflationary pressure, and higher operating costs. Despite inflation rates around the world easing, the cost of borrowing remains elevated.
For South Korea in particular, the combination of high corporate debt, higher interest rates, and depreciation of the Korean won currency in recent years has had a detrimental effect on the business environment.
What remedies are available to creditors of South Korean debtors?
Under the Debtor Rehabilitation and Bankruptcy Act of Korea (DRBA), court-administered insolvency proceedings include both rehabilitation and bankruptcy proceedings.
A Rehabilitation proceeding (Hoesaeng) is a reconstructive insolvency proceeding that seeks to rehabilitate debtors in financial distress via means such as debt rescheduling.
In contrast, a Bankruptcy (Pasan) proceeding is a liquidation proceeding where a court-appointed trustee takes into custody and realises the entire property of a debtor, who is deemed to have no possibility of rehabilitation. The proceeds from the sale of the debtor’s property are then distributed fairly to the creditors.
The table below summarises and compares the key points of each type of insolvency proceeding.
What is the likely outcome if a credit is successfully registered in a debtor’s Rehabilitation or Bankruptcy?
In Rehabilitation cases, the receiver will evaluate the debtor’s assets and then propose to the court for settlement of the claim. Typically, 10-20% of the claim amount will be awarded with the remaining debt waived by the court. The debtor will then likely pay the amount awarded in installments over a certain period of time.
For bankruptcy cases, the timescales and outcomes are less certain. The administrator will investigate the debtor’s assets, auction where necessary any real estate or movable assets, and then prepare a final report – a process which can take anything from a few months to several years to be completed. Following this, prioritized debt is (by law) satisfied first and any remaining assets are then distributed to the other creditors based on the claim amount percentage. However, in many cases, there is no payment to creditors as there are insufficient assets to satisfy repayment of even the prioritized debt.
How can Recovery Advisers support exporters/lenders/policyholders?
Our team of trade & legal experts is fully conversant with the local laws and court procedures applicable to each jurisdiction. With a dedicated office in Seoul for the Korean market, Recovery Advisers are able to support clients by utilizing on the ground presence and local knowledge to provide effective and responsive solutions.
In South Korea, our Recovery Managers can advise on and manage the application process for insolvency proceedings and the documents required for compliant application, including apostilled POA, supporting trade documentation, proof of identity, and any relevant translations.
In a recent bankruptcy case, Recovery Advisers acted on behalf of a policyholder in a transaction between Chinese suppliers and Korean debtors. We identified that the application, which had already been submitted by the policyholder, did not satisfy the requirements for the bankruptcy proceedings and deadlines had not been met. Following close communication with the court administrator, we were successful in re-submitting a compliant application and obtained a court hearing for the case which resulted in the policyholder being awarded a 12.84% dividend from the debtor’s assets.
For a similar ongoing Rehabilitation case, the Korean debtor had not included our client in its list of creditors and the deadline for submitting the application had passed. However, Recovery Advisers overcame this and objected to the administrator’s rejection of the full claim amount despite the very short deadline to do so. The court subsequently advised the administrator to acknowledge the full claim amount.
If you have any questions or would like to discuss a specific case please email us at [email protected].
| Rehabilitation proceedings | Bankruptcy proceedings | |
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Who can initiate/file: |
Creditors who have claims amounted to:
10% of the total amount of issued equity interests of the debtor at par value; KRW50 million, if a debtor is not a joint-stock company or a limited liability company. |
A debtor
A creditor of the debtor. A director, member with unlimited liability, or liquidator of the debtor company. |
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Conditions:
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Debtor is unable to repay its debt without causing a significant impediment to the continuation of its business. Only the debtor can allege this cause, or;
There is a danger that the debtor will become insolvent. |
Inability to pay liabilities when due.
Suspension of payment would lead the debtor to be presumed that he is unable to pay liabilities when due. If the debtor is a legal entity, insolvency can commence if there is an excess of liabilities over assets. |
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Supervision & control: |
A receiver controls and decides on the debtor’s business affairs, subject to court supervision and approval for all material decisions.
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A trustee (usually an attorney-at-law) has control over all decisions for the bankruptcy estate, subject to the court’s approval.
Unlike rehabilitation proceedings, debtor-in-possession management is not allowed. |
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Protection from creditors: |
Once commenced, secured and unsecured rehabilitation claims against the debtor are stayed and cannot be enforced.
Before commencement, the court can issue a comprehensive preservation order imposing restrictions on the creditors’ ability to enforce their claims. |
Once commenced, all bankruptcy claims are stayed and cannot be enforced.
Security interests of secured claims can be freely exercised. Preservation order on debtor’s property before the commencement of a bankruptcy proceeding is rarely issued in practice. |
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Length of procedure: |
In principle, the court must decide on whether to commence a rehabilitation proceeding within 1 month. Unless expedited through a pre-packaged plan, it usually takes at least 6 months to obtain the court’s approval for rehabilitation. | In principle, the court must decide on whether to commence a bankruptcy proceeding within 1 month. The proceedings can take up to a year, or even several years, until the administrator investigates the debtor’s assets, auctions them, and prepares the final report. |
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Time limit for PH to register their credit: |
For the creditor receiver reported to the court, the creditor is only required to confirm the claim amount unless it is disputed. However, creditors who are not included in the list submitted by the debtor should submit the apostilled application in the same was as for bankruptcy. | Usually one month from the date of the court’s bankruptcy decision (usually prior to the first creditor’s meeting)
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