The fall of Hanjin Shipping in South Korea – after five years
Dr Hyun Kim
Sechang & Co, Seoul
Hanjin Shipping, at the time the number one ocean carrier of South Korea, went bankrupt in February 2017 after struggling for a few months in court protection that was instituted in the year before. Initially, the bankruptcy procedure was a Chapter 11 reorganisation. However, it was found by the court-appointed investigator that the shipping company utterly lacked financial resources, and its business had collapsed irrevocably. (Consignees whose cargo was aboard the Hanjin ships had to pay twice or three times to release it from Hanjin ships.) As such, within a few months of the Chapter 11 filing, the bankruptcy procedure of Hanjin Shipping was converted by the bankruptcy court to a Chapter 7 liquidation.
As Hanjin suspended operations in early September 2016, a huge amount of cargo (reportedly worth US$15bn) became stranded at major ports around the world.
We witnessed a supply chain disruption at an unprecedented scale, which was all the more strongly felt as the year-end holiday season was looming.
It took several months (and, in certain terminals, even more than a year) for shipowners and container lessors to retrieve the pale blue painted boxes they rented to Hanjin as the terminals demanded ‘ransoms’ to release the boxes.
In retrospect, and given the recent boom in container shipping, certain politicians criticised the government’s harsh stance against Hanjin, which once ranked number six among the global container shipping entities in the industry. The government demanded the Cho family (who also owned Korean Air) inject cash to rehabilitate the financially ill company, without assisting it with tax monies.
South Korea had two major players in the industry: Hanjin and Hyundai Merchant Marine (HMM). HMM, which narrowly avoided court protection, was acquired later by Korean Development Bank (KDB), the government-backed bank. HMM posted a huge profit last year. South Korea, now having only one global shipping player, saw its market share reduce from 5 per cent to 3 per cent, which is alarming as it relies on maritime shipping for 99.7 per cent of its international trade.
Regarding the legal aspects of the bankruptcy proceeding, most of the filed bankruptcy claims were ruled on by the bankruptcy court or settled by the parties. However, these bankruptcy claims are unsecured and are likely to never be paid, as opposed to other higher-ranked claimants such as estate claim holders (eg, claimants holding post-bankruptcy incurred claims such as post-bankruptcy vessel hire and container hire).
In contrast, the estate claims will to a certain good extent be meaningfully honoured subject to the remaining cash held by the Hanjin estate. So far, the estate has paid out approximately half of the acknowledged or settled estate claims. Estate claims have priority over other claims such as bankruptcy claims. Hence, the distinction between estate claims and bankruptcy claims is of paramount importance to creditors. Regrettably, many foreign creditors seemingly failed to receive adequate legal advice on that distinction and merely walked out of or did not file claims in the proceeding, mistakenly thinking that their claims would not meaningfully be paid under the bankruptcy procedure.
The Hanjin estate has approximately US$100m in cash. (At an earlier stage, the cash was approximately US$250m). The amount is still lower than the sum of acknowledged estate claims, which are approximately US$250m. Hence, the eventual payment ratio for unpaid estate claims is about 40 per cent, but is subject to change depending on the results of pending estate claim suits in the regular civil court.
Hanjin’s final estate claim payments seem far off, as there are still pending lawsuits concerning estate claims in the regular civil court, and some of the claims exceed US$5m. Unless all or most of these estate claim lawsuits are finalised or settled out of court, the Hanjin estate will not distribute its cash holdings to the estate claimants, meaning that the conclusion of the Hanjin estate’s Chapter 7 liquidation proceeding may take a few more years.