Measures Required for Successful Corporate Rehabilitation
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It is inevitable that businesses will face financial difficulties at some point. When encountering financial challenges, the corporate rehabilitation process (formerly known as court receivership) and debt adjustment system have garnered much attention among small and medium-sized enterprises (SMEs). According to data from the Seoul Bankruptcy Court, until 2022, many businesses preferred bankruptcy over rehabilitation. However, since this year, more SMEs have been applying for corporate rehabilitation procedures through the 'Debtor Rehabilitation Act' to adjust debts and reduce liabilities.
In Seocho-dong, Seoul, the legal town, several firms specializing in corporate rehabilitation offer in-depth consultations, financial diagnostics, and thorough analyses of business profitability and outlooks. These firms provide tailored, comprehensive consulting to help businesses facing bankruptcy to successfully navigate corporate rehabilitation.
Attorney Cha Hye-seon, who has handled over 350 corporate rehabilitation cases with an 80–90% success rate over the past decade, emphasized, "It's not just about providing legal advice to get a rehabilitation plan approved. The most important task is to establish the most suitable strategic rehabilitation plan for each company, which involves close information exchange and legal coordination with stakeholders to ensure the plan's approval and increase the chances of success."
Q: What advice do you have when a company faces high external debt and the risk of default?
A: When a company's financial structure is heavily reliant on external borrowing, leading to a high debt ratio and constant risk of default, it is essential to apply for corporate rehabilitation as soon as possible, before the company’s value is eroded. Even if the debt repayment rate increases, securing creditors' approval for the rehabilitation plan can lead to easier approval and a smoother path to business recovery. This allows the company to significantly reduce its debt ratio and return to the market faster.
Q: What role does legal support play in corporate rehabilitation?
Corporate rehabilitation is a process aimed at minimizing the damage caused by business difficulties and promoting recovery. Legal assistance and the coordination of rights and obligations are essential. Attorneys must work efficiently to bridge the gap between the debtor's and creditor’s positions. Furthermore, understanding the interests of all stakeholders and analyzing various cases are crucial for swiftly recovering a company's capacity to operate.
Q: What is the importance of the "golden time" in corporate rehabilitation?
Attorney Cha stressed the importance of the "golden time" in corporate rehabilitation procedures. "To correct misconceptions about corporate rehabilitation systems and broaden their application, it is essential to enforce timely submission of rehabilitation requests, just as is done in advanced countries."
She emphasized, "If a company misses the golden time, the likelihood of failure increases. By applying for corporate rehabilitation quickly before the company’s value is damaged, and negotiating with creditors to increase the repayment ratio within the company’s capabilities, the approval of the rehabilitation plan becomes easier. Waiting until the company faces a complete financial collapse and applying for rehabilitation at that point is not advisable."
Q: What can be learned from international corporate rehabilitation practices?
The United Nations Commission on International Trade Law (UNCITRAL) has introduced legislative guidelines that suggest companies facing imminent bankruptcy or unavoidable financial collapse should be required to take timely action. By imposing obligations on business managers, UNCITRAL aims to minimize the impact of financial crises and protect the legitimate interests of creditors and other stakeholders.
Germany, for instance, requires companies that cannot repay their debts on time or are in financial distress within three weeks to apply for corporate rehabilitation procedures. Failure to comply with this obligation can lead to criminal liability for company directors, as well as damage compensation to creditors. Similarly, in the UK, if directors fail to take necessary actions to prevent a company’s deterioration despite being aware of the impending insolvency, they can be held liable for damages caused to creditors.
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