Administrative

Corporate Rehabilitation Lawyer

Corporate Rehabilitation Lawyer | A step-by-step guide from petition to plan confirmation

Summary

Corporate rehabilitation is a court-supervised restructuring procedure for companies that are insolvent or heading toward insolvency but still have a viable business to save (통합도산법, 채무자 회생 및 파산에 관한 법률). Unlike liquidation, the goal is to keep the company operating under a repayment plan approved by creditors and the court. Filing triggers an automatic stay that halts most individual collection actions, giving management breathing room to negotiate a plan. The process is document-heavy and time-sensitive, and the outcome depends heavily on whether creditors and the court are persuaded the business can generate enough cash flow to fund the plan.

Administrative · Insolvency Related law: 채무자 회생 및 파산에 관한 법률 Corporate Court Receivership

Corporate Rehabilitation | Filing the Petition and the Effect of the Automatic Stay

The first question most business owners ask is what actually happens the moment the petition is filed, and how quickly creditor pressure stops.

Who May File

A company itself, or creditors holding a certain proportion of claims, or shareholders holding a certain proportion of equity, may petition for rehabilitation when the company is unable to pay debts as they become due or faces imminent insolvency (채무자 회생 및 파산에 관한 법률 제34조). The petition must be filed with the district court (or the Seoul Bankruptcy Court, depending on the company's registered address and asset size), and must include financial statements, a creditor list, and an initial explanation of why rehabilitation rather than liquidation is appropriate.

Commencement Order and Comprehensive Stay

If the court finds grounds to commence proceedings, it issues a commencement order, which triggers a comprehensive prohibition on compulsory execution, provisional seizure, and other individual enforcement against the company's assets (채무자 회생 및 파산에 관한 법률 제58조). Even before the commencement order, the court may issue a temporary restraining order to prevent creditors from moving assets out of reach while the petition is under review.

Custodian or Debtor-in-Possession

The court typically appoints the existing representative director as custodian under the debtor-in-possession model, unless there is evidence of past mismanagement or fraud, in which case an outside custodian may be appointed instead (채무자 회생 및 파산에 관한 법률 제74조). This decision materially affects whether current management retains day-to-day control during the case.

⚠ The window to act before default judgments or seizures pile up is narrow

Once individual creditors obtain enforceable judgments or complete provisional attachments before filing, reversing those steps inside the rehabilitation case becomes harder. Filing earlier preserves more options for the comprehensive stay to actually protect the company's assets.

Corporate Rehabilitation | Claims Investigation and the Rehabilitation Plan

Once the case is underway, the process shifts to determining exactly who is owed what, and then negotiating a plan that creditors and the court will accept.

Claim Filing and Investigation

Creditors must file their claims within the period set by the court, after which the custodian and other stakeholders may raise objections that are resolved through a claim investigation procedure or, if unresolved, litigation over the existence or amount of the claim (채무자 회생 및 파산에 관한 법률 제147조). The result determines each creditor's voting power and expected recovery under the plan.

Drafting and Voting on the Plan

The debtor or custodian prepares a rehabilitation plan proposing how each class of claims (secured, unsecured, equity) will be repaid, often through reduced principal, extended maturities, or debt-to-equity conversion. The plan is put to a vote by class, and generally requires the consent of a special majority within each class, such as two-thirds of unsecured claim amounts (채무자 회생 및 파산에 관한 법률 제237조).

Court Confirmation and Cram-down

If the required majorities are met and the plan satisfies fairness and feasibility requirements, the court confirms the plan, which then binds all creditors including those who voted against it (채무자 회생 및 파산에 관한 법률 제243조). In limited circumstances the court may confirm a plan even without full consent from every class, provided statutory conditions for such a cram-down are met.

⚠ Missing the claim filing deadline can permanently bar a creditor's recovery

Creditors who fail to report their claims within the period fixed by the court generally lose the ability to participate in the plan or receive distributions under it (채무자 회생 및 파산에 관한 법률 제148조, 제152조). Both debtor companies and their known creditors need to track this deadline carefully.

Corporate Rehabilitation | What Changes for Management, Employees, and Creditors

Business owners often care most about practical consequences: does the CEO keep the job, can employees be paid, and what leverage do lenders retain.

