Post on 16-Dec-2015
-The Corporate Restructuring Promotion Act The Corporate Restructuring Promotion Act of Koreaof Korea
Prof. OH SoogeunEwha Womans University
Government Intervention in Government Intervention in Corporate Exit MechanismsCorporate Exit Mechanisms
Recent Developments in Corporate InsolvencyHong Kong University Faculty of Law
Asian Institute of International Financial Law
April 18-19, 2002
QuestionQuestion
Can the
Corporate Restructuring
Promotion Act Really Promote
Corporate Restructuring?
OutlineOutline
Corporate Exit Schemes in Korea History of Government Intervention The Corporate Restructuring
Promotion Act Efficient Exit Mechanisms and Rule
of Law in the Market
Corporate Exit MechanismsCorporate Exit Mechanisms
Major
Players
Business Entity
Dissolution Transformation Maintenance
Court
Debtor
Creditor
Gov’t
Foreclosure Reorganization Composition
Bankruptcy
Liquidation Merger/Sales of Business
Arrangement
Bank Management
Creditor Management under CRPA
Rationalization Measures/Big-Deal/Workout
Judicial ProcedureJudicial Procedure
Corporate Reorganization– Stock Corporations– Rehabilitation
Composition– Individuals, Partnerships, Corporations– Rehabilitation
Bankruptcy– Individuals, Partnerships, Corporations– Liquidation
‘‘Budoh’ Budoh’ and Other Judicial Proand Other Judicial Procedurescedures
Year Budoh Bankruptcy Composition Reorganization
1983 * * * 65
1984 * * * 52
1985 * 11 2 40
1986 * 26 - 26
1987 * 20 - 30
1988 * 21 - 26
1989 * 37 2 27
1990 4,107 27 - 15
1991 6,159 16 - 64
Budoh : non-payment of promissory notes or checks
‘‘Budoh’ Budoh’ and Other Judicial Proand Other Judicial Procedurescedures
Year Budoh Bankruptcy Composition Reorganization
1992 10,769
14 - 89
1993 9,502
26 - 41
1994 11,255 18 - 42
1995 13,992 12 13 79
1996 11,589 18 9 52
1997 17,168 38 322 132
1998 22,828 467 728 148
1999 6,718 733 140 37
2000 6,693 461 78 32
2001 5,277 842 51 31
Rationalization Measures Rationalization Measures AppliedApplied
YearYear Target
1969-19711969-1971 112 Failing Firms
19721972 61 Industries
19821982 Heavy/ Chemical Industries
1984-19851984-1985 Shipping/ Foreign Construction
1986-19881986-1988 57 Firms, Foreign Construction
Tools for RMTools for RM
Debt and rate reduction Extension of due Rescue loan Merger Forced sale, Liquidation Exclusion of competition Tax benefits Ban repayment Change existing loan agreements
Logic of RMLogic of RM
Government as PlannerGovernment as Planner– Economic Planning BoardEconomic Planning Board
Select business/ Choose corporation/ Provide resource
– Business FailureBusiness Failure Industrial policy issue/ Political responsibility
Government as Creditor– Ministry of Finance and EconomyMinistry of Finance and Economy
Supervisor of financial institutions Owner of many banks
– Understanding of BanksUnderstanding of Banks Tools for economic policy implementation
Government-led BankingGovernment-led Banking
Government– nominates directorsnominates directors– affects individual loans affects individual loans – urges policy loansurges policy loans– implements financial policies implements financial policies
through banksthrough banks
Basis of Government-led Basis of Government-led BanksBanks
Ownership – Government as major shareholderGovernment as major shareholder– Ownership restrictionOwnership restriction
Regulator Currency and Financial Policy
Maker
Largest Shareholders after Largest Shareholders after the Crisisthe Crisis
BanksBanks Largest ShareholdersLargest Shareholders SharesShares
Chohung Korea Deposit Insurance Co. 80.5
Hanvit U Holding 100
Cheil KFB-New Bridge Holding 50.99
Seoul Korea Deposit Insurance Co. 100
KFB Export-Import Bank/BOK 23.62
Kookmin GoldmanSachs 10.87
H&CB Government/KDIC 25.07
As of June 2001
Vicious Cycle of Vicious Cycle of Government-led BankingGovernment-led Banking
Employs Banks for Economic Policy Distorted Governance Structure
– Concern for political power as a nominator– Lacks business character, dependent on
government– Malfunctions as creditor in the market
Market Failure in Financial Sector– Government pours funds to make up
losses of banks– Moral hazard of creditors and debtors
Basic Understanding of EcoBasic Understanding of Econocratsnocrats
Fate of Major Failing Firms – ShouldShould
Not be a legal matter But an economic policy issue
– Should be decidedShould be decided Not by judges in a judicial process But by econocrats under economic policy
Economic Policy lies beyond the Rule of Law
Characteristics of RMCharacteristics of RM
No General Rule on Standards and Procedures
No Disclosure No Legislative Control No Judicial Review
WorkoutWorkout
Legal Basis– Corporate Restructuring Agreement by all fin
ancial institutions– Effective since 1998.6.25. until 2000.12.31.
