[At a Crossroads: Listed Companies] H&B Design② Allegations of Concealing 18 Billion Won Contingent Liabilities by Daehan Jonggeon in Acquisition

Daehan Jonggeon Agrees to Pay 18 Billion KRW Loss in May 2022
H&B Design Acquires for 20 Billion KRW After Agreement
Agreement Details Not Reflected in Daehan Jonggeon Valuation

It has been confirmed that Daehan Jonggeon, a subsidiary of H&B Design, a company listed on KOSDAQ, is involved in a lawsuit worth 18 billion KRW. Despite acquiring Daehan Jonggeon after this incident occurred, H&B Design did not reflect this issue in its valuation, which is expected to cause controversy.

According to the Financial Supervisory Service's electronic disclosure system on the 23rd, Daehan Jonggeon agreed in May 2022 to pay 18.3 billion KRW related to losses from the development project of the Yeongheungdo Diomare Resort to Gongwoo ENC, a subsidiary of the Military Mutual Aid Association. However, Daehan Jonggeon did not fulfill this obligation and was sued for subrogation rights by Gongwoo ENC in September 2022. This lawsuit is currently ongoing.

Previously, Daehan Jonggeon participated as a construction company along with Gongwoo ENC in the Yeongheungdo Diomare Resort development project in 2020. However, during the project, the project operator was arrested on charges of illegal activities during the public auction of the resort site, and the project was eventually halted amid the Optimus Asset Management slush fund scandal, a fund fraud case.

As a result, Daehan Jonggeon and Gongwoo ENC, which provided project financing (PF) guarantees such as completion guarantees, faced the obligation to repay losses amounting to 36.7 billion KRW. Due to this, Gongwoo ENC disclosed provisions and contingent liabilities related to the losses in its 2021 audit report and received a disclaimer of opinion.

After receiving the disclaimer, Gongwoo ENC demanded that Daehan Jonggeon, the joint construction company, share the loss burden, and on or around May 2, 2022, both parties agreed to bear 50% of the losses each, which was publicly disclosed. Subsequently, on May 9 of last year, Gongwoo ENC borrowed 36.7 billion KRW from its parent company, the Military Mutual Aid Association, to pay the entire loss amount upfront and requested Daehan Jonggeon to fulfill the agreement, but Daehan Jonggeon did not comply.

The problem lies in the fact that H&B Design did not reflect such contingent liabilities in the valuation when acquiring Daehan Jonggeon.

On July 29, 2022, H&B Design decided to acquire 100% of Daehan Jonggeon's shares for 20 billion KRW. They calculated a value of 30 billion KRW by adding Daehan Jonggeon's estimated operating value and asset value, then deducted interest-bearing liabilities of 10 billion KRW to set the value at 20 billion KRW.

The financial statements used to evaluate Daehan Jonggeon's value were as of the end of June 2022. Although these were financial statements after the agreement to share losses with Gongwoo ENC in May of the previous year, the contingent liability of 18.3 billion KRW was not reflected in the valuation. This contrasts with Gongwoo ENC, which recognized 36.2 billion KRW as provisions in its 2021 audit report. If this had been reflected, it is uncertain whether Daehan Jonggeon's value could have been set at 20 billion KRW.

In particular, it is unlikely that H&B Design was unaware of this contingent liability. At the time of acquiring Daehan Jonggeon, the CEO of H&B Design was former CEO Kim Hyung-soo, who also served as vice chairman of the Hangang Group.

Daehan Jonggeon is an affiliate of the Hangang Group. The shareholders transferring Daehan Jonggeon shares were Ko Dae-woong, chairman of Hangang Group (29%), Hong Sa-myeon, CEO of Hangang Do Class (28%), Lee Jong-hoon, co-CEO of Daehan Jonggeon (28%), and Kim Hyun-cheol, co-CEO of Daehan Jonggeon (15%).

Regarding this, a representative of H&B Design at the time stated, "The agreement with Gongwoo ENC in May 2022 was merely a memorandum prepared for Gongwoo ENC's re-audit and was deferred until a legal outcome is reached, so it was not reflected in the valuation. Daehan Jonggeon became aware of Gongwoo ENC's lawsuit in October 2022 and is currently preparing an objection."

Meanwhile, H&B Design is currently pursuing a merger with Daehan Jonggeon. If the merger is completed, H&B Design may have to bear Daehan Jonggeon's contingent liabilities.