Troubled firms abuse court control program
By Kim Tae-jong
The number of companies filing for court receivership has jumped almost 10-fold over the past five years, data revealed Friday. It is sparking an ethical debate because the legal maneuver is considered as a damaging last resort for survival at the expense of creditors, investors and partners.
The debate intensified after Woongjin Holdings and its construction subsidiary Kukdong Engineering & Construction together applied for court receivership Wednesday.
Debt holdings by Woongjin Holdings and its affiliates were estimated to stand at about 1 trillion won in June.
According to industry reports, the number of firms applying for court receivership soared to 712 last year from 76 in 2006.
The sharp rise is attributed to the fact that it is more favorable to companies than other options.
Under court receivership, management can maintain control of the company so they can create their own recovery plan without the intervention of creditors.
As a result, courts are now dealing with growing applications for receivership.
The Seoul Central District Court now manages the largest number of firms that go belly up.
In September, it managed 207 firms, up 30.2 percent from 159 in November 2010 with the assets of companies under receivership estimated at over 10 trillion won.
The court has 26 judges in the bankruptcy division, meaning each has to oversee about 10 businesses.
Critics argue that court receivership has been abused to cause negative impacts on financial firms.
“This can obviously be seen as a moral hazard,” an official from a local bank said. “A lot of companies with poor earnings seem to choose court receivership to avoid responsibility, causing massive damage to creditors and business partners.”
In this regard, many industry insiders claim that the Woongjin case is the latest example demonstrating how court receivership is abused.
While shedding tears, Woongjin Group Chairman Yoon Seok-geum pledged Thursday to overcome the unexpected crisis but he faces criticism that he had long prepared for court receivership in order to shirk responsibility.
According to the Financial Supervisory Service, Woongjin Holdings repaid 53 billion won in loans to subsidiaries Woongjin Think Big and Woongjin Energy on Sept. 19, a week before it filed for court receivership. The original maturity date was Sept. 28.
Although it is not illegal to pay loans earlier than their maturity dates, the move surely worsened the financial soundness of Woongjin Holdings.
Moreover, the chairman’s wife Kim Hyang-sook sold all her stock in Woongjin Think Big, worth 400 million won, for two days before Woongjin Group officially announced its decision to apply for court receivership a move to allegedly avoid a drop in price. She will have saved herself about 50 million won.
The FSS said Friday it has launched an investigation to see whether it was a case of insider trading using confidential information.