Pizza Hut Korea files for receivership in face of $15M fine for fleecing franchisees

Pizza Hut Korea has filed for receivership with the Seoul Bankruptcy Court as it faces a 21 billion won fine for padding its margins on materials for franchisees.

A passerby walks by a Pizza Hut store in Seoul on Tuesday. [NEWS1]

Pizza Hut Korea filed for receivership with the Seoul Bankruptcy Court on Monday.

The pizza chain was fined 21 billion won ($15.2 million) by the Seoul High Court in September for adding additional margins on materials supplied to franchisees without their consent, a ruling Pizza Hut has appealed. The receivership filing will delay the payment and offer a chance to potentially strike a deal with its franchisees before a final result from the High Court comes out.

The franchise filed to begin corporate rehabilitation proceedings (CRP) and for autonomous restructuring support (ARS) on Monday, the company confirmed in a statement after the news broke on Tuesday morning.

The ARS program is a preliminary phase before a company enters formal receivership. During the ARS period, court receivership proceedings are suspended for a minimum of one month and up to three months, allowing the company to work out a restructuring plan with its creditors. If stakeholders reach an agreement within the period, the receivership filing can be withdrawn.

The Seoul Bankruptcy Court ordered a preservative measure and a general prohibition order on Pizza Hut the same day the chain filed for receivership. Accordingly, the firm will be banned from collecting individual bonds, and its debts and assets will be frozen. The order will delay a potential compulsory execution by the court that will force Pizza Hut to pay the fine owed to its franchisees.

Pizza Hut Korea's cheese dip pizza [PIZZA HUT KOREA]

The Korean franchiser said in its Tuesday statement that filing for the CRP and ARS programs was “inevitable” to resolve its issues with its franchisees so that the company can unfreeze its accounts and normalize cash flow.

“The store owners participating in the lawsuit have filed for a seizure of the headquarters’ bank accounts that control assets for business operations since Oct. 4. With some of those store owners beginning proceedings for provisional execution, we have had problems with operations such as paying employee salaries, paying suppliers and supplying stores with ingredients,” Pizza Hut said.

“There are no problems with Pizza Hut’s core operations and difficulties from having our accounts frozen is only temporary.”

The 330-odd stores in Korea continue to operate normally, the firm added.

A pedestrian walks by a Pizza Hut store in Seoul on Tuesday. [NEWS1]

In an appellate trial in September, the Seoul High Court partially sided with 94 franchisees who sued Pizza Hut Korea for allegedly imposing additional costs not agreed upon in their contracts. The court fined the franchise 21 billion won that it received in additional payments from franchisees from 2016 through 2022. Pizza Hut appealed the ruling.

Global fast food operator Yum! Brands sold Pizza Hut Korea to a local investment company, an affiliate of KH Investment, in 2017 after consecutively seeing deficits.

The Korean chain has been in the red since 2022. It posted 452.24 million won in operating losses last year, an amount around 1.8 times, or 76.6 percent, over that of the 256.12 million won in operating losses recorded in 2022.

BY KIM JU-YEON [kim.juyeon2@joongang.co.kr]