[VIEWPOINT]Hyundai's Fate Should Be Left to Judges

A time bomb in the Korean economy has exploded, after an independent auditor reported that Hyundai Engineering and Construction Co. posted a net loss of nearly 3 trillion won ($2.3 billion) last year. In response, the government is acting as if it had not already predicted this situation last November, and with no compunction is trying to bail out the company with taxpayers' money again, bypassing the minimum legal measures required. Previous pledges by the government that it would no longer artificially support a corporation nor interfere in corporate management seem to have vanished into thin air. It can ignore the angry cries of minority shareholders, but how will the government cope with the soundless fury of the general public?

The government has committed two great errors in handling Hyundai Construction. One is a matter of timing; the other a matter of measure. The government ought to have concluded the Hyundai issue last November. With regard to measures to counter the crisis, it would have been better if the government had introduced them after requesting court receivership first, asking for a legal solution, and then take measures like a debt-equity swap, if necessary, on step by step basis. Then the situation would not have deteriorated so lamentably.

Some may argue that it is fortunate that the government decided to resolve the situation by forgiving debt in return for equity stakes. I cannot agree, for the following reasons.

First, the government's interference in resuscitating a specific corporation runs counter to the market principles that Koreans have been trying so hard to follow. The decision to revive a corporation should be left solely to participants in the market. When a collective consensus is difficult to reach, the matter should be taken to court and resolved in accordance with the law on corporation liquidation. No one other than the market and the court has the right to decide whether to rescue or do away with a company.

Second, in this ominous situation there are doubts that a debt-equity swap initiated without court protection can be free from new disputes. Right now there is the possibility of rampant lawsuits. If the government decides unilaterally to bolster the company without consent of the court, can those concerned cope with the legal ramifications?

Third, the effects of this precedent on market participants should be considered. The bankruptcy of the Daewoo Group and the decision to liquidate Dong-Ah Construction contributed to some extent to breaking the Korean conception that large companies are never left to go bankrupt. The recent bailout undoes this progress, and runs counter to current trends.

It is thought that the government seriously considered putting Hyundai under court receivership, but abandoned the notion. The exact reasons for this reticence are not known, but we can speculate.

First, government officials may have conceived that judges were not expert enough to handle the problem. If so, their assumption lacked credibility because judges make their decisions based on documents submitted by both sides, which both parties put their heart and soul into.

Second, there are concerns that international credibility will be damaged by liquidating Hyundai Construction, but there can be no credibility in a company whose capital is drained. And the different treatment given to Dong-Ah Construction when it was in similar plight － it underwent court receivership － means that this option should be out of the question.

Third, some may have argued that Korean insolvency laws are a mess, making them difficult to follow. This may be true, but making an exception of Hyundai still has no persuasive logic. The only solution to the present circumstances is to go to court quickly. That is what the Company Reorganization Act was made for, and what the judges are paid for.

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The writer is a professor of economics at Hong-Ik University.

by Jun Sung-in