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-The Corporate Restructuring Promotion Act of Korea Prof. OH Soogeun Ewha Womans University Government Intervention in Corporate Exit Mechanisms Recent.

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Presentation on theme: "-The Corporate Restructuring Promotion Act of Korea Prof. OH Soogeun Ewha Womans University Government Intervention in Corporate Exit Mechanisms Recent."— Presentation transcript:

1 -The Corporate Restructuring Promotion Act of Korea Prof. OH Soogeun Ewha Womans University Government Intervention in Corporate Exit Mechanisms Recent Developments in Corporate Insolvency Hong Kong University Faculty of Law Asian Institute of International Financial Law April 18-19, 2002

2 Question Can the Corporate Restructuring Promotion Act Really Promote Corporate Restructuring?

3 Outline nCorporate Exit Schemes in Korea nHistory of Government Intervention nThe Corporate Restructuring Promotion Act Efficient Exit Mechanisms and Rule of Law in the Market

4 Corporate Exit Mechanisms Major Players Business Entity Dissolution Transformation Maintenance Court Debtor Creditor Gov’t Foreclosure Reorganization Composition Bankruptcy Liquidation Merger/Sales of Business Arrangement Bank Management Creditor Management under CRPA Rationalization Measures/Big-Deal/Workout

5 Judicial Procedure nCorporate Reorganization –Stock Corporations –Rehabilitation nComposition –Individuals, Partnerships, Corporations –Rehabilitation nBankruptcy –Individuals, Partnerships, Corporations –Liquidation

6 ‘Budoh’ and Other Judicial Procedures YearBudohBankruptcyCompositionReorganization 1983 * **65 1984***52 1985*11240 1986*26- 1987*20-30 1988*21-26 1989*37227 19904,10727-15 19916,15916-64 Budoh : non-payment of promissory notes or checks

7 ‘Budoh’ and Other Judicial Procedures YearBudohBankruptcyCompositionReorganization 1992 10,76914-89 1993 9,50226-41 1994 11,25518-42 1995 13,992121379 1996 11,58918952 1997 17,16838322132 1998 22,828467728148 1999 6,71873314037 2000 6,6934617832 2001 5,277 8425131

8 Rationalization Measures Applied YearTarget 1969-1971112 Failing Firms 197261 Industries 1982Heavy/ Chemical Industries 1984-1985Shipping/ Foreign Construction 1986-198857 Firms, Foreign Construction

9 Tools for RM nDebt and rate reduction nExtension of due nRescue loan nMerger nForced sale, Liquidation nExclusion of competition nTax benefits nBan repayment nChange existing loan agreements

10 Logic of RM nGovernment as Planner –Economic Planning Board  Select business/ Choose corporation/ Provide resource –Business Failure  Industrial policy issue/ Political responsibility nGovernment as Creditor –Ministry of Finance and Economy  Supervisor of financial institutions  Owner of many banks –Understanding of Banks  Tools for economic policy implementation

11 Government-led Banking nGovernment – nominates directors – affects individual loans – urges policy loans – implements financial policies through banks

12 Basis of Government-led Banks nOwnership –Government as major shareholder –Ownership restriction nRegulator Currency and Financial Policy Maker

13 Largest Shareholders after the Crisis Banks Largest Shareholders Shares ChohungKorea Deposit Insurance Co.80.5 HanvitU Holding100 CheilKFB-New Bridge Holding50.99 SeoulKorea Deposit Insurance Co.100 KFBExport-Import Bank/BOK23.62 KookminGoldmanSachs10.87 H&CBGovernment/KDIC25.07 As of June 2001

14 Vicious Cycle of Government-led Banking nEmploys Banks for Economic Policy nDistorted Governance Structure –Concern for political power as a nominator –Lacks business character, dependent on government –Malfunctions as creditor in the market nMarket Failure in Financial Sector –Government pours funds to make up losses of banks –Moral hazard of creditors and debtors

15 Basic Understanding of Econocrats nFate of Major Failing Firms –Should  Not be a legal matter  But an economic policy issue –Should be decided  Not by judges in a judicial process  But by econocrats under economic policy Economic Policy lies beyond the Rule of Law

16 Characteristics of RM nNo General Rule on Standards and Procedures nNo Disclosure nNo Legislative Control nNo Judicial Review

17 Workout nLegal Basis –Corporate Restructuring Agreement by all financial institutions –Effective since 1998.6.25. until 2000.12.31. nLondon Approach? –Precedents  Anti-Budoh Agreement  Co-operative Loan Agreement –Non-voluntary Agreement  Financial Supervisory Board  Ministry of Finance and Economy

18 Workout Procedure nSelect Target Firm nCall for Creditors’ Conference nDue Diligence by External Auditors nDraft Workout Plan nConfirm Workout Plan nConclude MOU with Firm nRun Management Team and Management Assessment Council

19 Firms under Workout ResultsNumber of firms Under procedure37 Quit21 Graduation15 Self performance18 Merged15 Total106 As of 2001.6.5.

