P&A

Purchase and assumption, abbreviated as P&A (자산·부채이전/資産·負債移轉), is one of the Prompt Corrective Action by the Financial Services Commission pursuant to Article 10 of the Act on the Structural Improvement of the Financial Industry, (금융산업의 구조개선에 관한 법률/金融産業構造改善法) Article 10 (Timely Corrective Measures) of the Act
 * (1) Where any financial institution’s financial status falls short of the standards referred to in paragraph (2), such as its equity ratio failing to meet the specified standards, or it is deemed evident that a financial institution’s financial status falls short of the standards referred to in paragraph (2) due to the occurrence of any major financial scandal or accrual of non-performing loans, the Financial Services Commission shall recommend, request or order the financial institution concerned or the executives of such financial institution to take the following measures or order it to furnish its implementation plan in order to prevent insolvency, and promote the sound management of such financial institution:
 * 1. Admonition, warning, reprimand or salary reduction in relation to the financial institution concerned and its executives and employees;
 * 2. Capital increase or capital deduction, disposal of property holdings or reduction in stores and downsizing;
 * 3. Ban on acquisition of high-risk assets, such as nonfulfillment of obligations or price fluctuations, or restriction on the receipts at exorbitantly high interest;
 * 4. Suspension of executives’ performance of duties or appointment of management supervisors acting for executives’duties;
 * 5. Amortization or consolidation of stocks;
 * 6. Suspension of all or part of business;
 * 7. Merger or third-party takeover of the financial institution concerned;
 * 8. Transfer of business or contracts related to financial transactions, such as deposits or loans (hereinafter referred to as "transfer of contracts", 계약이전/契約移轉);
 * 9. Other measures equivalent to those listed in subparagraphs 1 through 8, which are deemed necessary to improve any financial institution’s financial soundness. and is binding on most financial institutions including commercial banks, financial investment business entities, insurance companies and mutual savings banks.

Key words
prompt corrective action (PCA), purchase of assets and assumption of liabilities (P&A), insolvent bank, IMF Crisis, transfer of business

Prompt Corrective Action
Prompt Corrective Action (PCA, 적기시정조치/適期是正措置), derived from the U.S. banking regulatory system, is one of the powerful regulatory measures toward financial institutions in Korea after the IMF Crisis.

The prompt corrective action system aims to strengthen the safety of the financial system by executing proper management improvement measures on troubled financial institutions, thereby normalizing their management or inducing liquidation of those having no likelihood of normalization.

Purposes
P&A is a transaction in which a healthy bank or thrift (called "savings bank" in Korea) assumes liabilities from an unhealthy bank or thrift, and purchases its assets to the extend of assumed liablities.

So P&A functions to reduce the liabilities to be covered by such public ensurer as the Korea Deposit Insurance Corporation or the public insurance guarantor. For instance, on June 28, 1998 when five unhealthy banks - Donghwa Bank, Dongnam Bank, Daedong Bank, GyeongGi Bank and Chungcheong Bank were expeled, P&A was used while bad assets of the exit banks were assigned to the Korea Asset Management Corporation (KAMCO).

In this regard, the employment, etc. in no relation to deposits, loans and trusts of the exit banks was excluded from P&A arrangements.

Similar Concepts
P&A is different from transfer of business, and asset purchase and sale.

With respect to the succession of employment (고용승계/雇傭承繼), P&A and asset purchase and sale do not include such clause as obligate the successor or assignee to succeed employment while transfer of business is obliged to do so.

Next, P&A centers on the contracts on the assets and liabilities while transfer of business, and asset purchase and sale are interested on the assets and liabilities on the balance sheet. Therefore, such real property or good will as is not related with any contract is excluded from P&A. Take an example of a building which has never been granted as collateral. The title of the building is excluded from the P&A arrangement.

