Insolvency cases

Of so many insolvency cases (기업도산/企業倒産 사례) since the foreign exchange crisis in the late 1990s, two or three cases are worthy to be analysed and learned as a lesson.

In this regards, Korea's Hynix Semiconductor Inc. ("Hynix") and the Korea Exchange Bank ("KEB") have made a successful turnaround. However, while Hynix is praised enthusiastically both at home and abroad, KEB has been a target of continuous investigation by the law enforcement bodies of Korea like the Pubic Prosecutors' Office, the Board of Audit and Inspection and the National Tax Service.

Key words
corporate insolvency, Creditors' Bargain theory (채권자협상 이론), Team Production theory (팀프로덕션 이론), cramdown, reorganization plan

Issues
What's up with Hynix and KEB, respectively? Both of them were for sale toward the United States company and capital almost at the same time.

Hynix failed to be sold to Micron Semiconductor at the final phase because of the adamant opposition of its board of directors, most of employees and public opinion. On the contrary, KEB was conveyed with speed and efficiency to the US private equity fund, Lone Star, on the government's initiative.

During the reorganization process, Hynix was put into high gear thanks to the devoted efforts by the management and employees alike as well as robust market demand for semiconductors. But KEB has been plagued by the allegedly suspicious sale to the alien fund based upon fraudulent capital adequacy (BIS) figures and tax evasion in its transaction.

Creditors' Bargain v. Team Production
The above two cases would make good examples for the competing bankruptcy arguments, i.e., the Creditors' Bargain theory and the Team Production theory in the United States. These arguments would be helpful in orienting the possible amendment to the newly implemented Bankruptcy Act of Korea toward an efficient and productive corporate reorganization process.

Before introducing the two theories based upon Professor Lynn LoPucki's article, "A Team Production Theory of Bankruptcy Reorganization," this comparative study describes what was going on in Hynix and KEB. Then it explores which theory could explain better the process and consequences. In this regard, the board of directors of Hynix and KEB functioned as a kingpin of the reorganization. It would be interesting for the board with whom to share the information on the distressed business and reorganization projects.

KEB case
As the Creditors' Bargain theory explains, the Korean government, the largest substantial shareholder and future creditor (possibly subject to the payment of insured deposits to customers) of KEB, took initiative to sell the time-honored bank to the only likely purchaser, Lone Star. At that time, the government officials regarded the board of directors as a mere agent of shareholders. They ruled out any other alternatives to revitalize KEB and instructed the president of KEB to enter into the sale agreement with Lone Star in an accelerated manner. Accordingly, the head of KEB couldn't help but to manipulate the BIS ratio of the bank far below the trigger ratio of 8.0 percent. The result was a series of investigation and indictment of the key players in the KEB transaction in violation of laws.

Hynix case
Likewise, the creditor banks and the government initially pursued to sell Hynix to Micron. However, as the Team Production theory suggests, the board of directors of Hynix refused to endorse the execution of MOU or a pre-agreement to sell the company to Micron with the overwhelming support of employees and the community. In terms of information, a convincingly good news that a little investment and modification of production lines could enhance the productivity of semiconductors was well circulated within the company and notified to the board members as well as a representative creditor bank executive.

Priority in Insolvency
The review of Hynix and KEB cases confirms what matters in the bankruptcy or reorganization. As for the question, "Whose interests should bankruptcy serve first?" total disregard of the interests of parties with noneconomic rights and community interests might play havoc with the bankruptcy reorganization itself.

From the viewpoint of the sharing of information on bankruptcy reorganization, the Creditors' Bargain theory seems to have an advantage because creditors and shareholders have more influence over the board of directors than any other constituencies of the insolvent firm. In fact, no one other than major shareholders and large creditor banks has access to confidential corporate information. But Production Team members want to preserve the going concern value of the firm and are willing to delegate necessary powers to the board of directors to the extent they share such information with the board.

Of course, it might be hasty generalization after a short review of only two cases of Hynix and KEB that the Team Production theory is well fit in the corporate environment of Korea. Still now the government officials remain confident of the necessity of the controversial sale of KEB to Lone Star. But it is quite strange that KEB's shareholders and large creditors would make an agreement "ex ante" to dispose the bank to a foreign capital once the bank's capital adequacy ratio fell below a certain level. On the contrary, it is reasonable to expect the board of directors of KEB rather than the biased shareholders to have concluded an independent reorganization plan with sufficient information.

Conclusion
In conclusion, it is advisable that the new Bankruptcy Act of Korea accommodate several improvements in line with the Team Production theory and the efficient Information Sharing Scheme. Therefore I think the improvements include the followings:

First, the board of directors, in principle, shall manage the company as an informed debtor-in-possession so as to maximize its going concern value. The trustee - representative board member is required to prepare a reorganization plan in consultation with interested parties of the company;

Second, necessary information on the success of bankruptcy reorganization shall be provided in the reorganization plan, and distributed to the bankruptcy court and other interested parties. So employees, suppliers and taxing authority other than creditors and shareholders should be allowed to have access to the relevant information;

Third, the Korean bankruptcy legislation needs to adopt the cramdown provisions in the U.S. Bankruptcy Code under which the court may adjust the proposed reorganization plan in accordance with the absolute priority rule notwithstanding the opposition of creditors and shareholders. Thereby the court should bear in mind that the other interested parties take considerable bankruptcy distributions; and

Finally, the best interests of creditors and shareholders shall be protected at the same time in order to prevent a marginal company from prolonging its life only by resorting to noneconomic rights and interests.

In addition to the current legislation, careful consideration of non-economic rights and community interests surrounding the insolvent firm would be helpful to avoid the recurrence of a KEB case. Also it is necessary to establish an infrastructure to assess the exact value of a company, and evaluate the rights and interests of the interested parties in an objective manner.