On March 22, 2018, Sungdong Shipbuilding & Marine Engineering (“Sungdong”), a mid-sized shipyard in South Korea, filed a petition to commence a “rehabilitation proceeding” with the Changwon District Court. A rehabilitation proceeding is a court-administered reorganization proceeding comparable to a Chapter 11 proceeding in the United States. In a rehabilitation proceeding, the debtor continues to do business while restructuring its pre-existing debt.
Although filing a petition for commencement of a rehabilitation proceeding does not result in an automatic stay as in a U.S. Chapter 11 proceeding, the bankruptcy court, upon application of the petitioner, usually issues orders to preserve the assets of the debtor and to stay all enforcement actions against the debtor.
In Sungdong’s case, the court entered an order to preserve Sungdong’s assets and also a comprehensive order to stay all enforcement actions against Sungdong on March 23, 2018.
It is expected that the court will decide whether to commence the rehabilitation proceeding for Sungdong within the next few days. If the court finds that Sungdong’s value as a going concern is higher than its liquidation value, it will commence the rehabilitation proceedings. If however, the court finds that the yard’s liquidation value exceeds its going concern value, the court will dismiss Sungdong’s petition and most likely, a bankruptcy proceeding will be commenced to liquidate Sungdong.
1. Sundong's Current Situation
It had been reported that Sungdong was on the verge of liquidation for some time, with E&Y reporting last year that the yard’s liquidation value (KRW 700 billion) is much higher than its value as a going concern (KRW 200 billion). It’s capital as of June 2017 was already minus KRW 1.4 trillion, while its operating profit for the first half of that year was only KRW 13 billion.
Sungdong, which was founded in 2003 and had grown to be a reputable mid-sized shipyard in South Korea, started having financial difficulties in 2010, after the global financial crisis. Due to the downturn in the global market, shipbuilding contracts were cancelled and new contracts were not forthcoming. Faced with a liquidity crisis, Sungdong entered into voluntary restructuring agreements with creditor banks, converting existing debt into equity and borrowing additional funds. Sungdong struggled to revive, implementing stringent self-rescue plans that included asset sales and laying off employees. However, in 2016, the shipbuilding market was at its worst and competition harsh. Without the means to improve its profit margins significantly, Sungdong was not able to win any contracts that year. After surviving on government subsidies for 8 years, the government finally decided to let go and have the bankruptcy court take over. Highly doubtful that Sundong would revive on its own, it is expected that even if a rehabilitation proceeding is commenced, the yard will be probably be sold after a “clean-up,” i.e., debt restructuring.
2. Immediate Next Steps
When a petition for commencement of a rehabilitation proceeding is filed, the court usually conducts (i) a site visit to the petitioner’s business; and (ii) an interview with the petitioner’s business representative. The court then decides whether to commence the rehabilitation proceeding. If a rehabilitation proceeding is commenced, the court will issue a decision (i) not to appoint a custodian (in which case the current representative becomes the custodian as a debtor-in-possession), (ii) appoint a co-custodian to act jointly on behalf of the debtor, or (iii) if special circumstances merit such a decision, appoint a custodian. The court will also set deadlines for creditors to submit their claims, accompanied by supporting documents.
In due course, the court will also order the debtor to submit a rehabilitation plan, which will eventually be subject to vote at a creditor’s meeting and approval by the court.
3. What Foreign Creditors Should Expect
If a rehabilitation proceeding is commenced, creditors known to the debtor (whether domestic or foreign) usually receive a notice in writing via email or post. The notice advises the creditor of the fact that a rehabilitation proceeding has been commenced for the debtor and that the creditor must file its claim with the Changwon District Court by the given deadline. The notice is usually posted on the debtor’s website as well.
Yulchon"s Insolvency and Restructuring Team specializes in both domestic and international bankruptcy cases, with a wide range of representation experience in corporate rehabilitation and bankruptcy proceedings in South Korea and other insolvency proceedings globally. If you have any questions regarding how to preserve your claims in the Sungdong case or insolvency and restructuring in general, please do not hesitate to contact any member of our team or your usual contact at Yulchon LLC.