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Construction Companies and Rehabilitation Process

2010.03.30

We recall how, after the collapse of Lehman, a large number of our domestic construction companies were faced with imminent threats of bankruptcy during the second half of 2008. 
 
Because of the close relationship between the construction companies and corporations from a range of other industries, the bankruptcy of construction companies has not been the sole concern of the construction industry. Accordingly the creditor banks and other financial institutions have led and implemented a variety of restructuring programs in the past year. Despite their efforts, the issues of restructuring process of domestic construction companies have once again become the center of current media's attention as Sung Won Corporation was put in the danger of bankruptcy and applied for rehabilitation process on March 16, 2010 and other construction companies began to grow anxious of their chances of survival. As a former judge and a lawyer currently specializing in corporate rehabilitation, I firmly believe that supporting rehabilitation of companies in financial difficulties helps our economy function more efficiently and effectively. In light of my personal experience, however, the reality of the construction industry structure and the rehabilitation procedures makes it difficult to believe that companies can resume their normal operation of business after going through the rehabilitation process for the following reasons. 
 
First of all, construction companies often face grave difficulties due to their frequent use of project financing. Under normal circumstances, there is no doubt that project finance is a useful way to raise large sum of capital necessary for construction projects. However, project financing is structured to minimize the risks of the lenders, including but not limited to separating the lenders' interests from the risk of the developers going bankrupt and maximizing the highest return possible for the lenders. Despite the lenders' participation in the project financing based on their independent assessment of the profitability of the project, notwithstanding the low credit rating of developers and their lack of capital, the construction companies bear the sole responsibility to discharge the liabilities of the developers in the events of their defaults. The companies have no protection mechanism for themselves, while the lenders are fully insulated from the insolvency and bankruptcy risks of the developers. 
 
Further, although not only limited to construction companies, the society does not provide an environment where construction companies can effectively overcome their economic hardships on their own. As can be commonly observed, corporations in financial difficulties are rarely given the opportunity to play a lead role in rehabilitation process by restructuring themselves; instead they are often involuntarily subject to programs collectively led by lenders and creditors, pursuant to which they are granted an extension of loans and at times, the promise of funding. While they are exhausting their options agreed with the lenders and creditors, the companies lose their best opportunity to begin the rehabilitation process. By the time they turn to their last chance of rehabilitation process, it is simply too late. On a personal note, I have not come across a single case, for a period of more than ten years after the IMF, during which time a construction company which voluntarily entered into rehabilitation process, succeeded in restructuring the company, and resumed its business. As of now, the only way to conclude the rehabilitation process of a construction company is to delay the fall in value of the company by selling its assets until a third party acquires the company. 
 
Lastly, another problem is the delay of shareholders or board of directors in deciding to apply for rehabilitation process, which is undoubtedly closely related to the reasons discussed above. The shareholders and the board of directors often focus their decisions on the protection of their own interests and give insufficient consideration to a broad range of stakeholders, such as creditors, employees, and customers. The rehabilitation process requires the stakeholders to suffer a certain degree of loss so as to maintain the value of the company by way of keeping the employees and minimizing the loss of the creditors and other parties-which will in turn ensure that the shareholders' interests are protected to the greatest possible extent. The delay in the rehabilitation process, due to the unwillingness to give up the decision-making power over the management of the company, not only contributes to further depreciation of the value of the corporation and such delay affects all stakeholders, including the shareholders themselves. On the other hand, early entry into the rehabilitation process will prove to be more effective and beneficial to the stakeholders. 
 
I do not think it is easy, although not impossible, for the business to get back on track by going through the rehabilitation process, which takes a lot of time and effort. However, I believe that it is desirable for the construction companies to begin their rehabilitation process in the early phase of financial difficulties, without any delay, when the foundation of business is still intact. In order to have sufficient funding available for the implementation of all the required process, the company should also consider early M&A before the value of the company depreciates any further. It is fortunate that in recent years, the courts are becoming more and more familiar with this type of M&A. 
 
It cannot be stressed enough that the shareholders and the creditors should both strive to make the best decision that will protect and maximize both of their interests.

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