Uncertainty surrounds extension of Korea’s debt workout law

[Photo by Kim Ho-young]

South Korean financial and law authorities are at odds over the extension of the Corporate Restructuring Promotion Act, which is set to expire in October. The Act, which aims to facilitate ordinary corporate restructuring under market functions, has served as the legal foundation for debt workout programs in Korea.

According to the State Affairs Committee under the National Assembly on Wednesday, a proposal for the extension was under negotiation on July 4 but it failed to reach an agreement.

The main concern revolved around whether to extend the expiring Act.

The Act was put into effect in 2001 as a temporary law in the wake of the growing importance of government-led restructuring following the financial crisis of 1997. Some have urged to establish the Act as a permanent fixture.

The Financial Services Commission (FSC) believes the Act needs to be extended as marginal firms are likely to increase. The extended maturity and repayment suspension for small and self-employed businesses are set to end in September amid worsening economic conditions with higher interest rates and rising prices of raw materials.

Given the circumstances, it is imperative to establish a workout system that facilitates the swift recovery of companies displaying indications of insolvency, according to the FSC.

According to an analysis by the FSC, the number of small-to-mid-sized enterprises (SMEs) with signs of insolvency rose to 183 as of the end of last month from 153 in 2020 and 157 in 2021.

The Federation of Korean Industries found in its statistics released in May that marginal firms in Korea accounted for 17.5 percent of the country’s listed stocks as of 2022.

The number has doubled in five years from 9.2 percent in 2017. The financial authorities expected the actual number to be more.

“We have expressed its stance on the necessity of an extension, considering the progress made through the workout initiatives,” said an unnamed official from the FSC.

The 24 companies that had gone through the financial rescue under the supervision of the state-run Industrial Bank of Korea (IBK) since 2012 saw their sales rise by 25.1 percent on average, according to a comprehensive analysis of their financial indicators.

Moreover, the number of severely capital-crunched companies decreased from 11 to 6. While 16 companies showed improved operating profits, the average return on assets (ROA) witnessed a significant improvement from -20.5 percent to 7.5 percent.

However, the Office of Court Administration say that determining an extension of the timeframe requires objective approaches to economic conditions and the effects of restructuring measures taken under the Act.

The Office emphasizes that rehabilitation proceedings should be consistent, suggesting that relevant laws should be integrated into the Debtor Recovery and Bankruptcy Act.

In response, the FSC asserted that the debt workout and rehabilitation programs should remain separate as they have different goals. The former aims to expedite the financial recovery of companies with signs of insolvency without requiring court intervention.

On the other hand, rehabilitation programs seek to resolve debts through equitable loss sharing based on the court’s judgment.

“Rehabilitation and workout are complementary systems that can operate in conjunction with each other,” said Jeon Yo-seop, a senior official at the FSC.