Filings for court’s bankruptcy protection rise sharply after law revision in 2006


The number of companies filing for court receivership has increased 10-fold in the last five years, raising questions over whether CEOs did it to save their own necks while incurring losses for creditors, investors and customers.

Seven-hundred-and-twelve companies filed for court receivership last year, up from 76 in 2006 when the bankruptcy law was revised to guarantee major shareholders’ management rights and greatly write off the debt.

The revised law adopted the debtor in possession system from U.S. bankruptcy law, under which a person or corporation who has filed a bankruptcy petition remains in possession of property upon which a creditor has a lien or similar security interest. A corporation which continues to operate its business under Chapter 11 bankruptcy proceedings is a debtor in possession.

After the bankruptcy law was revised, the number of firms applying for court receivership surged to 116 in 2007, 366 in 2008, 669 in 2009 and 630 in 2010 as court receivership is more advantageous for the companies compared to entering a debt workout program.

The major shareholder can keep his management rights using the DIP system under court receivership, whereas entering a debt workout program means interference from creditors.

Companies in debt workout can get only liabilities owed to banks and financial firms deducted, while those under court receivership can get both financial and non-financial creditors to write off their debts.

With more firms trying to save their skin through the DIP system, the Seoul Central District Court alone had 207 companies under receivership this month, up 30 percent from November 2010.

Such an increase has earned the court a witty nickname: “the holding company.”

Apparently, each of the 26 judges of the Seoul Central District Court’s bankruptcy division has an average of eight companies in his or her hands.

The combined assets of companies under the court’s receivership are estimated to have jumped from 8.3 trillion won to 10 trillion won in the same period.

“Going under court receivership incurs losses upon investors in corporate bonds as well as subcontractors,” said an official at the Financial Supervisory Service.

“There is also the issue of moral hazard as many attempt to escape bad earnings through receivership.”

Noting that companies usually get advice from large law firms when applying for court receiverships, a bank official said the surge in receiverships plays a part in increasing law firms’ income from consultancy fees.

The judiciary and the companies at risk say, however, that being under strict legal management by the court is better in many ways than joining a debt workout program.

The court, first of all, organizes a committee of outside experts to oversee the firms under receivership.

“Committee members in charge of fund management and restructuring take part as ‘chief risk officers’ of the company which is monitored by the court, so the CEO cannot take unilateral actions,” an official at the Seoul Central District Court said.

Whereas the debt workout program is run based on an agreement by the creditors under a law on promoting corporate restructuring, which has an expiration date, court receivership has its grounds on the integrated law on bankruptcy.

The law on promoting corporate restructuring, which was adopted from Britain, allows a company to enter workout if only three quarters of the creditors agree, causing constant criticism in the judiciary that it may be unconstitutional.

By Kim So-hyun (sophie@heraldcorp.com)