Most Read Contributor in South Korea, January 2017
I. Hanjin Shipping applies for rehabilitation proceedings
Hanjin Shipping Co., Ltd. ("Hanjin"), South
Korea's largest shipping operator, has applied for
rehabilitation proceedings with the Seoul Central District Court
(the "Court") on August 31, 2016. Hanjin has been
suffering from financial troubles due to its depletion of operating
funds caused, in part, by its high chartering costs and low freight
fees and, as a result, has been undergoing a private workout and
restructuring program led by its creditor banks. However, due to
Hanjin's failure to procure additional capital, which the
creditor banks requested as a condition to normalizing its
business, the creditor banks decided to terminate the workout
program and Hanjin was forced to apply for the rehabilitation
proceedings. Such rehabilitation proceedings in Korea are similar
to chapter 11 procedures under the United States Bankruptcy
II. Expected procedures of the rehabilitation proceedings
The Court will promptly issue a preservation order and a
comprehensive stay order, which will bar Hanjin's creditors
from enforcing compulsory measures or security rights. The Court is
then expected to decide whether to commence the rehabilitation
proceedings promptly after conducting certain reviews. At this
juncture, the Court will be appointing inspectors(s) who will look
into the status of Hanjin and evaluate the going concern and
liquidation values, deciding on whether to appoint a receiver and
designating time periods for submission of creditors list and
application of claims.
Hanjin's creditors will not be required to separately report
their claims if such claims are accurately reflected in the
creditor list which will be submitted by the receiver within the
court designated period; however, if such claims are not accurately
reflected in the creditors' list, then the relevant creditors
will need to prepare and submit separate reports of their claims.
Such claim reports can be submitted even after expiration of the
designated claim report period, but should be reported prior to the
end of interested parties meeting convened to examine the draft of
rehabilitation plan. Please note that Hanjin will no longer be
liable to make payment on claims if such claims are not duly
reported in time. Rights and remedies arising from claims against
Hanjin will be determined by the rehabilitation plan adopted by the
creditors' meeting and approved by the Court.
On a related note, Hanjin's receiver can terminate contracts
that have not been completely performed before the commencement of
the rehabilitation proceedings, in which case counterparties to
such contracts will hold damages claims against Hanjin. Interested
parties with liabilities as well as claims against Hanjin may be
able to set off their claims against their liabilities under
Since Hanjin is one of the major shipping companies in Korea, it
can be revived through the rehabilitation proceedings or an M&A
transaction. There are, however, some market observations that
Hanjin is likely to be liquidated given that it will no longer be
able to operate container ships as it has entered the
rehabilitation proceedings. Therefore, it would be necessary to
closely monitor the progress of Hanjin's rehabilitation
III. Cautionary notes for stakeholders
When shipping companies such as Hanjin enter into rehabilitation
proceedings, the receiver is generally expected to obtain or
attempt to obtain recognition of the Korean rehabilitation
proceedings as the main proceedings by courts of other
jurisdictions where such shipping companies have assets or visiting
ships. Also, since the governing laws in a number of Hanjin's
contracts are the laws of England and Wales or New York instead of
Korea, the rights and obligations of the contracting parties
including termination of contracts or setoff of claims under such
contracts would require relatively complex legal analysis.
Accordingly, it would be advisable for interested parties in Hanjin
to obtain legal advice from experienced bankruptcy lawyers in order
to prevent their rights and remedies from being unnecessarily
restricted or unenforceable.
Originally published Insolvency Legal Update
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