1.

Key Details of Pre-ARS

Pre-ARS is a preventive restructuring system that allows companies experiencing or anticipating financial difficulties to restructure their debts or negotiate restructuring terms with major creditors through court mediation under the Judicial Conciliation of Civil Disputes Act before applying for formal rehabilitation proceedings.

Since 2018, the Seoul Bankruptcy Court has been using the autonomous restructuring support (“ARS”) program as a preliminary restructuring system. However, because the ARS program requires filing for rehabilitation proceedings, companies have been hesitant to use it due to the social stigma, known as the “stigma effect,” associated with such filings. The pre-ARS system has been introduced to address this issue. It enables debtors to negotiate the timing and method of restructuring with stakeholders before the formal conditions for rehabilitation proceedings, set forth in the Debtor Rehabilitation and Bankruptcy Act, arise.

If a company needs to negotiate debt restructuring or reorganization with major creditors, it can submit a simple application to the Seoul Bankruptcy Court for pre-ARS debt restructuring. Under the guidance of a conciliation panel, the company can conduct private negotiations concerning restructuring in accordance with the procedures prescribed in the Civil Conciliation Act. Depending on how negotiations progress, the company may include additional creditors or appoint experts such as law firms or accounting firms for detailed negotiation advice.

If the debtor company and its creditors reach agreement on debt restructuring, they may execute an agreement and withdraw the pre-ARS application. If they fail to reach an agreement, the debtor company may proceed with (i) filing for formal rehabilitation proceedings, (ii) applying for workout proceedings under the Corporate Restructuring Promotion Act, or (iii) applying for hybrid restructuring (as described below), and, following any of the foregoing, withdraw the pre-ARS application.
 

2.

Key Details of Hybrid Restructuring

Hybrid restructuring is a combination of workout proceedings under the Corporate Restructuring Promotion Act and rehabilitation proceedings under the Debtor Rehabilitation and Bankruptcy Act where the two proceedings proceed in parallel. The Seoul Bankruptcy Court has implemented this approach to leverage the benefits of both systems, offering a solution to the situation where companies previously faced a mutually exclusive choice between workout or rehabilitation proceedings.

Accordingly, if a debtor files for the commencement of rehabilitation proceedings along with a workout application, the Seoul Bankruptcy Court will support the restructuring by (i) issuing (a) a comprehensive stay order for the debtor’s operation of normal business without being threatened with compulsory enforcement and (b) wide-ranging approvals for the debtor to maintain continuity of business, and by (ii) deciding to suspend the commencement of rehabilitation proceedings for several months through the ARS program in order to allow negotiations on workout proceedings. Under hybrid restructuring, the debtor is able to operate its business normally and negotiate restructuring with its financial creditors, free from the threat of compulsory enforcement by commercial creditors.

If an agreement is executed to implement a corporate improvement plan in workout, the debtor may withdraw its application for commencement of rehabilitation proceedings. If a corporate improvement plan is not resolved or an agreement is not executed to implement the corporate improvement plan, the debtor may carry out restructuring through the commencement of rehabilitation proceedings.
 

3.

Significance of Newly Introduced Pre-ARS and Hybrid Restructuring

The introduction of pre-ARS and hybrid restructuring by the Seoul Bankruptcy Court represents a significant opportunity for companies facing current financial challenges or anticipating future crises. These mechanisms enable timely and proactive corporate restructuring efforts. More importantly, the Seoul Bankruptcy Court’s introduction of the new systems will make possible (i) private restructuring under the court’s mediation prior to filing for the commencement of rehabilitation proceedings, and (ii) parallel operation of workout and rehabilitation proceedings, neither of which was previously an option. Individual companies now are afforded a wider range of choices in deciding on corporate restructuring measures appropriate for their own unique situations.