Corporate Restructuring Promotion Act

The Corporate Restructuring Promotion Act (기업구조조정촉진법/企業構造調整促進法) is to facilitate out-of-court workout, or debt restructuring, of insolvent companies, has been enacted as a sunset law. This Act was effective during the period:
 * i) from January 2001 to December 2005 for the first time; and again
 * ii) from January 2007 to December 2010.

Now the Act came into force for the third time on May 19, 2011 and will be effective to December 2013. The main content of the Act has been kept intact for the purpose of constant corporate restructuring through market functions and promotion of speedy and smooth corporate restructuring, while some minor provisions were modified from time to time.

Key words
corporate restructuring, sunset provision, creditors group, insolvent-likely company

Corporate Restructuring and Workout
In 1998 right after the IMF Crisis, hundreds of creditor financial institutions carried out workout of insolvent companies under the "Inter-Creditors Agreement to Promote Corporate Restructuring", which was beyond the existing insolvency regime such as the Corporation Reorganization Act (회사정리법/會社整理法), the Composition Act (화의법/和議法) and the Bankruptcy Act (파산법/破産法). In fact, this kind of workout could lack the legal stability and reliability.

What's the difference between the privately implemented corporate restructuring and legally binding workout?

First of all, the so-called workout, derived from the gymnastic workout, means privately conducted corporate restructuring to relieve the debtor from financial distress by means of the reduction of debt service amount, debt-equity conversion, payment rescheduing, etc. Its merits include the self-administering of insolvency proceedings, reduction of bankruptcy cost, and sharing of resultant benefit. However, it is not certain whether such an agreement has legally binding force over the non-participating creditors.

Inevitably, it is necessary to afford the legal effect to such restructuring mechanisms as the inter-creditors decision-making upon voting over hold-out problems, agenda setting among creditors, etc.

Statistics of Workout
It turns out to be productive to carry out the workout based on the Corporate Restructuring Promotion Act:


 * For the period from 2001 to 2008, 72 financially distressed companies were listed for such workout program. Around three fourths of the total candidates, 53 companies successfully graduated from workout program, or were merged into other financially stable companies. 10 companies went to the court-controlled insolvency proceedings, or such workout proceedings were stopped because of disagreement among creditors.
 * In 2009, workout plans were implemented for 59 big corporations, 10 companies of which have completed such plan while 33 companies are still undergoing workout plans, and 13 companies stopped workout.

Unconstitutionality Issue
Though the corporate restructuring is conducted out of the court, such legally mandated insolvency proceedings have been criticized based on the following problems:
 * Its mechanism is contrary to the private ownership system of the Constitution. For example, some financial institutions are forced to enter the creditors group. Unless they excersize the claim to put aside the outstanding loan, with the counterparty-buyer and the sale price uncertain, helpless creditors are legally, without exception, bound by the resolution of the said group.
 * The corporate restructuring program would not respect the private autonomy. The corporate insolvency proceedings are carried out regardless of the intent of the affected insolvent company. No one knows whether creditors' assessment of such insolvency is fair and corect.
 * Most of all, it is in breach of equality between local and foreign creditors, because foreign financial institutions are excluded from the creditors group.
 * The concept of "insolvent-likely company" (부실징후기업/不實徵候企業) is not clear. Any probable miscalculation of the creditors group cannot be remedied by appropriate judiciary proceedings. In other words, it is violating the "due process of law" ensured by the Constitution.

However, some supporters of the Act argue that the citizen's right may be restricted by the Act when necessary for public welfare, insofar as essential aspects of the right are not violated.

Solutions
First of all, is it necessary to carry out constantly out-of-court workout besides the existing debtor rehabilitation proceedings? As mentioned above, this kind of workout is usually dominated by big creditor banks which used to be fragile to the pressure of government officials or large business groups. Some critics argue that arbitrary classification for the workout of insolvent companies by creditor banks should give way to market-oriented private equity funds (PEFs) for corporate restructuring.

On the other hand, it is true that binding out-of-court agreement among creditor financial institutions is considerably efficient for debt restructuring in the Korean business environment.

So, for the time being insofar as the Act is still applicable, which of the out-of-court workouts or court-regulated insovent proceedings are convenient to creditors as well as debtors, time and cost saving, effective in fund raising shall be decided case by case.