-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