The creditors of SK Global, the trading firm at the center of a scandal that threatens to tear apart South Korea's third-largest conglomerate, rejected a plan by a sister company to prop the trading company up, and moved instead to shut it down.
The SK Corp, the oil refiner and flagship company of the SK Group conglomerate, owns 38 percent of the troubled trading company and had offered to swap stock for a portion of its debts.
But the creditors, led by Hana Bank, one of the country's largest lenders, rejected the offer as inadequate and said they would ask a court in Seoul to place the trading company into receivership, removing it from the control of the SK Group and the company's own top managers.
The SK Corp expressed shock over the decision and asked the creditors to reconsider.
The oil refiner has problems of its own. Its chairman, Chey Tae-won, was arrested in February and remains in jail on fraud charges related to his efforts to increase his control over the entire group. Nine other executives of the group face similar charges but have been freed while awaiting trial.
Analysts said the court was likely to agree to the creditors' request that SK Global be declared bankrupt. The next step is less clear: the court may order liquidation or give creditors a chance to reorganize the company and try to keep it a going concern. The trading company's liabilities of more than US$8 billion, including US$1.25 billion owed to the refining company, are more than twice its assets.
It was the debt owed to the refiner that precipitated Wednesday's action. The creditors demanded that the refiner essentially write off the entire debt by accepting stock in the trading company as payment. But the refiner offered to convert only about three-fifths of the total, according to reports in South Korean media.
Bankruptcy for the trading company would not only weaken the refining company, but would also deal a severe blow to the entire SK Group because of its role in the group's operations. The refining company relies on the trading company to market all its products, and other companies in the group also depend on it to varying degrees.
The refining company also owns 18 percent of SK Telecom, South Korea's biggest mobile phone firm, but the phone company has little need of the trading company and has said it will not provide any financial aid to it.
Complicating the refining company's situation is the 14.99 percent stake in it that was acquired this year by a foreign investor, Sovereign Asset Management, through an affiliate, Crest Securities.
Sovereign has pressed the refining company publicly not to put any more money into the trading company, whose accounting irregularities and other problems have revived memories of the scandal that brought down the Daewoo Group nearly four years ago.
SK Global hit the headlines last winter when it was forced to acknowledge that it had concealed losses of US$1.2 billion in its 2001 financial reports. Other errors totaling in the hundreds of millions of dollars have come to light since then.
The South Korean finance minister, Kim Jin-pyo, said on Wednesday that the government would not interfere in the dispute between the SK Group and SK Global's creditors. But the case has implications for the country's entire economy. Negative revelations about SK Global prompted investors to withdraw more than US$20 billion from the country's investment trusts, akin to large mutual funds, over a short period in March, and the government found itself having to help the trusts by forcing the banking system to absorb several billion dollars worth of bonds they owned that were issued by the country's credit card companies.
The case has also raised the issue of the ways founding families have retained control of the country's big conglomerates, known as chaebol, which still form the bedrock of South Korean business even after several of them failed in the 1997-1998 economic crisis.
The uncle of the current chairman of the SK Group founded it, and the current chairman's father was chairman for years. Chey, the imprisoned chairman of the refining company, is the son-in-law of a former South Korean president, Roh Tae-woo, who is imprisoned on corruption and other charges.
South Korea's president, Roo Moo-hyun, has vowed to crack down on corruption and family control over the chaebol. Officials have held off investigating other chaebol because revelations about SK have been so unsettling to the economy.
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