[Jeon Daegyu's 7 Trials and 8 Failures] Rehabilitation Companies Forced to Sell Commercial Real Estate

Jeon Dae-gyu, Chief Judge of Seoul Bankruptcy Court

A significant number of companies attempting restructuring through rehabilitation procedures are small and medium-sized enterprises (SMEs). Most of them do not have assets, and even if they do, there are many difficulties in proceeding with rehabilitation. If the assets held are non-operating real estate, they can be sold to repay debts, but selling operating real estate (such as land or buildings for factories or stores) means closing the business. Most operating real estate of SMEs has secured claims established before the application for the commencement of rehabilitation procedures. SMEs applying for rehabilitation intend to continue management while holding operating real estate and establish a rehabilitation plan that repays secured claims (rehabilitation secured claims) in installments during the repayment period under the rehabilitation plan. However, in reality, due to early repayment demands from secured creditors (rehabilitation secured creditors), they have no choice but to prepare a rehabilitation plan that involves selling operating real estate early in the rehabilitation process to repay secured claims. For the rehabilitation plan to be approved, it must receive consent from at least three-quarters of the total voting rights of rehabilitation secured creditors, and to meet this consent requirement, early sale and repayment demands from rehabilitation secured creditors must be accepted.

Rehabilitation procedures are fundamentally designed not to repay debts by selling held assets but to continue the business while retaining assets and repay debts with future income. If operating real estate is sold at the request of secured creditors, the business cannot continue, and naturally, repayment under the rehabilitation plan becomes impossible. Then, the rehabilitation plan cannot be executed, and ultimately, the rehabilitation procedure must be terminated. Is there a way to continue business even while selling operating real estate?

First, it is to sell the existing operating real estate and relocate to a cheaper place. If the business can continue as before after relocation, the existing operating real estate can be sold to repay secured claims. However, realistically, relocating operating real estate for SMEs is difficult due to issues such as permits and complaints, making it a less suitable alternative. Next is the sale and leaseback method. SMEs often need to sell operating real estate to repay secured claims. However, selling operating real estate causes SMEs to lose their production and business base, lowering the possibility of rehabilitation.

SMEs need to consider the sale and leaseback method to maintain their production and business base even after selling operating real estate by leasing back the sold property. The sale and leaseback method allows companies to raise funds under relatively favorable conditions compared to their credit rating, solving debt repayment problems, and reduces the burden of finding new operating real estate and relocation costs. On the other hand, there is a problem that cash flow from business activities may decrease due to the need to pay rent.

Korea Asset Management Corporation (KAMCO) operates an ‘Asset Purchase and Lease Program’ targeting companies with high management normalization potential and those judged capable of repurchasing sold assets within five years through operating cash flow generation. This program supports the continuation of going concerns by acquiring assets of companies undergoing rehabilitation procedures, guaranteeing leases for five years, and granting a right of first refusal for repurchase three months before the lease period ends. It is necessary to make good use of the sale and leaseback method, which allows companies to secure repayment resources for secured claims by selling operating real estate while continuing business activities.

Jeon Dae-gyu, Chief Judge, Seoul Rehabilitation Court