Voluntary agreement between creditors and corporations to take effect within this month

By Anna J. Park

As the country’s five-year-limited law on corporate debt restructuring or workout expired on Monday, the Financial Services Commission (FSC), the top financial regulator, has vowed to respond to the legislative vacuum with voluntary agreements between debt-lending financial institutions and money-borrowing corporations to minimize potential confusion in the market. The financial authority has also vowed to closely cooperate with the Assembly for the re-legislation of the law as soon as possible.

“We express our deep regret (over the cessation of the effect of the workout law), and the FSC will thoroughly examine any difficulties borne by corporations due to the lack of legal framework. The FSC will take immediate action when necessary,” FSC Chairman Kim Joo-hyun said Sunday, vowing to close the possible legal loopholes to support normalized corporate activities.

The Corporate Restructuring Promotion Act, which ended its five-year effect on Sunday, had so far served as the fundamental legal framework for debt adjustment, or workouts, of companies with signs of upcoming insolvency. The law allows a company that undergoes a temporary liquidity crisis to prolong its debt maturity or necessary capital, when more than 75 percent of creditors consent to provide such support.

Two pending bills at the National Assembly failed to extend the effect of the act earlier this month amid extreme conflicts between the ruling and opposition parties. This now leaves insolvent Korean companies the only option of court receivership, or corporate rehabilitation procedures, as a valid means for restructuring.

With the workout system losing its legal basis, market watchers urge lawmakers and the government to swiftly work on re-legislation. They warn that without the corporate workout system, providing necessary liquidity and readjusting debts to marginal companies will become difficult, threatening the vitality of the economy.

In the event of a workout, creditors can also flexibly join hands to support a firm’s rapid normalization without court intervention. In addition, the possibility of one company’s liquidity crisis spreading to others has increased, as court receivership, unlike workouts, freezes all outstanding debts, exposing partner companies of an insolvent firm to their own risk of insolvency.

The current legal vacuum has now become more dangerous, given that 17.5 percent of the country’s listed corporations in Korea are considered marginal, having difficulty with interest payments on debts with their operating profits, according to data by the Federation of Korean Industries (FKI). The ratio of such zombie companies is on the rise every year, from 9.2 percent in 2017.

“It is difficult to substitute the workout system based on the Corporate Restructuring Promotion Act, considering the system’s convenience and the possibility of overcoming corporate insolvency,” a Korea Economic Research Institute (KERI) report highlighted.

“The act should be institutionalized permanently, instead of repeating the current unstable practice of facing the threat of expiration every few years, to prevent a distortion in corporate restructuring plans.”

The act was first introduced in 2001, following an increase in calls for government-led restructuring during the Asian Financial Crisis in the late 1990s. It was enacted as a temporary law with an expiry date, and it has since been either re-legislated or amended six times so far. During the past two decades, there were four cases in which the act lost effect after the sunset deadline, similar to the current situation.

“The workout act has so far contributed to the normalization of some major companies in the country, including hynix and Hyundai Engineering & Construction. The law has maintained its status in the Korean legal system over six times of enactment or amendment, as its usefulness has been recognized as necessary for companies’ rapid normalization,” an FSC official explained.

“We plan to minimize the legal vacuum in demand for restructuring by relying on voluntary agreements between creditor banks and corporations.”

The official also pointed out that the agreement is slated to take effect within this month, and added that the financial authorities will closely consult with the Assembly to push through the re-legislation of the workout law.