Outward growth without profitability; capital impairment amid three straight years of losses

Settlement halt triggers wave of criminal complaints; a platform ecosystem that has lost trust

Normalization uncertain even after rehabilitation commences; structural crisis with no buyer in sight

Balaan, once valued at 800 billion won and hailed as a 'unicorn' of Korea's luxury platform market, has finally entered court receivership. Its founder, CEO Choi Hyung-rok, is under police investigation over the recent failure to settle sales proceeds with vendors and has been placed under a travel ban.

According to industry sources on the 10th, after Balaan filed for corporate rehabilitation on the 31st of last month, the Seoul Rehabilitation Court decided on the 4th to commence proceedings and, without appointing a separate outside custodian, designated CEO Choi Hyung-rok as the custodian. He has thus taken on the dual task of submitting a rehabilitation plan and responding to the criminal investigation at the same time.

Choi, a former Air Force accounting officer, founded Balaan in 2015 right after his discharge. Starting out as a C2C platform model connecting luxury sellers with consumers, Balaan grew rapidly during the COVID-19 period on the back of rising consumption and demand for contactless services.

Annual revenue grew from 24.3 billion won in 2020 to 89.1 billion won in 2022. Choi then propelled Balaan into the ranks of the 'world's No. 3 luxury platform' through aggressive marketing and fundraising strategies.

Behind the outward growth, however, lay a structural lack of profitability. Balaan has not posted a profit in a single year since 2020. In 2022 in particular, its annual net loss reached 37.4 billion won, and losses continued in 2023 at 12.3 billion won.

At the end of 2023, the company fell into complete capital impairment, with total assets of 7.6 billion won and total liabilities of 15.3 billion won, leaving total equity at minus 7.7 billion won. Current assets amounted to only about 5.6 billion won, while current liabilities stood at roughly 13.8 billion won, a short-term liquidity shortfall of 8.2 billion won. Structurally, it was effectively impossible to settle with sellers or cover operating expenses without an inflow of outside funds.

The financial situation was serious enough that the audit report explicitly stated that 'total liabilities exceed total assets, raising significant uncertainty about the company's ability to continue as a going concern.'

Nevertheless, Balaan focused on expanding its scale, spending roughly 69.1 billion won on advertising over the three years from 2021. It poured 30 to 40 percent of annual revenue into marketing, but never built a revenue base to offset it.

Internal controls were also inadequate. With improvements to the seller settlement system repeatedly deferred, operations continued until last month's failure to pay sales proceeds. Balaan halted settlements on March 24 and stopped product transactions altogether on the 28th.

Once the situation became official, some vendors filed criminal complaints against Choi on charges of fraud and embezzlement. More than 20 complaints have reportedly been filed so far. The vendors claim that "after the TMON and WeMakePrice cases, Balaan promised to bring in a settlement agent, but never kept that promise."

In particular, because the company was still pushing vendors to sign up for advertising products right up until settlements stopped, suspicions have been raised that this was a planned deferral of settlements rather than a simple mistake. Police have accordingly placed Choi under a travel ban and launched a full investigation.

Damage to trust with investors has also become unavoidable. On February 28, Balaan secured a convertible bond (CB) investment totaling 15 billion won from KOSDAQ-listed Silicon2. The first tranche of 7.5 billion won was paid in, with the remainder to be disbursed once Balaan met certain conditions.

But when the rehabilitation filing came to light, Silicon2 could not hide its dismay, saying it "had not been informed of the matter in advance." The 50 percent stake it secured through a call option is now increasingly likely to lose its practical value as the rehabilitation proceedings progress.

With the court's decision to commence rehabilitation proceedings, Balaan's debts have been temporarily frozen. As a result, most of the settlement receivables held by sellers are classified as general unsecured claims and may rank low in repayment priority. Industry analysts believe the recovery rate is likely to fall below 10 percent. For this reason, some sellers are shifting strategy toward pursuing personal liability through criminal complaints in addition to civil suits.

At present, Balaan's prospects for rehabilitation are unclear. No company has so far expressed an intent to acquire it. Given the combination of impairments, including damage to the brand's image, financial risk and settlement debts, the likelihood of a strategic investor (SI) or financial investor (FI) stepping in is also rated as low. The deadline for submitting the rehabilitation plan is June 27. Even if a plan is submitted, it is uncertain whether the court will approve it. In particular, with self-rehabilitation looking difficult, the possibility that the case will be converted to bankruptcy proceedings if no buyer is secured cannot be ruled out.

Immediately after the filing, CEO Choi Hyung-rok said, "We are keeping every option open to resolve the settlement problem and normalize our service." But given that the platform industry runs on trust, the consensus in the industry is that trust once lost is not easily regained. That is why analysts increasingly believe Balaan's rehabilitation will be difficult unless it secures accounting-based transparency, normalizes its capital structure and repairs its relationships with sellers, all at once.

Attorney Shin Dong-woo of DAEON Law Firm pointed out, "Once rehabilitation proceedings begin, sellers, as general unsecured creditors, will inevitably be pushed down the repayment priority, so their actual recovery rate is very likely to be extremely low," adding, "For small and mid-sized sellers in particular, whose settlement payments fed directly into revenue and operating funds, the rehabilitation could itself lead to a liquidity crisis."

He added, "Ultimately, the essence of a platform business is trust, and with that trust shattered, it is hard to expect the business to normalize through legal rehabilitation alone. Rebuilding trust when investors, sellers and consumers have all walked away is, in effect, starting over from scratch."