[Jeon Daegyu's 7 Trials and 8 Failures] Bankruptcy Filing, the Last Consideration for Workers

Jeon Dae-gyu, Chief Judge of Seoul Bankruptcy Court

Recently, two employees working at a hotel resigned together after their wages were delayed for about three months. This company, which had been experiencing financial difficulties due to a lack of operating funds for several years, was unable to pay wages and severance pay to employees as sales sharply declined due to the novel coronavirus disease (COVID-19). The hotel’s representative has decided to close the hotel, judging that the business is no longer viable. In such cases, how can employees receive their unpaid wages and severance pay?

Employees can receive unpaid wages and severance pay through the Wage Claim Guarantee Fund from the Korea Workers’ Compensation and Welfare Service. The Wage Claim Guarantee Fund refers to money paid in advance by the Korea Workers’ Compensation and Welfare Service on behalf of the employer within a certain limit (wages and suspension allowances for three months and severance pay for three years) when employees cannot receive wages or severance pay due to reasons such as company closure, bankruptcy, or rehabilitation. To receive the Wage Claim Guarantee Fund, first, the company must be legally recognized as insolvent (rehabilitation or bankruptcy) by a court judgment. Specifically, there must be a decision to commence rehabilitation proceedings or a bankruptcy declaration against the employer. Second, the company must be a business with fewer than 300 regular employees, and the closure or closure process must be recognized by the local employment and labor office as due to the employer’s deteriorating management, with an inability or severe difficulty in paying wages, etc. In other words, it must be acknowledged that the employer is effectively insolvent.

To receive the Wage Claim Guarantee Fund from the Korea Workers’ Compensation and Welfare Service, employees must prove one of the two reasons above. However, it is not easy for employees to prove the second reason?that the employer is effectively insolvent. As a result, when the employer is effectively insolvent, it takes too long for employees to apply for and receive the Wage Claim Guarantee Fund. However, since the decision to commence rehabilitation proceedings or the bankruptcy declaration is an official confirmation by a public institution, the court, that the employer is insolvent, employees can receive the Wage Claim Guarantee Fund simply by submitting the decision document of the commencement of rehabilitation proceedings or the bankruptcy declaration to the Korea Workers’ Compensation and Welfare Service after applying for rehabilitation or bankruptcy. This significantly reduces the time employees wait to receive the Wage Claim Guarantee Fund.

Rehabilitation proceedings are premised on the continuation of the employer (debtor), and wages and other claims are defined as public claims to be preferentially repaid at any time. Therefore, it is rare for employees to receive the Wage Claim Guarantee Fund once rehabilitation proceedings have commenced. The problem arises when the employer reaches a state of bankruptcy. Typically, when the employer is bankrupt, not only is payment of general claims impossible, but wages and other payments to employees are often significantly overdue. Of course, even in bankruptcy proceedings, wages and other claims are recognized as estate claims and can be repaid at any time. However, this is only legally so. In reality, once bankruptcy proceedings begin, there is almost no debtor’s property to liquidate. Therefore, it is practically difficult to receive full payment of wages and other claims through bankruptcy proceedings.

Claims for wages and other payments are directly related to the livelihood of employees and their families, unlike other general claims. Therefore, institutional measures are necessary to ensure payment is completed in any situation and by any means. This necessity is even more urgent when the employer is bankrupt. Thus, for employees who urgently need living expenses until reemployment after retirement, the Wage Claim Guarantee Fund is like a rain in a drought. Therefore, in the case of the hotel mentioned earlier, if the business must be closed, it should not be left unattended but actively cooperate by applying for bankruptcy and obtaining a bankruptcy declaration so that employees can promptly receive the Wage Claim Guarantee Fund. Even if employees receive the Wage Claim Guarantee Fund from the Korea Workers’ Compensation and Welfare Service, if there are unpaid wages, they can prove this to the bankruptcy trustee and claim payment of the remaining balance. Since employees’ wages and other claims are estate claims in bankruptcy proceedings and are repaid preferentially over general bankruptcy claims, employees’ wages are better protected in the event of bankruptcy. From this perspective, filing for bankruptcy can be the last consideration for employees who have worked diligently.

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