Management's Position During the Case

Under the debtor-in-possession structure, the incumbent representative director generally continues to manage the company as custodian, but major transactions above certain thresholds require prior court approval (채무자 회생 및 파산에 관한 법률 제61조). Shareholders' rights, including the right to appoint directors, can also be restricted while the case is pending, and existing equity may be diluted or cancelled under the confirmed plan.

Employee Wages and Ongoing Contracts

Wage claims and severance pay owed to employees for work performed can qualify as claims with priority treatment, and unpaid wages within a certain period before filing may receive preferential status separate from ordinary unsecured claims. Whether ongoing supply or lease contracts continue is decided case by case, since the custodian can choose to affirm or reject certain executory contracts depending on whether they benefit the rehabilitation.

Secured Creditors and New Financing

Secured creditors do not lose their security interests outright, but their ability to enforce them individually is suspended during the stay, and their treatment under the plan is negotiated separately from unsecured claims. The court may also authorize new financing (debtor-in-possession financing) with priority repayment status to keep operations funded through the case (채무자 회생 및 파산에 관한 법률 제179조).

Corporate Rehabilitation | From Initial Consultation to Plan Confirmation

Financial Diagnosis & Strategy
Review cash flow, debt structure, and asset status to determine whether rehabilitation, out-of-court workout, or liquidation better fits the company's situation.

Petition & Emergency Protection
File the rehabilitation petition along with financial statements and creditor lists, and request a temporary restraining order if urgent asset protection is needed before commencement.

Commencement Order
If the court finds grounds for proceedings, it issues a commencement order and appoints a custodian, triggering the comprehensive stay on individual enforcement.

Claims Investigation
Creditors file claims within the court-set period; the custodian reviews and, where necessary, disputes claims through the investigation procedure.

Plan Drafting & Creditor Vote
The rehabilitation plan is drafted, submitted to a creditors' meeting, and voted on by class of claims.

Confirmation & Implementation
Once confirmed by the court, the company implements the plan under ongoing court supervision until obligations are performed or the case is closed early upon substantial completion.

Corporate Rehabilitation | How Fees Are Typically Structured

Court Filing Fees & Deposits
The court requires a filing fee calculated on a statutory schedule plus a deposit to cover the custodian's and court-appointed examiner's expenses; the deposit amount scales with the company's asset size and case complexity.

Retainer Fee
Attorney retainer fees for rehabilitation cases are generally set higher than standard civil litigation given the volume of financial documentation, creditor negotiations, and court filings involved, and are usually agreed based on company size and expected case duration.

Success or Milestone Fee
Some engagements include a separate fee tied to specific milestones, such as successful plan confirmation or early termination of the case upon substantial performance, agreed in advance and calculated as a percentage or fixed amount rather than guaranteed.

Custodian & Examiner Costs
If the court appoints an outside custodian or an examiner to assess feasibility, their compensation is paid from the company's estate and is separate from the debtor's own legal fees.

Ongoing Case Administration Costs
Throughout the case, additional costs may arise for accounting review, valuation, and periodic reporting required by the court, which should be budgeted for separately from the initial retainer.

※ Costs vary depending on case complexity and specific circumstances; exact fees will be provided during consultation. No specific outcome is guaranteed.

Corporate Rehabilitation | Self-Check Before You File

1️⃣ For Company Management Considering Filing

Has the company already missed payments to major creditors, or is default imminent within the next few months?
Does the underlying business still generate positive operating cash flow before debt service?
Have you documented the causes of the financial distress in a way that can support a feasibility argument to the court?
Are there creditors likely to pursue provisional seizure or enforcement in the near term that would justify an urgent restraining order request?

2️⃣ For Creditors Responding to a Rehabilitation Filing

Have you confirmed the exact claim filing deadline set by the court for this case?
Is your claim secured, and if so, have you reviewed how the stay affects your ability to enforce that security?
Do you have documentation to support the claim amount if the custodian raises an objection during the investigation procedure?
Have you calculated your likely recovery under the proposed plan compared to a liquidation scenario?

