As GM mulls options for unit, how does bankruptcy work in South Korea?

General Motors (GM.N) has said its loss-making South Korean operation would file for bankruptcy if its union failed to agree to cut labour costs by Friday, heaping pressure on workers and the South Korean government to approve a rescue plan.

The Detroit carmaker said in February it would shut one of its four factories in South Korea, and asked for government support and union concessions to stay in the country.

GM has warned that it would file for bankruptcy if there isn’t a restructuring deal by Friday, as the Korean operation is running out of cash to pay employees and suppliers amid slumping sales.

But it could still avoid filing for bankruptcy protection. The head of Korea Development Bank (KDB) told Reuters this week that the state-run bank may sign a preliminary deal next week to extend financial support for GM Korea.

Here is a look at how South Korea’s court-managed bankruptcy protection procedures work.

LENGTHY PROCESS

The court-managed rehabilitation procedure, equivalent to a U.S. Chapter 11 bankruptcy filing, can be requested by creditors holding claims equal to or greater than 10 percent of the paid-in capital, or shareholders owning 10 percent of the company.

GM holds a 77 percent stake in GM Korea, while KDB has a 17 percent stake. GM’s main Chinese partner, SAIC Motor Corp Ltd (600104.SS), controls the remaining 6 percent.

GM and KDB also have a side agreement that requires the U.S. automaker to get approval from 85 percent of shareholders for the Korean unit’s bankruptcy filing, a KDB official said.

The official added that KDB could consider legal action if GM went ahead without its consent.

Upon receiving such a petition, the court would decide, usually within a month, whether to start a restructuring process after hearing opinions from the interested parties, said Park Seung-du, a law professor at Cheongju University.

By contrast, Chapter 11 in the United States is effective immediately upon filing to create an automatic stay of all collection activity against the debtor company, according to legal experts.

In South Korea, once a court decides to start a restructuring process it will appoint an administrator who is required to submit a plan with details on asset disposal and debt restructuring. The plan needs approval from creditors.

In the event that a reorganization plan is implemented successfully and the debtor manages to pay creditors over time and reschedule obligations, the court has the discretion to end the structuring process or can do so at the request of the debtor’s administrator.

But if the debtor is likely to fail in carrying out the restructuring plan, and the liquidation value of the company is deemed to exceed the going concern value, the court will terminate the process and will put the company into bankruptcy.

“Compared to the U.S. process, South Korea’s court rehabilitation process is much more complex and takes longer,” said Park, the professor at Cheongju University. “Depending on the size of a debtor company, it can take years to see the end of it.”

Legal experts also say negative public perceptions of bankruptcy often hamper efforts to keep troubled companies alive.

“GM restored itself after transferring healthy assets to a new GM,” said Rim Chi-yong, a lawyer from Kim & Chang in Seoul, referring to the U.S. firm’s successful restructuring after it filed for bankruptcy protection in 2009 after years of losses and market share declines.

“In South Korea, when a company files for rehabilitation to the court, it’s largely considered as dead. It is difficult for them to take part in a bidding and banks are reluctant to provide loans for that company,” he said.

(REUTERS)