On October 11, 2012, the Seoul Central District Court (“Court”) commenced reorganization proceedings against Woongjin Holdings, a holding company of Woongjin Group, under the Debtor Rehabilitation and Bankruptcy Act (“Bankruptcy Act”). As a result, various issues under the Bankruptcy Act related to the reorganization proceedings of Woongjin Holdings surfaced.
- The Sales Prospect of Woongjin Coway Shares: Executory Contractual Issues
Woongjin Holdings entered into a share sales and purchase agreement of Woongjin Coway Co., Ltd. (“Woongjin Coway”) shares (“Share Sales Agreement”) with MBK Partners (“MBK”) on August 15, 2012, and received a down payment from MBK on September 5, 2012. When Woongjin Holdings applied for reorganization proceedings and the Court approved the application just a few days prior to the closing of this transaction, a question arose as to whether the transfer of Woongjin Coway shares would still take place.
As of the commencement date of the reorganization proceedings, the payment obligation of MBK and the obligation to transfer the ownership of Woongjin Coway shares by Woongjin Holdings were not yet fully performed, making the Share Sales Agreement an executory contract under Article 119 of the Bankruptcy Act. Even if reorganization proceedings are commenced, not all contracts are automatically terminated or canceled, especially in the case of an executory contract. If both parties have not yet fulfilled their obligations under an executory contract, as it was the case for the Share Sales Agreement, the trustee or the debtor in possession (“DIP”) may assume or reject the executory contract (Bankruptcy Act §119). Therefore, the survival of the Share Sales Agreement will depend on what DIP determines.
- Supplementary Measure for the DIP System: Appointment of a CRO
Another hot issue regarding Woongjin Holdings’ reorganization was whether the existing management would be declared as a trustee by the Court. The Court did not appointed a trustee and ordered Woongjin Holdings as the DIP for it was unable to find any fraud, dishonesty, incompetence or gross mismanagement of the existing management under the principles of the Bankruptcy Act. Instead, the Court proposed to appoint a chief restructuring officer (“CRO”) based on the recommendation of the creditors’ committee so that the interests of the creditors may be fairly represented.
Although not provided under the Bankruptcy Act, the Court has been testing the CRO system since September 2011 to alleviate the distrust and skepticism of creditors on the DIP system. A CRO is an executive acting as a bridge between the creditors and the debtor, who performs tasks associated not with ordinary business operations but company restructuring, whose work scope is determined based on an individual CRO appointment contract. As of April 2012, approximately 20 companies under reorganization proceedings, including Limkwang Engineering & Construction Co., Ltd. and Byucksan Engineering & Construction Co., Ltd., appointed CROs.