Pilot Operation of the Pre-ARS System
Civil Mediation Before Filing for Rehabilitation
Confidential Negotiations with Major Creditors
Expectations are rising for the "pre-ARS (pre-Autonomous Restructuring Support)" system, which the Seoul Bankruptcy Court will begin piloting in May. Attorneys have evaluated that this system could become a practical platform for securing the "golden time" for corporate rehabilitation and enabling restructuring while avoiding the stigma associated with formal rehabilitation procedures.
"Silent Restructuring Possible"
Pre-ARS is a system in which companies experiencing or at risk of financial difficulties can, prior to filing for rehabilitation, use the court's civil mediation process to conduct confidential restructuring negotiations with major creditors. The existing ARS (Autonomous Restructuring Support) system, introduced in 2018, has been used in various cases such as TMON, Wemakeprice, and Interpark Commerce. However, because it requires a formal rehabilitation filing, it has been difficult to avoid issues such as loss of maturity benefits or stigma effects. The Seoul Bankruptcy Court has advanced the existing system by introducing a framework of "confidential mediation." From application to completion, the process is not disclosed externally and does not appear in the court's case search system.
Attorneys generally responded positively, stating that the pre-ARS's proactive approach and confidential process could significantly enhance the effectiveness of corporate rehabilitation. Choi Hyojong (51, Judicial Research and Training Institute Class 34), attorney at Law Firm Lin, said, "Pre-ARS is a positive initiative in that the court has recognized the problems with the rehabilitation system and placed institutional emphasis on 'confidentiality.' In reality, merely filing for rehabilitation often leads to frequent creditor collections or loss of business partners, so this can greatly improve a company's chances of survival."
Lee Jinman (61, Class 18), attorney at Law Firm Songwoo, said, "This is an ideal system in that companies can negotiate with major creditors and have an opportunity for recovery before falling into crisis. If restructuring succeeds, there is no need to file for rehabilitation, and normal business operations can continue without external disclosure."
Lee Jinwoong (50, Class 30), attorney at Kim & Chang, also stated, "While the existing ARS inevitably led to external exposure due to the prerequisite of a rehabilitation filing, pre-ARS is a step forward in terms of effectiveness because it proceeds as confidential mediation."
There are also opinions that the court's supervision brings expectations of fairness and stability. Attorney Lee Jinwoong said, "The court is an institution with neutrality and expertise in restructuring, and even if voluntary agreements fail, it is advantageous that the structure allows for flexible transition to workout or rehabilitation."
The U.S. Also Operates a Similar 'RSA' System
Similar systems are already established overseas. The U.S. Restructuring Support Agreement (RSA) system is a representative example. Global companies such as Hertz (car rental), Revlon (cosmetics), and General Motors (GM) successfully carried out restructuring by reaching agreements with major creditors through the RSA process before filing for restructuring with the federal bankruptcy court, thereby reducing debt and attracting new capital.
In Japan, companies facing insolvency risk can utilize civil mediation procedures to adjust debt terms and repayment methods through legislated systems such as "Debt Repayment Agreement Mediation" and "Specified Debt Adjustment," thereby establishing a preventive restructuring system.
Attorney Jeon Daegyu (57, Class 28) stated, "Until now, Korea's rehabilitation procedures have essentially remained reactive restructuring. Pre-ARS could serve as a catalyst for opening a proactive restructuring market."
The Confidentiality Principle Could Be a Weakness
There are concerns that the confidentiality principle of pre-ARS could become a weakness. In the past, Kyungnam Construction faced suspicions of collusion and preferential treatment with creditor banks and related institutions during workout proceedings under the Corporate Restructuring Promotion Act.
Attorney Choi Hyojong said, "In past workouts, closed-door negotiations between banks and companies often led to non-transparent or unfair rights adjustments. While court supervision increases the likelihood of fairness, the fact that the process is not disclosed externally makes securing trust even more important." Attorney Jeon Daegyu also said, "For the pre-ARS system to succeed, discussions should not remain court-centered. Like in Japan, the introduction of various third-party mediation organizations should also be considered." A representative of the Seoul Bankruptcy Court commented, "We plan to cooperate with relevant authorities such as the Financial Services Commission."
Hybrid Restructuring Also Introduced
If debt adjustment through pre-ARS proves difficult, conversion to a "hybrid restructuring" method is also possible. Previously, companies had to choose between a workout under the Corporate Restructuring Promotion Act or a rehabilitation procedure under the Debtor Rehabilitation and Bankruptcy Act for restructuring. However, the Seoul Bankruptcy Court plans to pilot a hybrid restructuring system that combines the advantages of both systems alongside pre-ARS.
Under hybrid restructuring, if a company applies for both a workout and rehabilitation simultaneously, the court can issue comprehensive stay orders and approvals at the application stage, allowing workout negotiations to proceed without the risk of compulsory execution. This enables companies to continue normal business operations during the restructuring process.
The Seoul Bankruptcy Court will present on the pre-ARS and hybrid restructuring systems at the Insolvency Law Research Society on April 28 and plans to begin full-scale discussions.
An Jaemyung, Law Times Reporter
Park Suhyeon, Law Times Reporter
※This article is based on content supplied by Law Times.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
