Struggling Small and Mid-Sized Manufacturers: How to Design an "Early Termination" Beyond Rehabilitation Approval?

-Legal Column by Attorney Kim Won-sang, Daeryun LLC (Limited)

Amid the prolonged economic downturn and high interest rate trends, corporate rehabilitation filings by small and mid-sized manufacturers driven to the brink of solvent bankruptcy are surging. Many executives feel relieved, regarding the court's "approval of the rehabilitation plan" as the finish line for escaping crisis. But the reality is harsh. Approval is merely the starting line of an arduous restructuring marathon. The strict financial oversight and credit constraints that continue even after approval become another shackle on corporate activity. The key strategy for resolving these risks early is precisely the "early termination of rehabilitation proceedings."

B2B-based small and mid-sized manufacturers, which are absolutely dependent on prime contractors, differ from ordinary companies from the very cause of their crisis. This is because "exogenous shocks," such as a prime contractor's delayed investment or suspension of bidding, can plunge an otherwise healthy company into a liquidity crisis in an instant. However, if such external shocks are not objectively proven, courts or creditors are likely to assess them as mere management failures.

If this misunderstanding is not dispelled at the early stage, executives face a fatal crisis of being subjected to a harsh capital reduction ratio or being stripped of management rights. Therefore, the first step of rehabilitation must begin with proving that the cause of the crisis was an unavoidable external variable, thereby securing "narrative legitimacy" that guarantees the current management's retention and business continuity.

Once the legal defense line is established, the next step is to persuade the creditors. The core of the rehabilitation process is proving that the going-concern value exceeds the liquidation value. Mere figures on the books are not enough. One must demonstrate, as indicators, that relationships with major business partners remain intact and that actual cash flow allows for normal operations even after repaying public-interest debts. Only then can one preemptively block the offensive of creditors pressing for a liquidation-type scenario.

The structure of rights modification also requires precise design. Converting about 80% of the debt into equity and repaying the rest is the common approach, but what matters more lies in the details. In particular, for the uncertain debts of guarantee institutions, which are fatal to small and mid-sized enterprises, a single clause coordinating the timing of subrogated payment and the repayment date to fit the company's financial plan becomes a decisive safeguard protecting the company's cash flow down the road.

The most important point is that all procedures must be designed by working backward from the goal of early termination, which is a swift return to the market rather than mere approval, from the very beginning. To achieve early termination, one must prove that there is no impediment to carrying out the rehabilitation plan. To this end, tax claims should be tied up in installment repayment from the plan-drafting stage, and a preemptive plan should be devised to execute repayment immediately after approval.

Ultimately, corporate rehabilitation is not merely a procedure for having debts forgiven, but an integrated restructuring process that encompasses the characteristics of the industrial ecosystem as well as tax and criminal risks. The golden time is short. The success or failure of a rehabilitation that determines a company's fate can only be secured not by merely observing the situation, but by supplementing legal blind spots and preemptively setting up a sophisticated exit strategy.

Reporter Lee Dong-oh (canon35@mt.co.kr)

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