Homeplus Likely to Go Bankrupt... How Will Wages, Supplier Payments, and Short-Term Bonds Be Handled?

In the event of consequent bankruptcy, a trustee disposes of the assets... wages and public-interest claims are repaid first

The 62 stores held as Meritz trust collateral will be handled separately... recovery of general claims such as short-term bonds is unlikely to be easy

With Homeplus halting operations at large discount stores nationwide on the 13th, the possibility of bankruptcy has grown considerably. If the decision to discontinue the rehabilitation procedure is finalized and the case moves to consequent bankruptcy (in which, when a rehabilitation procedure ends midway without achieving its purpose, the court declares bankruptcy ex officio), the fates of stakeholders—employees, suppliers, and short-term bond (electronic short-term bond) investors—are expected to diverge according to the repayment order set by law.

The legal community believes that, unless new funds to raise the chances of rehabilitation are secured, Homeplus is likely to proceed to "consequent bankruptcy" linked to the rehabilitation procedure.

Attorney Kim Won-sang of the law firm Daeryun said, "At present, there is no visible variable that could raise the chances of rehabilitation, such as attracting new investors or raising funds, so it is more likely to lead to a consequent bankruptcy procedure than an ordinary bankruptcy," adding, "Because consequent bankruptcy proceeds in connection with the rehabilitation procedure, the process can proceed relatively quickly and simply."

If consequent bankruptcy is declared, a bankruptcy trustee appointed by the court, rather than the existing management, will manage the company's assets. The trustee manages and disposes of the company's assets and then distributes to creditors according to the order set by law. However, since 62 Homeplus stores are assets that Meritz Financial secured through collateral trust, those stores are likely to be excluded from the bankruptcy estate and disposed of separately in a manner in which Meritz executes its security rights.

The fates of stakeholders—12,000 employees, 1,000 indirectly employed workers, some 4,600 supply and service firms, and short-term bond holders—are expected to diverge according to the nature of their claims. Wages, supplier payments, and taxes arising after the commencement of the rehabilitation procedure are recognized as public-interest claims and repaid ahead of ordinary bankruptcy claims.

Employees' unpaid wages are repaid ahead of other ordinary claims. The final three months' wages and final three years' severance pay, etc., can be subject to top-priority repayment, and can also be received first within a certain limit through the government's substitute payment system. However, if the unpaid amount exceeds the limit or the remaining assets are insufficient, full recovery may be difficult.

Supplier payments vary depending on when they arose. Payments arising after the commencement of the rehabilitation procedure are likely to be recognized as public-interest claims, but unsettled payments arising before that may be classified as ordinary bankruptcy claims and pushed down in the repayment order.

Conversely, the prospects for recovering financial investment claims such as asset-backed short-term bonds (ABSTB) are not high. Short-term bonds without separate collateral are classified as ordinary bankruptcy claims and receive distributions from the assets remaining after security holders and public-interest claims are paid first. Related claims amount to about 400 billion won, and damage to individual investors is estimated at around 300 billion won.

On the other hand, the Meritz Financial Group, which secured major stores as trust collateral, can exercise its security rights ahead of other creditors. Meritz has currently set a first-priority beneficial interest on 62 of Homeplus's own stores. Since trust collateral assets are usually handled separately from the general bankruptcy estate, Meritz can sell those stores and recover its loan principal and interest first.

Attorney Kim said, "Since a considerable portion of Homeplus's core assets are already tied up as trust collateral, it is realistically not easy to secure distribution resources that would go to general creditors."

In the market, there is talk of the possibility that Meritz will selectively sell prime stores or bundle some stores to hand over to retailers or real estate developers. Since trust collateral stores account for most of Homeplus's assets, the observation is that if Meritz executes its security rights first, the resources general creditors can actually receive in distribution could be greatly reduced.

Reporter Kim Myeong-geun meang@viva100.com

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Homeplus Likely to Go Bankrupt... How Will Wages, Supplier Payments, and Short-Term Bonds Be Handled? (Go to link)