[EDITORIALS]Caveat on bankruptcy law

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[EDITORIALS]Caveat on bankruptcy law

The Justice Ministry's decision to amend legislation governing corporate and individual bankruptcies is a belated but excellent move.

The need to integrate the three main bankruptcy laws in the wake of corporate restructuring following the 1997 financial crisis has been constantly recommended. The call was for the integration of the Company Reorga-nization Act, the Composition Act, and the Bankruptcy Act to expedite the folding of bad companies in a way that lessens the damage to creditors and the moral hazard of debtors. There have been calls for early introduction of an individual workout system.

But first, any misplaced notions about the individual workout system should be clarified. The system would give individuals five years to work out their debts. No debts would be written off after five years of repayments unless the debtor is declared bankrupt or worthy of rehabilitation. Individuals must prove that there is more to be gained than lost by restructuring their debts. The system is quite different from the government's write-off of loans held by farmers. Reports say some people who are laden with debt are under the misconception that "maybe I can get another loan." There can be no greater mistake.

Second, we propose that the government set up an independent "bankruptcy court" to determine whether an individual or a corporation should fold or enter a debt workout.

There are phrases in the current regulations that need clarification. Under the law, the management of companies entering court receivership can remain on the board if they are proven to not have committed a "major management mistake," and the company's "debts do not markedly exceed its assets." It must be made clear what a "major" mistake is, and just how much would constitute "markedly" larger debts over assets.

The bankruptcy court should comprise only personnel with the relevant expertise. The government should not chose, as they do now, personnel through routine appointments. Such a court would permit unification of bankruptcy cases and allow speedier resolution of insolvent companies.
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