[Simplified Bankruptcy] Representing Company A, engaged in software development and supply, to proceed with corporate bankruptcy proceedings.

Law firm Veat (hereinafter referred to as "Veat") proceeded with the corporate bankruptcy proceedings of A, the developer of an application.

1. Overview of Debtor A

A is a company that developed and supplied a schedule management app (hereinafter referred to as “P app”), and has been operating its business through government support programs and subcontracting projects for about 3 years after its establishment.

2. Status of A's Assets and Liabilities

Due to A's business structure being based on technology, it does not possess any inventory or tangible assets. Moreover, intangible assets such as trademark registration, service registration, and patent registration are assessed as having almost no current value due to a significant period of inactivity.

In contrast, the total amount of short-term borrowings is approximately 30 times the amount of assets, and interest continues to accrue, meaning the scale of liabilities could inevitably increase.

​3. Circumstances Leading to Bankruptcy

A operated both SW subcontracting supply and event agency businesses, and secured government support projects, making efforts to create various profit streams in order to secure the company's cash flow. Subsequently, after launching P app in 50 or so countries worldwide and receiving a rating of 4.8/5 on the Google Play Store, the company recorded excellent results and, in order to concentrate on the P app business, it cleared out all secondary businesses.

However, when developing the next version of P app, a lack of available cash arose, and, due to a policy change by the Korea Credit Guarantee Fund, the company received a request for excessive principal repayment, effectively losing its operating ability. Ultimately, the company proceeded with the repayment of the maximum principal and settled the wages of the remaining personnel, and, around 2016, entered a de facto state of shutdown.

4. Corporate Bankruptcy Proceedings

Director K attempted to secure 100 million won in investment and personally raised funds in order to resuscitate A, but, as continued loan interest was overwhelming, the company proceeded with corporate bankruptcy proceedings.

Accordingly, the Seoul Bankruptcy Court recognized A’s state of inability to pay debts and the fact of over-indebtedness as the cause of bankruptcy and applied Article 305, Article 186 and Article 259 of the “Act on Insolvent Debtors' Rehabilitation and Bankruptcy”, and made a decision for ‘Simplified Bankruptcy.’

Article 259 (Requirements for Simplified Bankruptcy)

If it is recognized that the amount of property belonging to the bankruptcy estate is less than 500 million won, the court shall, at the time of pronouncing bankruptcy, make a decision for simplified bankruptcy.

Special Rules for Simplified Bankruptcy Procedure

In the case of a simplified bankruptcy procedure, the date of the first creditors’ meeting and the date of asset investigation shall be merged unless there is a compelling reason (Article 186), and there shall be no auditing committee (Article 187). Distribution shall be made once, according to the provisions concerning the final distribution. However, additional distribution may be made (Article 189).

5. Conclusion and Implications

Considering A’s situation, where the amount of debt was approximately 30 times the amount of assets and the company was in a de facto state of shutdown, it was necessary to proceed with the corporate bankruptcy proceedings swiftly to minimize losses. Accordingly, Veat demonstrated that A’s property belonging to the bankruptcy estate was less than 500 million won, and led to a decision for simplified bankruptcy.

This case is significant in that it achieved a large reduction in costs and time through the omission of the creditors’ meeting and the distribution being made at the first meeting, utilizing the simplified bankruptcy procedure while the company's debt continued to increase.

With the development of mobile platforms, there has been an increase in the creation of IT startups among young people, but, due to the nature of businesses with technology-based business structures, they are inevitably vulnerable to cash flow and have limitations in terms of management stability. Since it is often difficult for managers to objectively assess their management status, it is recommended that they seek assistance from legal professionals rather than deciding on their own regarding corporate bankruptcy procedures.

Law firm Veat, led by Managing Director Choi Sung-ho, who served as the deputy director of the Startup Legal Support Team of the Korea Bar Association, provides objective and professional consulting to numerous startup companies, based on its extensive experience. Please contact Law firm Veat if you are considering corporate bankruptcy procedures.

Thank you.

Law firm Veat