3️⃣ For Shareholders and Directors

Do you understand how the plan may affect existing equity, including potential dilution or cancellation of shares?
Have you reviewed which transactions now require prior court approval under the debtor-in-possession structure?
Is there a risk the court will appoint an outside custodian instead of retaining current management, based on past conduct?

4️⃣ For Employees of a Company in Rehabilitation

Have you confirmed whether your unpaid wages qualify for priority treatment under the case?
Do you know whether your employment contract is being continued or is subject to review by the custodian?
Have you kept records of unpaid wage and severance amounts in case a separate claim needs to be filed?

Frequently Asked Questions

Q. What is the difference between corporate rehabilitation and corporate liquidation (bankruptcy)?

A. Rehabilitation is designed to keep a viable business operating while restructuring its debts under a court-approved plan, whereas liquidation (파산) involves winding down the company and distributing its assets to creditors. Courts generally favor rehabilitation when the business's ongoing value as a going concern exceeds its liquidation value.

Q. Can a small or medium-sized company file for rehabilitation, or is it only for large corporations?

A. Companies of any size can file, and the Debtor Rehabilitation and Bankruptcy Act includes a simplified track for small companies with limited assets and debts to reduce cost and case length (채무자 회생 및 파산에 관한 법률 제293조의2 이하 소액영업자 간이회생 규정 참조). The right track depends on the company's asset size, debt amount, and number of creditors.

Q. What happens to lawsuits and collection actions already filed against the company?

A. Once the commencement order is issued, most pending compulsory execution and provisional seizure procedures against the company's property are suspended or discontinued (채무자 회생 및 파산에 관한 법률 제58조). Pending civil lawsuits regarding claims subject to the rehabilitation are generally interrupted and resolved instead through the claims investigation procedure within the case.

Q. Will the CEO lose control of the company during rehabilitation?

A. Under the debtor-in-possession model that Korean courts commonly apply, the existing representative director usually continues to run the company as custodian, subject to court oversight for major decisions. An outside custodian is more likely to be appointed if there is evidence of prior mismanagement, fraud, or conduct that harmed creditors.

Q. How long does a corporate rehabilitation case usually take?

A. Duration varies significantly with the size of the company, the number of creditors, and whether the plan is contested, so no fixed timeline applies to every case. Courts have mechanisms to expedite simplified cases for smaller companies, while larger or contested cases involving complex asset valuation can take considerably longer.

Q. Do all creditors have to agree to the rehabilitation plan for it to take effect?

A. The plan needs to be approved by special majorities within each class of claims, such as a required proportion of unsecured claim amounts, rather than unanimous consent (채무자 회생 및 파산에 관한 법률 제237조). In limited situations, the court may confirm a plan over the objection of a dissenting class if statutory cram-down requirements are satisfied.

Q. What happens to personal guarantees given by the company's owner or directors?

A. The rehabilitation of the company does not automatically discharge personal guarantees given by individuals such as the representative director, since the stay and plan generally apply to the company's own debts, not the guarantor's personal liability. Guarantors facing separate collection actions may need to consider their own personal debt restructuring options.

Q. Can employees still get paid while the company is in rehabilitation?

A. Yes, ongoing wages for work performed after the case begins are typically treated as claims necessary for the case's administration and are paid in the ordinary course, while certain unpaid wages from before filing may receive priority status. Whether the company continues operating and paying employees depends on whether the court authorizes continued business operations during the case.

Q. What if the rehabilitation plan fails after it's confirmed?

A. If the company fails to perform the confirmed plan, the court may convert the case into a liquidation proceeding upon request or on its own initiative if continuing the plan is no longer feasible (채무자 회생 및 파산에 관한 법률 제288조 참조). This is one of the reasons the initial feasibility analysis behind the plan matters so much before it is submitted for a vote.

Q. Should we consider an out-of-court workout instead of formal court rehabilitation?

A. An out-of-court workout under creditor agreement (such as arrangements coordinated through financial institutions) can be faster and less public, but it generally requires voluntary cooperation from major creditors and does not bind dissenting creditors the way a court-confirmed plan does. Which path fits better depends on the number and type of creditors, the urgency of enforcement threats, and whether a comprehensive stay against all creditors is necessary.

Official References

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