[Jeon Daegyu's 7 Wins and 8 Losses] Why Rehabilitation is Easy for Golf Courses but Difficult for Construction Industry

Jeon Daegyu, Chief Judge of Seoul Rehabilitation Court

Recently, the Seoul Bankruptcy Court conducted a project to collect and analyze various data on corporate rehabilitation cases over the past five years. Through this work, several meaningful outcomes were derived. Among them, it is notable that golf courses often apply for rehabilitation procedures and successfully complete them, whereas the construction industry has found it far from easy. Specifically, in the case of golf courses, there were few cases where rehabilitation procedures were applied for and subsequently dismissed, and the success rate of mergers and acquisitions (M&A) was very high at 40%. On the other hand, in the construction industry, many cases were dismissed, and the M&A success rate was only 9%.

So why is it that golf courses proceed smoothly through rehabilitation procedures and successfully complete them, while the construction industry finds it difficult to succeed through rehabilitation? There are likely several reasons behind this.

First, there is a difference in the composition of creditors. In the case of golf courses, the composition of creditors is simple. Most golf courses in Korea operate on a consignment fee system, and most creditors are those holding claims for the refund of membership fees from golf members. Trade creditors are rare, and it is uncommon for other creditors to exist. Therefore, it is relatively easy to obtain the consent of creditors. Having a membership list also helps, as it makes it easy to identify the addresses and contact information of creditors. In contrast, the construction industry has a diverse composition of creditors. In addition to banks and financial institutions, there are many creditors related to construction payments due to the complex subcontracting structure, making it difficult to identify them. Furthermore, due to the nature of the construction industry, disputes over defects are inevitable, and there are often ongoing or latent disputes. This makes it difficult to form a creditors' committee and to identify or locate creditors. As a result, obtaining consent for the rehabilitation plan is also challenging.

Second, there is a difference in the difficulty of evaluating corporate value. Golf courses have land and buildings to continue their business, and the evaluation of corporate value (calculation of annual revenue) is easy depending on their location. When corporate value evaluation is easy, it is also easier to raise funds. From an investor's perspective, if corporate value evaluation is easy, the risk is lower, making investment decisions easier. In a recent case handled by the Seoul Bankruptcy Court, a golf course attracted bids from four parties. Located in Yongin, it had good accessibility from Seoul and was not difficult to operate, attracting much investor interest. Ultimately, the 27-hole golf course was acquired for over 230 billion won. When I worked as the head of the bankruptcy division at Suwon District Court in 2017, a 27-hole golf course located in Yongin was acquired for 190 billion won. In contrast, evaluating corporate value in the construction industry is not easy. The construction industry is heavily influenced by economic conditions, and construction orders are uncertain, making it difficult to predict annual sales. Additionally, there are many contingent claims due to various reasons such as defect disputes, which can be a burden for acquirers. This causes investors to hesitate to invest in the construction industry.

Third, rehabilitation procedures are a legal tool suitable for golf courses. According to the 'Act on the Installation and Use of Sports Facilities,' if a golf course is acquired by a third party through auction or public sale, the acquirer must succeed the status of the golf members. In other words, even if a golf course is acquired through auction or public sale, the acquirer does not obtain a clean golf course but must succeed all the statuses of existing golf members. However, if a third party acquires the golf course through rehabilitation procedures, they do not have to succeed the status of existing golf members. Therefore, golf courses that want to convert from membership-based to public golf courses have no choice but to use rehabilitation procedures.

Statistically and practically, golf courses are industries suitable for rehabilitation procedures, while the construction industry is not. However, whether a company can successfully revive through rehabilitation procedures depends more on how quickly the application for commencement of rehabilitation procedures is made and the will of the existing management. If the rehabilitation procedure is entered too late, it is not easy to proceed. At least about two months' worth of operating funds should be secured before entering rehabilitation procedures. Ultimately, how quickly a company enters rehabilitation procedures is the key to successful revival.

This content was produced with the assistance of AI translation services.