Early Termination Just 3 Months After Approval...The Finish Line of SME Rehabilitation Is Not "Approval" but "Return"

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

For companies undergoing corporate rehabilitation proceedings, the most brutal time is, paradoxically, after the rehabilitation plan is approved. This is because approval is not the finish line of rehabilitation, but the start of a long tunnel of court supervision and credit constraints lasting several years. In the case of a steel toll-processing company I recently handled, it took 8 months from the commencement decision to approval, and then just 3 months after approval, we were able to draw out an early termination. This shows what kind of legal strategy is needed to use the rehabilitation process not as a mere debt forgiveness but as a substantive means of returning to the market.

The first watershed in the rehabilitation of small and mid-sized manufacturers is the superiority between the "going-concern value" and the "liquidation value" calculated by the investigating commissioner. In the above case, the gap between the two values was only about 280 million won, so there was a risk of facing liquidation pressure at any time depending on the sales trend. Accordingly, at the due diligence stage, beyond simple accounting estimates, we proved, with objective data, self-rescue efforts such as a confirmation of maintained transactions with major sales outlets and the relocation of the factory. This response was positively reflected in the going-concern value assessment and became a decisive factor in securing trust by presenting creditors with a higher recovery possibility compared to liquidation.

The fate of management is also a key variable determining business continuity. Article 205, Paragraph 4 of the Debtor Rehabilitation Act provides for the retirement of shares and capital reduction when insolvency arises through the responsibility of management. However, in the above case, we closely demonstrated that the crisis in question originated from exogenous shocks such as the prime contractor's bidding delays. As a result, we defended management rights through a 2:1 share consolidation—an exceptionally lenient level in practice—and, by specifying the retention of the current management, were able to fully preserve the company's core assets: its technical know-how and prime contractor network.

The "early termination" confirmed just 3 months after approval is the final fruit of such legal design. A considerable number of companies rest content with the approval decision, but to quickly escape the court's supervision, an early termination based on Article 283 of the Debtor Rehabilitation Act is essential. In the above case, we designed the cash flow structure by working backward from the rehabilitation plan stage so that initial repayment resources could be secured immediately right after approval. Behind the court's short-term conviction that "there is no impediment to carrying out the rehabilitation plan" was an objective repayment-performance capability prepared with termination as the goal from the beginning of the application.

Ultimately, the rehabilitation of small and mid-sized manufacturers, unlike that of large corporations, is essentially about preserving management's business expertise and a swift return to the market. Rehabilitation should be used not merely as a procedure for adjusting debt, but as an advanced legal compliance means for improving the company's constitution and re-entering the market. The external audit costs and constraints on fund operation that continue for several years after approval can be resolved early through such a sophisticated exit strategy aimed at early termination.

Management considering rehabilitation must, from the beginning of the application, undertake meticulous legal review with the possibility of early termination after approval in mind. The assistance of an expert who can precisely weave the particularities of the individual business site into the rehabilitation plan and draw out the court's recognition is essential. This is because only a strategy properly designed from the start is the most realistic measure to shorten the distance between approval and termination and put the company back on a fully normal track.

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

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