The Legal Challenges Left by the "200 Billion Won Injection" Homeplus Consequent-Bankruptcy Risk

Column by Attorney Hwangbo Young of the law firm Daeryun

Homeplus, once a representative of the domestic retail industry, was brought back from the brink by receiving 200 billion won in emergency operating funds and securing the cancellation of the court's decision to discontinue the rehabilitation procedure, but a rough road is still expected before normalization. The point the legal community is watching is not the company's very survival, but the large-scale claim liquidation procedure that will unfold during the rehabilitation process or, in the worst case, upon bankruptcy. This incident, in which claims on the order of 1 trillion won—including unpaid wages and supplier payments—are entangled, is highly likely to lead to a "claim recovery battle" on which the survival of numerous stakeholders depends.

Despite having barely escaped the bankruptcy crisis, the potential risk still most frequently mentioned in this Homeplus incident is the "consequent bankruptcy (牽連破産)" procedure. Consequent bankruptcy is a method in which, if the rehabilitation procedure is discontinued again in the future, the case moves directly to bankruptcy proceedings; it is a system designed to connect the two procedures consecutively so as to maintain creditors' legal relationships as stably as possible.

One reason a company chooses consequent bankruptcy in the worst situation is to maintain the priority of public-interest claims and minimize social repercussions. Public-interest claims that arise in the rehabilitation procedure mean claims that arose to keep the company running—such as workers' wages or payments for goods supplied for normal business operations after the commencement of the rehabilitation procedure. Such claims are protected ahead of ordinary rehabilitation claims, and consequent bankruptcy is used to maintain this priority as much as possible in the bankruptcy proceedings as well.

Although 200 billion won was injected on an emergency basis, Homeplus is known to have almost no cash assets remaining at present, with its remaining assets mostly concentrated in real estate. The problem is that these real estate assets already carry enormous security rights (rights of segregation) held by senior creditors such as financial institutions. Under insolvency law, even in bankruptcy proceedings, security holders can exercise their rights first without being restricted by the bankruptcy procedure and recover their funds. In contrast, unsecured ordinary suppliers or subordinated creditors are placed in a structure where they must compete for distribution over the residual assets remaining after security rights are executed.

The court will declare bankruptcy and appoint a bankruptcy trustee to carry out asset disposal and distribution procedures, but it is not uncommon for large-scale real estate with complexly entangled rights relationships to take a long time to sell. Since actual distribution requires going through many procedures—asset disposal, claim investigation, and confirmation of the distribution schedule—it is highly likely to take considerable time. Moreover, in this process, legal disputes frequently arise, such as the trustee exercising the "avoidance power" to cancel biased repayments made favorably to only specific creditors, or "claim confirmation adjudications" over the confirmation of the rights of claims.

Thus, the Homeplus incident vividly shows that a trading partner's liquidity crisis can approach a company as a fatal chain-insolvency risk. A trading partner's liquidity crisis does not arise suddenly one day. In many cases, various signs precede it—delayed payment, excessive inventory purchase demands, and repeated changes to delivery schedules. If such signs are confirmed, the trading company should immediately review legal measures to preserve its claims, rather than simply watching the situation.

For example, one should raise the likelihood of physical recovery by, in addition to provisional attachment based on the claim for goods payment, securing additional collateral or, through a claim assignment agreement, equipping requirements to assert against third parties with a document bearing a fixed date. In particular, if one holds both a claim and a debt against a trading partner that goes bankrupt, exercising the "right of set-off" to lawfully offset the claim, within the scope not falling under grounds for prohibition of set-off, is also one defensive measure. However, since set-off may be restricted depending on the timing of the maturity for set-off or the time the claim and debt arose, prior legal review is necessary. Therefore, if the risk of a trading partner's insolvency is detected, accurately analyzing the nature of the claim and comprehensively reviewing provisional attachment, exercise of the right of set-off, and whether to secure collateral can be a realistic response measure to minimize damage.

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