20 Financial Restructuring under Workout Firms Debt Arrangement New Loans Extension of Due Equity Swap OthersTotal Plan Daewoo 36.726.67.871.25.0 Other Chaebols 21.3 5.21.828.41.2 Others 4.40.30.7 5.30.5 Total 62.432.110.3104.96.8 As of March 2000 72.6 2.84.5 (Unit: Trillion Korean Won)

21 Weak Points of Workout nOnly Domestic Financial Institutions nMoral Hazard on Both Sides –Too big to fail, holdout –No business interests available nNo Distinct Direction for the Next Step

22 Enactment of Workout nRevision Proposal by MOFE –Court’s approval of workout plans –Super priority on new loans nEconocrats’ Perception of Law –A tool for policy implementation –The Law is decided by the Government

23 Industry Merger and Consolidation Semiconductor Hyundai Elec. merged LG Semiconductor Power Generating Equipment Korea Heavy Industries merged Hyundai and Samsung Heavy Industries Petro-chemicals Merger failed b/w Hyundai Petro-chemicals and Samsung General Chemicals Aircraft Manufacturing Divisions of Samsung, Hyundai and Daewoo were consolidated into Korea Air Industry Railway Vehicles Divisions of Hyundai, Daewoo and Hanjin were consolidated into Korea Railway Vehicles Ship Engines Korea Heavy Industries and Samsung Heavy Industries were consolidated into HSD Engines Oil Refining Hyundai Oil merged Hanwha Energy Electronics and Automobile Exchange failed b/w Samsung Motors and Daewoo Electronics Big Deals

24 Government and Political Initiation of Big Deals nOwnership Structure of Chaebols –High debt ratio, small share –Good for creditors, bad for owners nAnti-Competition nPolitical Retaliation –No synergy effect –No problems in payment of interests

25 Legislative History of CRPA nMOFE’s effort to enact Workout supporting legislation since 1999 nCongressmen’s proposal to mandate corporate exit in 2000 nAgreement between two dominating parties nConflict between the Finance and Economy Committee and Judiciary Committee nEnacted on August 14, 2001, effective on Sept. 15, 2001

26 Structure of CRPA Structure of CRPA nInternal Accounting Control System nEvaluation of Credit Risk –Statutory Evaluation and Management Standard –Standard of Financial Supervisory Committee nRestructuring of Ailing Firms –Positive Measures  Creditor Management (Financial Institutions/ Creditor Banks / Prime Bank)  Court Process (Corporate Restructuring/ Composition) –Negative Measures  Liquidation or Bankruptcy in court

27 Restructuring Process under CRPA nCredit risk Evaluation by banks nSelection of Ailing Firms by Banks Management of Creditor(s) –Call for Creditor Financial Institutions Council –Due diligence and evaluation by independent agency –Debt restructuring and new credits –Prepare Management Normalization Plan among Creditors –Conclude Implementation Agreement with debtor firm –Dispatch of Financial Administrator

28 Legal Characteristics of CRPA nApplication –All creditor financial institutions nAutomatic Stay –At the time of the call for the Council nDamage Liability –When approving creditor fails to perform the resolution of the Council –When creditor sells its claims to third parties nDissenters right to Sell Claims –Pricing of claims : Agreement/ Mediation Committee of Creditor Financial Institution/ Court

29 Performance of CRPA nWorkout Companies Transferred under the CRPA –25 Firms nNewly Designated Ailing Firms in 2001 –7 firms total –2 firms failed to get the approval at the Council –5 firms (including Hynix and Hyundai Construction) got the Approval nNo New Entry in 2002

30 Results of Government Intervention nMoral Hazard on Both Sides –Insufficient risk management nMarket Failure of Corporate Exit nConsequent Inexperience in Judicial Procedures

31 Infrastructure for Effective Corporate Exit Mechanism nEffective Judicial Enforcement nRational Decision of Creditors nReliable Accounting Information nActive Financial Markets

32 Impediments nGovernment intervention in market nUnreasonable Decision of Creditors nUnawareness of Rule of Law in the area of economy

33 Rule of Law in the Market nMake creditors creditor-like –Privatization of banks –Reform governance structure nKeep Government away from the failure of firms –Let the statutes work –Legitimate and direct involvement

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