ASIAN DEVELOPMENT BANK

REGIONAL TECHNICAL ASSISTANCE

TA NO: 5795-REG

INSOLVENCY LAW REFORM

CASE STUDY FROM KOREA

Soo Chang Kim Lee & Ko

Halla Group Restructuring Case

1. In December of 1997, at the point when Korea was engulfed with a financial crisis, Halla Group, which was one of the top 30 chaebol groups, encountered its main affiliates going bankrupt which had to apply for commencement of composition and corporate reorganization procedures to the courts. The application for commencement of composition proceedings was for Mando Machinery Corporation, Halla Cement Manufacturing Corporation and Halla Engineering & Construction Corporation, which were the representative companies of Halla Group, and the application for commencement of corporate reorganization procedures was for Halla Engineering & Heavy Industries Corporation, which was the largest affiliate of Halla Group.

2. Halla Group immediately undertook group-wide restructuring operations and as a priority, sold such affiliates, namely Halla Climate Control Corporation, Halla Pulp & Paper Co., Ltd. and Marco Polo Hotel Corporation, which were identified as readily available to be sold to foreign buyers. With respect to the four companies that have applied for commencement of composition and corporate reorganization proceedings of above, simultaneously with such formal proceedings, the companies entered into informal proceedings and voluntarily commenced negotiations with its major creditors for write-off of debts and promoted the sales of companies to foreign buyers.

3. In order to effectuate the informal proceedings of above, Halla Group appointed the American investment bank, Rothschild Inc., as its financial advisor and Lee & Ko of Korea, as its legal counsel.

4. Between the period of June to December of 1998, the commencement of composition and corporate reorganization procedures for the above four affiliates were respectively consented by their respective creditors and approved by the court. While the customary composition or corporate reorganization plan would provide for the postponement of debt repayment (for such a extended period as 5 to 10 years) and the write-off of a certain amount of debt and the matter of redeveloping the company left to the future management of the company, in these particular instances, the distinctive features of the composition and corporate reorganization plans of the respective companies were that the informal restructuring plans of the respective companies would be effectuated simultaneously with the formal proceedings so that should a company fail with its informal restructuring plan, the formal proceedings would immediately be terminated and the company would enter into liquidation proceedings. Accordingly, the above composition and corporate reorganization plans wrote-off the total debt of Halla Group from approximately 6.4 trillion Korean won ("KRW") to approximately 4.2 trillion KRW provided that the entire amount of the written-off debt would be repaid within one year pursuant to the restructuring plan. Such a method of dealing with the insolvency of Halla Group is significant because it provided an innovative model to deal with insolvency. Korean financial institutions, which have been traditionally adverse to write-off or write-down in their books, accommodated in these instances the write-off of a substantial amount and unlike other Korean insolvent companies in the past which have traditionally used formal insolvency proceedings to obtain the benefit of long-term postponement of debt repayment, the insolvent companies provided its restructuring plans which reflected its zealous determination for redevelopment of the respective companies

5. In order to perform the composition and corporate reorganization procedures of above, Halla Group arranged for bridge debt financing which was secured by all assets of Halla Group. Such bridge debt financing was accomplished by a syndicated loan from international financial institutions of which Rothschild Inc. served as the agent and the issuance of bonds in Korea to which the newly established company restructuring funds of Korea mainly participated. All funds raised by such bridge financing were used to pay the entire amounts of the existing debts. Halla Group subsequently commenced the sale of the above mentioned four main affiliates. Currently, Halla Engineering & Construction Corporation, which is the smallest amongst the said four affiliates, is now under the redevelopment without being sold due to the success of raising the required capital by the bridge financing and the recovery of the construction industry in Korea and abroad. Halla Cement Manufacturing Corporation established a new company into which all assets of the company was contributed for the purpose of selling this new company to a foreign buyer. Mando Machinery Corporation spun-off its individual businesses into independent companies in order that each such independent companies may be sold to foreign buyers. Halla Engineering & Heavy Industries Corporation, the largest amongst the said four affiliates, will be managed by Hyundai Heavy Industries Co., Ltd., the largest heavy industry company in Korea, to promote the redevelopment of the company and will be sold to a foreign or domestic buyer. Unless some unforeseeable conditions occur, the restructuring procedures for Halla Group will be completed by this year and the composition and corporate reorganization plans of the four affiliates will be faithfully performed.

6. As mentioned, the restructuring case of Halla Group has become a model case to provide a new and innovative approach in settling company insolvency in Korea. This model has been regarded positively as such a model allows the realization of the associated burden in a short period of time of what is otherwise typically a long term economic impact following a company's insolvency to such economic components as the company itself, creditor financial institutions, general creditors as well as all related parties including the Government to allow swift and clear settlement and encourage the redevelopment of the insolvent company. Additionally, it is an important point that effectuating this model provided such basis for the need to reform the relevant laws and regulations, mainly insolvency law, corporate law and tax law, to resolve the legal and regulative obstructions and vagueness by establishing a new western-type reform legislation.