London Approach?– Precedents
Anti-Budoh Agreement Co-operative Loan Agreement
– Non-voluntary Agreement Financial Supervisory Board Ministry of Finance and Economy
Workout ProcedureWorkout Procedure
Select Target Firm Call for Creditors’ Conference Due Diligence by External Auditors Draft Workout Plan Confirm Workout Plan Conclude MOU with Firm Run Management Team and
Management Assessment Council
Firms under WorkoutFirms under Workout
Results Number of firms
Under procedure 37
Quit 21
Graduation 15
Self performance 18
Merged 15
Total 106
As of 2001.6.5.
Financial Restructuring Financial Restructuring under Workoutunder Workout
FirmsDebt Arrangement
New LoansExtension
of DueEquitySwap Others Total
Plan
Daewoo 36.7 26.6 7.8 71.2 5.0
Other Chaebols 21.3 5.2 1.8 28.4 1.2
Others 4.4 0.3 0.7 5.3 0.5
Total 62.4 32.1 10.3 104.9 6.8
As of March 2000 72.6 2.8 4.5
(Unit: Trillion Korean Won)
Weak Points of WorkoutWeak Points of Workout
Only Domestic Financial Institutions
Moral Hazard on Both Sides– Too big to fail, holdout– No business interests available
No Distinct Direction for the Next Step
Enactment of WorkoutEnactment of Workout
Revision Proposal by MOFE– Court’s approval of workout plans – Super priority on new loans
Econocrats’ Perception of Law– A tool for policy implementation– The Law is decided by the Govern
ment
IndustryIndustry Merger and ConsolidationMerger and ConsolidationSemiconductor Hyundai Elec. merged LG Semiconductor
Power Generating Equipment
Korea Heavy Industries merged Hyundai and Samsung Heavy Industries
Petro-chemicals Merger failed b/w Hyundai Petro-chemicals and Samsung General Chemicals
Aircraft Manufacturing
Divisions of Samsung, Hyundai and Daewoo were consolidated into Korea Air Industry
Railway Vehicles Divisions of Hyundai, Daewoo and Hanjin were consolidated into Korea Railway Vehicles
Ship Engines Korea Heavy Industries and Samsung Heavy Industries were consolidated into HSD Engines
Oil Refining Hyundai Oil merged Hanwha Energy
Electronics and Automobile
Exchange failed b/w Samsung Motors and Daewoo Electronics
Big DealsBig Deals
Government and Political Government and Political Initiation of Big DealsInitiation of Big Deals
Ownership Structure of Chaebols– High debt ratio, small share– Good for creditors, bad for owners
Anti-Competition
Political Retaliation– No synergy effect– No problems in payment of interests
Legislative History of CRPALegislative History of CRPA
MOFE’s effort to enact Workout supporting legislation since 1999
Congressmen’s proposal to mandate corporate exit in 2000
Agreement between two dominating parties
Conflict between the Finance and Economy Committee and Judiciary Committee
Enacted on August 14, 2001, effective on Sept. 15, 2001
Structure of CRPAStructure of CRPA
Internal Accounting Control System Evaluation of Credit Risk
– Statutory Evaluation and Management Standard– Standard of Financial Supervisory Committee
Restructuring of Ailing Firms– Positive Measures
Creditor Management (Financial Institutions/ Creditor Banks / Prime Bank)
Court Process (Corporate Restructuring/ Composition)
– Negative Measures Liquidation or Bankruptcy in court
Restructuring Process Restructuring Process under CRPAunder CRPA
Credit risk Evaluation by banks Selection of Ailing Firms by Banks Management of Creditor(s)
– Call for Creditor Financial Institutions Council– Due diligence and evaluation by independent
agency– Debt restructuring and new credits– Prepare Management Normalization Plan among
Creditors– Conclude Implementation Agreement with debtor
firm– Dispatch of Financial Administrator
Legal Characteristics of CRPALegal Characteristics of CRPA
Application– All creditor financial institutions
Automatic Stay – At the time of the call for the Council
Damage Liability– When approving creditor fails to perform the
resolution of the Council– When creditor sells its claims to third parties
Dissenters right to Sell Claims– Pricing of claims : Agreement/ Mediation
Committee of Creditor Financial Institution/ Court
Performance of CRPAPerformance of CRPA
Workout Companies Transferred under the CRPA– 25 Firms
Newly Designated Ailing Firms in 2001– 7 firms total– 2 firms failed to get the approval at the Co
uncil – 5 firms (including Hynix and Hyundai Con
struction) got the Approval
No New Entry in 2002
Results of Government Results of Government InterventionIntervention
Moral Hazard on Both Sides– Insufficient risk management
Market Failure of Corporate Exit
Consequent Inexperience in Judicial Procedures
Infrastructure for Infrastructure for Effective Corporate Exit MechanismEffective Corporate Exit Mechanism
Effective Judicial Enforcement
Rational Decision of Creditors
Reliable Accounting Information
Active Financial Markets
ImpedimentsImpediments
Government intervention in market
Unreasonable Decision of Creditors
Unawareness of Rule of Law in the area of economy
Rule of LawRule of Law in the Market in the Market
Make creditors creditor-like– Privatization of banks– Reform governance structure
Keep Government away from the failure of firms– Let the statutes work– Legitimate and direct involvement