In October, 2019, a landmark decision is rendered: (i) the bankruptcy of a project company is a valid ground for termination of a concession agreement (“CA”) and (ii) termination payment under the CA (“TP”) should be paid for such ground. Lee & Ko has served as legal counsel in all aspects of this project, including offering solutions to stabilize the project company’s business to pre-bankruptcy status, negotiating during the restructuring process, handling bankruptcy proceeding, as well as litigating for termination of the CA and payment of the TP.
In 2000s, some of BTO-based PPP projects failed for forecasting demands and began suffering losses due to lack of actual demands. There were growing concerns among investors having exposures to such failed projects that they could not exit from the projects with TP unless the government terminated the CAs for bankruptcy of the relevant project company, being one of the project company’s EOD for which only the government can terminate the CAs.
In 2010, Lee & Ko began studying how to terminate a CA where a project company was in bankruptcy and concluded that a bankruptcy trustee (“Trustee”) would be entitled to, under the Bankruptcy Act, exercise a termination right of an executory contract in which neither party fully performed its obligations. This legal opinion greatly relieved investor’s concerns and eventually helped the PPP market staying active.
This Project also kept suffering losses due to a significant gap between forecast and actual demands. Sponsors have provided equity support exceeding their original committed amounts. Nonetheless, Uijeongbu City, the relevant government party refused the restructuring proposals which led this Project eventually toward bankruptcy.
Lee & Ko advised investors to file a bankruptcy and thereby terminate the CA to recoup investments and in the related lawsuit, with deliberately developed legal rationales, successfully persuaded the court to render a favoring judgment: (i) even if only the government has a right to terminate the CA for the project company’s bankruptcy under the CA, the Trustee can still terminate the CA as executory contract pursuant to the Bankruptcy Act; and (ii) when terminated, the TP shall be calculated based on the formula provided in the CA.
The Korean PPP market, in its 25th year, faces adversity and this judgment is welcomed by PPP investors as it would help drawing more cooperation of governments so that investors in struggling BTO projects may negotiate the restructuring of the project before going into bankrupt.