Criteria for Choosing Corporate Rehabilitation vs. Corporate Bankruptcy for Small and Medium-sized Enterprises Facing Financial Difficulties

If the business can generate operating profits, corporate rehabilitation is the way to go. If accumulating operating losses are unavoidable, corporate bankruptcy is the solution.

Corporate rehabilitation or bankruptcy is not just about numbers; it is a management strategy for a new leap forward.

In a situation where business funds are not flowing smoothly, is closing the business the only right choice? Recently, with the tightening of the financial market and the cash flow difficulties in business management, there has been an increase in consultations with bankruptcy law experts in Seocho-dong. Attorney Choi Hye-seon, who has represented around 350 corporate rehabilitations and 150 corporate bankruptcies, shared insights in an interview regarding corporate rehabilitation vs. corporate bankruptcy.

Q. How do corporate rehabilitation and corporate bankruptcy differ, and what situations are they suitable for?

A. Corporate rehabilitation involves continuing business operations to generate sales and paying off debts with operating profits over a period of up to 10 years, with the remaining debts being forgiven. On the other hand, corporate bankruptcy involves liquidating all of the corporation's assets, repaying debts, and forgiving any unpaid debts while liquidating the corporation itself.

In other words, if the company is facing a liquidity crisis due to insufficient cash flow, such as unpaid transaction payments, tax arrears, overdue loan interests, and employee wage arrears, but sales are still alive, and there is a prospect of generating operating profits in the future, corporate rehabilitation is the solution. However, if it is judged that no matter the effort, generating operating profits is unlikely, corporate bankruptcy is more suitable.

Q. Could you provide examples of cases where corporate rehabilitation or corporate bankruptcy was pursued?

A. When facing financial difficulties, CEOs often debate whether to pursue corporate rehabilitation or corporate bankruptcy. If there is no real estate collateral and the credit debt is about 3 billion KRW, and if sales and operating profits are still viable, it is possible to reduce fixed costs such as employee wages and repay debts over five years using operating profits, with the remaining debts being forgiven.

However, if the company has its own factory and has taken out loans with the factory as collateral, and if the collateral loan accounts for more than 60% of the total debt and the factory's productivity or profitability is not good, it may not be feasible to continue generating operating profits even after selling and leasing back (sale-and-leaseback) the factory. In such cases, it is better to file for corporate bankruptcy while there is still some capacity left.

Q. What happens to the CEO who provided joint guarantees for company loans during corporate rehabilitation?

A. When a company borrows from a bank or receives a guarantee from a guarantee institution, the CEO provides a joint guarantee. Even if the company applies for corporate rehabilitation or bankruptcy, the CEO’s joint guarantee debt does not disappear. While the joint guarantee system was abolished on April 1, 2021, guarantee institutions no longer require joint guarantees, but any joint guarantees signed prior to that date still remain valid. In the case of financial institutions, it is a common practice to write limited joint guarantees.

Therefore, when consulting with an expert on corporate rehabilitation, it is crucial to carefully check the CEO’s joint guarantee debt, the company’s tax arrears, and employee wage arrears. It is necessary to examine whether the company can repay or cover these amounts within its financial capacity. Care must be taken to avoid preferential payments or fraudulent activities, as such actions may be challenged during the corporate rehabilitation process.

When a company undergoes corporate rehabilitation or bankruptcy, the method of settling the CEO’s debts involves rehabilitation, bankruptcy, and discharge. In the case of the CEO’s rehabilitation, they continue receiving a salary while repaying debts with disposable income, and the remaining debts are forgiven. If the CEO is unable to work, personal assets may be liquidated to repay debts, and the remaining debt will be discharged.

Q. What are the advantages of M&A in corporate rehabilitation procedures and the ideal timing for it?

A. The advantages of acquiring a rehabilitating company include the reduction of previous debts to the level of net asset value and the elimination of the possibility of contingent liabilities. Therefore, the M&A market for rehabilitation companies is expanding.

In corporate rehabilitation procedures, the court initiates the rehabilitation process, appoints an accounting firm as an investigator to assess the company’s value, and submits a report. If the court determines that continuing the rehabilitation process is appropriate, a rehabilitation plan is submitted. In the past, when the investigator (accounting firm) concluded that the going concern value was lower than the liquidation value, the rehabilitation plan could not be submitted, and M&A often took place before approval. However, recently, companies have been seeking potential investors for M&A before applying for corporate rehabilitation, and the M&A process is increasingly taking place during corporate rehabilitation.

Q. Do you have any special know-how that has led to a particularly high success rate in multiple corporate rehabilitation and bankruptcy cases?

A. In addition to accurately understanding the company’s financial data, we thoroughly assess the future value of the company, the will of the CEO and employees, and the support programs available from organizations such as the Ministry of SMEs and Startups, the Small and Medium Business Corporation, and Korea Asset Management Corporation (KAMCO) to maximize the use of available benefits for each company.

Furthermore, merely approaching the issue legally has limitations. The key lies in combining legal management with financial management techniques, leveraging accumulated experience, and offering both short-term and long-term solutions based on thorough pre-evaluation and investigation, which can fundamentally address the CEO’s and company’s debt problems.

Q. What advice would you like to offer in conclusion?

A. Many entrepreneurs seek consultations on corporate rehabilitation or bankruptcy only after their company’s finances are seriously blocked. Many view corporate rehabilitation or bankruptcy negatively and hesitate to seek career advice. However, it is highly advisable to consult and take action in advance to prevent further deterioration of financial structure, which could help save the company and avoid complete failure.

In other words, the right choice is to consult with experts and take strategic actions as soon as warning signs of financial deterioration appear, rather than waiting for the situation to worsen. Corporate rehabilitation or bankruptcy is no longer just a number; it is a strategic management step for a new leap forward.

Bucheon Personal Rehabilitation Lawyer

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