P&A is implemented by:
 * an mandatory order with the enforcement power;
 * an advice with no such effect; or
 * an FSC decision which is rendered subject to the consent of the board of directors of the relevant financial institution in accordance with Article 14 (5) of the Act on the Structural Improvement of the Financial Industry in case other PCA measures are not so effective. Article 14 (Administrative Disposition) of the Act
 * (1) Where a financial institution falls under any of the following subparagraphs, the Financial Services Commission may, on the recommendation of the Governor of the Financial Supervisory Service, order executives of the relevant financial institution to suspend the execution of their business and may appoint management supervisors to conduct the business on behalf of such executives or recommend a general meeting of stockholders to dismiss such executives:
 * 1. Where the financial institution fails to comply with any request or order made or issued under Article 10 (1);
 * 2. Where the financial institution fails to perform as ordered under the provisions of Article 12 (3).
 * (2) Where an insolvent financial institution falls under any of the following subparagraphs, the financial Services Commission may make administrative dispositions, such as a decision on the transfer of contracts, suspension of business for a period of not more than six months against the insolvent financial institution, and cancellation of authorization, permission, etc. for its business; provided, that in cases of any insolvent financial institution falling under subparagraph 4, it may make an administrative disposition only to suspend its business for up to six months, and in cases of any insolvent financial institution not falling under subparagraph 1 or 2, the same shall not apply: 
 * 1. Where the insolvent financial institution fails to or is unable to perform as ordered under Article 10 (1) or 12 (3);
 * 2. Where the insolvent financial institution fails to merge under an order or arrangement issued or made under Articles 10 (1) and 11 (3);
 * 3. Where an insolvent financial institution is deemed unable to perform the order or to merge with another insolvent financial institution under Article 10 (1) because its liabilities significantly exceed its assets;
 * 4. Where an insolvent financial institution is recognized as undoubtedly infringing on depositors’ rights and interests and disrupts order in credit after it has been unable to pay claims, such as deposits, and repay borrowings due to its abruptly destabilized financial standing.
 * (3) Deleted. 
 * (4) A financial institution shall be dissolved if authorization, permission, etc. for its business is revoked under paragraph (2). 
 * (5) Where the Financial Services Commission decides to transfer contracts pursuant to paragraph (2), it shall determine the scope of contracts to be transferred, terms for the transfer of contracts, and the financial institution to which contracts are transferred. In such cases, it shall in advance obtain the consent of the board of directors of the financial institution to which the contracts are to be transferred. 
 * (6) The transfer of contracts according to a decision under paragraph (2) shall not require resolution by the board of directors, and a general meeting of stockholders, of an insolvent financial institution to transfer contracts, notwithstanding the provisions of related Acts and the articles of incorporation. 
 * (7) Where the Financial Services Commission decides the transfer of contracts pursuant to paragraph (2), it shall appoint a management supervisor for the insolvent financial institution. 
 * (8) An insurance company for which the Financial Services Commission has decided the transfer of contracts shall be deemed to have been granted authorization on dissolution, consolidation, etc. by the Financial Services Commission pursuant to Article 139 of the Insurance Business Act. 
 * (9) The provisions of Article 5 shall apply mutatis mutandis where the financial institution to which contracts are transferred from an insolvent financial institution pursuant to paragraph (2) performs procedures, such as resolution of a general meeting of stockholders, request for stock purchase, and creditor’s filing of objections in connection with the transfer of contracts. 

Some Questions remained
In the midst of the IMF Crisis, some questions were raised as follows: Answers to the above questions may be found at "Corp. Restructuring" section of Park's IBT Forum.
 * 1) Is it true the P&A cases were successful? Were the employees of the exit banks cooperative to purchasing banks? How about the responses of the foreign shareholders of the purchasing banks?
 * 2) How were the performance-based trust (실적배당형 신탁) contracts treated?
 * 3) Does the P&A order/decision toward an insolvent bank constitute an event of default?
 * 4) Is a commitment for an exit bank to extend a loan transferable to the purchasing bank? How about the guarantee for a loan?