Default and Bankruptcy

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Hello, readers! Finally winter is going away and spring of warm breeze and flowers is coming. But when it comes to Yong-san international business project, so called Yong-san development plan, it seems that the freezing winter has just been started. Recently, the Yong-san plan announced its default status, which it fails to pay the interest of promissory note. But the story is not finished. Whether the Yong-san project goes into bankruptcy or not will be determined on 12th of June. This is the time when the project needs to repay principal for the note. If the Yong-san project defaults again with the principal, court will choose between bankruptcy process and court receivership. Then, I was confused with the bankruptcy and default. What exactly is the difference between those two terms?

Both two terms describe the condition of failing to repay the interest or the principal of the loan until the maturity. But these two terms have quite a different meaning. First, as the Yong-san case, default indicates the situation that the firm or individual, or even a nation fails to repay interests or principal of the debt in a due date. But this does not also mean bankruptcy since it is the court who decides to announce bankruptcy. This decision is based on the possibility of revival which depends on a potential of the defaulter to recover their business. When the firm announces default, it is possible for other creditors to ask for their repayment of money regardless of the maturity. Therefore, it is not easy for the firm to evade its bankruptcy after its default. default_bankruptcy

Then some of you might ask “Is there any solution for this kind of problem?”

Though this situation is very hard to solve, there are two ways that the firm can do when they face default. The first way is to register for the program called workout just before its default. You might confuse this term with working out in the gym, and it is actually somewhat similar. The firm or individual who is in the verge of default, go through this program to be come financially healthy again. If the firm wants to register for the workout, 75 percent of the creditors should agree to do it. When they cannot reach the agreement, they can ask Corporate Restructuring Committee for mediation. As the program begins, support begins such as conversion from debt to investment, postpone of the repayment, and debt reduction.  During the workout period, owner of the firm sometimes pressurized to invest one’s own money to the firm and there is a good possibility of changing the majority of shareholder due to the conversion to investment or reduction of capital.

When the firm fails to reach an agreement for its workout, the court decides whether to make this firm bankrupt or go into court receivership. If the court decides to go into court receivership, first it freezes the debt. It means the firm becomes free for repaying the debt and also means that the creditors cannot receive their borrowing. Then they choose CEO to run the company. Even if there is a disagreement between creditors, the court has legal power to do things by its will. With this program, firm will find way to recover their financial records and start its business again.

In Yong-san case, which I mentioned in the first, already defaulted and cannot have workout as an option. But it can still negotiate with its creditors and register for the court receivership. If the court sees possibility of Yong-san project to recover, it will decide to do the court receivership. So let’s see what happens.

By Um Hojoon

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