I. Hanjin Shipping applies for rehabilitation proceedings
Hanjin Shipping Co., Ltd. (“Hanjin”), South Korea’s largest shipping operator, has applied for rehabilitation proceedings with the Seoul Central District Court (the “Court”) on August 31, 2016. Hanjin has been suffering from financial troubles due to its depletion of operating funds caused, in part, by its high chartering costs and low freight fees and, as a result, has been undergoing a private workout and restructuring program led by its creditor banks. However, due to Hanjin’s failure to procure additional capital, which the creditor banks requested as a condition to normalizing its business, the creditor banks decided to terminate the workout program and Hanjin was forced to apply for the rehabilitation proceedings. Such rehabilitation proceedings in Korea are similar to chapter 11 procedures under the United States Bankruptcy Code.
II. Expected procedures of the rehabilitation proceedings
The Court will promptly issue a preservation order and a comprehensive stay order, which will bar Hanjin’s creditors from enforcing compulsory measures or security rights. The Court is then expected to decide whether to commence the rehabilitation proceedings promptly after conducting certain reviews. At this juncture, the Court will be appointing inspectors(s) who will look into the status of Hanjin and evaluate the going concern and liquidation values, deciding on whether to appoint a receiver and designating time periods for submission of creditors list and application of claims.
Hanjin’s creditors will not be required to separately report their claims if such claims are accurately reflected in the creditor list which will be submitted by the receiver within the court designated period; however, if such claims are not accurately reflected in the creditors’ list, then the relevant creditors will need to prepare and submit separate reports of their claims. Such claim reports can be submitted even after expiration of the designated claim report period, but should be reported prior to the end of interested parties meeting convened to examine the draft of rehabilitation plan. Please note that Hanjin will no longer be liable to make payment on claims if such claims are not duly reported in time. Rights and remedies arising from claims against Hanjin will be determined by the rehabilitation plan adopted by the creditors’ meeting and approved by the Court.
On a related note, Hanjin’s receiver can terminate contracts that have not been completely performed before the commencement of the rehabilitation proceedings, in which case counterparties to such contracts will hold damages claims against Hanjin. Interested parties with liabilities as well as claims against Hanjin may be able to set off their claims against their liabilities under certain restrictions.
Since Hanjin is one of the major shipping companies in Korea, it can be revived through the rehabilitation proceedings or an M&A transaction. There are, however, some market observations that Hanjin is likely to be liquidated given that it will no longer be able to operate container ships as it has entered the rehabilitation proceedings. Therefore, it would be necessary to closely monitor the progress of Hanjin’s rehabilitation proceedings.
III. Cautionary notes for stakeholders
When shipping companies such as Hanjin enter into rehabilitation proceedings, the receiver is generally expected to obtain or attempt to obtain recognition of the Korean rehabilitation proceedings as the main proceedings by courts of other jurisdictions where such shipping companies have assets or visiting ships. Also, since the governing laws in a number of Hanjin’s contracts are the laws of England and Wales or New York instead of Korea, the rights and obligations of the contracting parties including termination of contracts or setoff of claims under such contracts would require relatively complex legal analysis. Accordingly, it would be advisable for interested parties in Hanjin to obtain legal advice from experienced bankruptcy lawyers in order to prevent their rights and remedies from being unnecessarily restricted or unenforceable.