Integration of Bankruptcy Law Begins

The government has begun work on the integration of the nation's three bankruptcy laws, organizing a task force charged with producing a legislative proposal for consideration in the autumn National Assembly session.

The state-run Korea Development Institute recommended in a paper for the Finance Ministry that one of the bankruptcy procedures, called composition, be either abolished or applied only to small and medium-size companies.

Based on the paper, officials from the research institute, the Finance Ministry and the Ministry of Justice, along with courts and financial institutions, will try to integrate the separate laws on reorganization, composition and liquidation law.

The government has considered such a step since the 1997-98 foreign exchange crisis, when the number and size of the firms filing for the procedures sharply increased. Moreover, the procedures have been criticized as too complex for efficiency and too vulnerable to abuses by debtors.

The reorganization procedure prescribes court receivership under which companies reorganize their debts with the supervision of a court-appointed trustee. Under the composition procedure, on the other hand, a debtor retains control of the corporate asset and restructures the company by agreement with creditors.

As the three bankruptcy laws are independent of one another, it takes much time for a company to move from one to another system － for example from composition procedures to court receivership. Each individual procedure also takes a relatively long time, economists point out.

"The bankruptcy systems should be revised to withdraw unviable firms from the market as quickly as possible," said Choi Do-soung, a professor of business administration at Seoul National University.

The Korea Development Institute's paper argued that the composition system is responsible for delays in the disposition of bankrupt firms. "The system gives the largest shareholders chances to abuse it as a way of retaining their management rights," an official said. Accordingly, the institute insisted that it would be better that companies with debts of more than 100 billion won ($76 million) or large firms whose creditors' interests are complicated and mixed not be allowed to file for composition.

"Rather than abolish the composition system, it is better to change it so that a firm under the composition procedure might be easily transferred to court receivership," said Hwang Eui-in, a lawyer at Bae, Kim & Lee.

The research institute also proposed measures to quickly settle bankruptcy procedures, including spin-off of the current bankruptcy section of the court and punishment of the managements of debt-ridden companies when they intentionally delay bankruptcy procedures.

by Song Sang-hoon