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PF Project Site, Construction Company, Workouts

2013.04.29

In general, under the Corporate Restructuring Promotion Act (“CRPA”), a “workout” refers to a joint administration process of creditor financial institutions where an Agreement for Implementation of Plan for Business Normalization (the “Business Normalization Plan”) is entered into with the Creditor Financial Institutions Committee (“CFIC”). (hereinafter the reference to the Business Normalization Plan includes the CFIC resolutions) A construction company initiating a workout process enters into the Business Normalization Plan with the CFIC and follows the steps specified in the Business Normalization Plan. 
 
Section 2 of the Article 18 of the CRPA provides that creditor financial institutions shall conscientiously perform its obligations under the resolutions passed by the CFIC. The lower court rulings also show that the resolutions passed by the CFIC under the CRPA have binding force on all creditor financial institutions, including those institutions that are absent at the time of voting or that have expressed dissenting opinions against such resolutions. The Business Normalization Plan executed according to the resolutions of the CFIC becomes effective to bind the construction company as well as its creditor financial institutions. 
 
 
1.  Issues regarding Normally Operated Project Site 
 
In the case of a normally operated project site, the Business Normalization Plan places the burden on the PF lenders to take such measures as providing additional funding and extending the loan maturity date, and stipulates rules to prevent the construction company from adding onto its financial burden. This is based on the assumption that having the business to continue would accelerate debt recovery. 
 
At the time of the completion of the normally operated project site, a dispute may arise between the PF lender and the CFIC over who should be paid first between the construction company and the PF lender. The dispute often arises where there is a discrepancy between the Business Normalization Plan and the PF agreement with the PF Agreement giving priority to the PF lender, while the Business Normalization Plan giving priority to the construction company. To complicate matters, such disputes may sometimes involve the right of the project developer not bound by the Business Normalization Plan to consent to the withdrawal of funds. However, the core issue deals with the direct conflict between the creditor financial institutions and the PF lender. The position of the creditor financial institutions is that since they have absorbed suspension of debt recovery, new credit offering and debt-for-equity swaps, the PF lender should bear the burden of deferring the collection of its loan in light of the bad financial state of the construction company caused by the shortage of the construction funds. 
 
Consequently, it stands that in many cases the PF lender will be deemed to have violated the Business Normalization Plan, which takes precedent over the PF Agreement. Under the CRPA (Sections 1 to 3 of the Article 21), if a creditor financial institution fails to comply with the CFIC resolutions, it shall be jointly and severally liable for the loss sustained by other financial institutions and the liable creditor financial institution has to pay its penalty to the CFIC for all other creditor financial institutions. Additionally, the amount of penalties and distribution of such penalties received shall be determined by the CFIC and any dispute arising from such penalties shall be settled by mediation by the CFIC’s mediation committee 
 
However, where there are violations of the Business Normalization Plan and disputes among the parties ensue, it is highly likely that the business normalization of the construction company would not be fulfilled and would result in an unfavorable outcome for all parties, including creditor financial institutions, the PF lender, and the construction company. 
 
If such disputes arise, it is recommended that efforts be made by the CFIC, an autonomous decision-making entity, to work in favor of the construction company.  Instead of resolving issues by way of compensation to the parties, the CFIC should encourage the sharing of the necessary financial support to the construction company and guide the creditor financial institutions in arriving at agreement over the respective proportion of support to be rendered to the construction company by the creditor financial institutions. 
 
 
2. Issues related to the sale or reservation of project sites 
 
In relation to the project sites for sale or reservation, some Business Normalization Plans stipulate that the construction company cannot be changed or the project site cannot be sold until the guarantee and loan are settled. This may sound reasonable given that the guarantee has been provided with the expectation of earning profits from the construction. However, considering that it is not certain that the business is financially viable, these restrictions may hinder the normalization of the project sites designated for sale or reservation. 
 
In order to achieve smooth normalization of the project sites for sale or reservation, it is recommended that the Business Normalization Plan be amended to relax or eliminate change of the construction company clause and any pre-conditions to the sale of the project sites. 
 
With a rapid increase of the construction company workouts since 2008 and an immediate need for the normalization of the construction company, many project sites have had to be evaluated, categorized and equipped with measures to support and normalize the project sites in a limited period of time. As a result, there have been many instances where the Business Normalization Plans have not been applicable in practice. In order to solve these problems, in addition to acknowledging the liability of the breaching party, efforts are required to amend the Business Normalization Plan to match the reality and solve the problem in a way that is favorable to the business normalization of the construction company.

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Seung Hyeon LEE
+82-2-6200-1804 shlee@jipyong.com