Restructuring may get a little easier, again

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Restructuring may get a little easier, again

Published: 08 Oct. 2018, 20:07

A law that allows companies to seek help in corporate restructuring with the agreement of just 75 percent of creditors will likely go back into effect as early as next month.

The government agreed on Monday during a cabinet meeting to the reimplementation of the Corporate Restructuring Promotion Act that ended at the end of June this year.

The law allows companies facing bankruptcy to proceed with corporate restructuring when 75 percent of financial creditors agree, a more relaxed rule than the current voluntary agreement where companies need the full consent of financial creditors.

Once the companies get the approval of creditors, the law lays out the form of the financial support, such as all financial creditors extending the maturity of loans and a cutback on interest rates.

The act, which was first introduced in 2001 during the aftermath of the financial crisis in the late 1990s that led to the bankruptcies of numerous companies, was created to prevent corporate restructuring from being stopped based on the opinion of just a few creditors.

The private sector including the Federation of Korean Banks has repeatedly stressed the need to revive this law to help swiftly normalize companies, particularly SMEs.

The newly implemented law was passed at the National Assembly last month for another five years. The law, which started off as a temporary measure, has matured and been revived three times - in 2006, 2011 and 2016.

In recent years there have been growing demands on the need for the law to have a longer life expectancy considering the impact it has on the industry.

The two other corporate restructuring processes - the voluntary agreement that needs the full consent of all creditors and court receivership - are considered to have a potentially crippling effect not only on the company in trouble but also its business partners as the long process makes it difficult for companies to find new investments amid the looming threat of court receivership.

In the case of court receivership, which falls under the Consolidated Insolvency Act, all the debt that a company faces is written off, but there is a notoriously low possibility of the company normalizing due to its intense corporate restructuring. Even if a company succeeds under a court-led restructuring program, it takes an average 10 years to return to normal operations, a very long time for SMEs to survive.

The Financial Services Commission (FSC) on Monday said it has already taken steps to make the restructuring promotion act permanent, which may be by including it in the Consolidated Insolvency Act by creating a task force made of legal, financial and corporate experts as well as civic groups.

The task force will be working on cost analysis and corporate restructuring evaluation as demanded by lawmakers when passing the law last month.

The FSC, the Financial Supervisory Service and Korea Asset Management Corporation are creating a team that will work with the corporate restructuring companies to provide support, including finances, through government corporate restructuring funds.

“We believe that [the Corporate Restructuring Promotion Act] will contribute largely to revitalizing market-friendly corporate restructuring and also contribute to coming up with measures that will help draw the management direction and system reform on our corporate restructuring system,” said an FSC official.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]