Chapter 20: Corporate Restructuring During Times of Crisis in South Korea
- International Monetary Fund. Legal Dept.
- Published Date:
- February 2013
Despite some debate regarding when industrialization in fact began in South Korea, considering the history of policies up to the present, one may posit that industrialization commenced in 1962, when the government initiated the Five-year Economic Development Plan.1 Since then, South Korea’s economy has developed rapidly; now, it is an industrially advanced country.2 South Korea had faced many crises during its development. Some crises came from the outside, such as the 1973 and 1979 oil shocks and the subprime mortgage crisis; some crises arose internally, such as excessive household debt or the 1997 Asian financial crisis.3
Economic crises reduce the incomes of enterprises and households, thereby increasing the number of economic entities that are unable to pay their debts. Therefore, it is crucial to resolve the question of how to deal with excessive corporate and household debt during economic recovery. The answer can be either economic or legal. Economically, increased income may resolve the excessive debt problem; legally, due date extension or debt write-off may also resolve the problem. These legal measures either directly or indirectly involve insolvency laws. Extension of due or write-off of debts in insolvency proceedings is a direct use of insolvency laws; a creditor’s private debt-settlement with the debtor is an indirect application of insolvency laws.
Economic indicators indicate that South Korea has successfully overcome the 1997 Asian financial crisis and the 2008 subprime mortgage crisis. South Korea paid back all of its IMF loans ($19.5 billion) in less than three years,4 making South Korea the first East Asian country to do so. South Korea experienced a phenomenal enlargement of its foreign currency reserves after the crisis.5 Now, the adequate amounts of the reserves and their efficient use have become major issues.6 South Korea is considered to be one of the countries that have dealt with the subprime mortgage crisis most effectively,7 as indicated by its high GDP growth rate.8
There can be many explanations for the success: political stability, national consensus to overcome the crisis, reasonable financial health capable of supporting government policies, and manufacturing competitiveness. It is also crucial to manage bad loans when attempting to overcome economic crises. Thus, if an economic crisis has been well managed, then the country has also succeeded in managing excessive bad debts. This article begins with an inquiry into South Korean measures to consolidate excessive debts and the conditions and limitations of those measures.
This article is composed of five parts. Section 2, which follows the Introduction, outlines the policy measures responding to the subprime mortgage crisis. It also includes comparison of the subprime mortgage crisis and the foreign currency crisis of 1997 and shows that the Workout was a policy measure applied to both cases with some variation. Section 3 explains the historical and economical background of the Workout, which was the government response to economic crises. Section 4 answers the questions of how the Workout has been evolved and whether the Workout is an efficient insolvency scheme. In the final section, the author compares the executive measures and judicial proceedings upon the economic crises and argues the Korean experience demonstrates the learning curve on the rule of law in the market, which is a key factor for successful restructuring and market economy.
2. Policy Measures in Response to the Subprime Mortgage Crisis
South Korea was not immune to the global crisis in 2008. External factors, aside from the general downturn of the global economy, such as the withdrawal of foreign capital and cancellation of foreign orders accelerated the crisis inside. Internally, South Korea suffered from a real estate bubble, investment overheating in construction and shipbuilding industries, and relatively short-term foreign loans.
Policy measures taken by the South Korean government can be summarized in three types. The first type is liquidity assurance. To prevent a liquidity crunch, the government allowed financial institutions to extend due dates for up to a year and provided 10.7 Trillion Won to financial institutions. The second is financial market stabilization. The government set up funds such as the Fund of Fund (10 trillion won), the Bank Recapitalization Fund (20 trillion won) and the Non-performing Asset Management Fund Bond (20 trillion won). The third type of policy measure is corporate restructuring.
Corporate restructuring was initiated by the Financial Supervisory Service (FSS).9 The FSS established the Corporate Credit Support Task Force, which is headed by its chairman. It employed a structured approach under the Corporate Restructuring Promotion Act (CRPA).10 The FSS also adopted a market-oriented approach through private equity funds11 and Korea Asset Management Corporation (KAMCO).12 The corporate restructuring program had two objectives: one was to assure the provision of money to non-ailing firms and the other was to promote a quick exit for ailing firms.
This program started with a credit assessment by creditor banks under the standard set by the FSS. After the assessment, the firms were classified into four categories: A, B, C and D. A means normal and B means temporary liquidity shortage. For A and B firms, creditor banks are in charge of financial support and are responsible for their survival. C means distressed and are subject to the Workout, a restructuring scheme under the CRPA. D means insolvent firms and is subject to either judicial insolvency proceedings, the rehabilitation proceeding or the bankruptcy proceeding.
Corporate Restructuring in Target Industries
The assessment process was first implemented in target industry groups including construction, shipbuilding and shipping industries and then in other industry in general. Assessment in construction and shipbuilding industries was conducted twice, in January 2009 and in March 2009. In the 1st round of the assessment, 79 construction companies and 20 shipbuilding companies were classified as A or B. 11 construction companies and three shipbuilding companies were classified as C. Two construction companies were classified as D. BIS Ratio impact was -0.1 percent for commercial banks and -0.4 percent for saving banks. As for the second round assessment, 15 firms got C and 5 got D; however, the BIS ratio impact was minimal. No official report was made public regarding the credit assessment of the shipping industry.
The government took industry-specific measures to save firms. The construction industry received full protection on paid-in price by Korea Housing Guarantee Corporation (KHGC) through construction real estate investment trust as shown in Figure 1. The government allowed KHGC, a quasi-government agency, to provide guarantees to real estate investment trusts in order to protect construction firms from unsold apartment units.
Figure 1.Structure of Construction REITs
Private fund vehicles were also introduced in order to facilitate private investment in real estate development. A typical scheme of a private fund vehicle is illustrated in Figure 2.
Figure 2.Structure of Private Fund Vehicle Scheme
In order to provide cash to construction firms, the claims for construction costs were securitized through trustees, illustrated in Figure 3. Guarantees were given for international construction projects.
Figure 3.Trust and Securitization of Claims for Construction Costs
As for the shipbuilding industry, Korea Development Bank (KDB) offered the “Let’s Ship Together Fund” to facilitate the purchase of ships under construction. FSS also increased Loan to Value (LTV) ratio to allow more money to be poured into the shipbuilding industry. Some regulations were lifted under the Ship Investment Company Act for shipping companies.
Also, four trillion won worth of Shipping Fund was spent to purchase ships from ailing shipping companies.
Corporate Restructuring in General Industries
Risk assessment and following restructuring on industry in general was conducted by size starting from conglomerates. Forty-five big corporation groups, of which credit facilities were more than 0.1 percent of total claims of financial institutions, were evaluated. As a result, nine cash-strapped groups underwent a debt rescheduling program as of June 1, 2009.
Large non-conglomerate firms underwent routine credit assessment under the CRPA; in June 2009, 22 firms were given C classification and 11 were classified as D, among 433 firms with credit facilities over 50 billion won. From July to October 2009, small and medium size enterprises (‘SMEs’) went through the assessment as well. 185 were classified as C and 102 were classified as D among 4,164 companies (40,734 in pool). Assessment and restructuring of smaller firms was followed; firms with credits facilities of 3 to 5 billion won in September, 2009 and 1–3 billion won in November, 2009.
Comparison of Economic Situations between 1997 and 2008
Ten years prior to the subprime mortgage crisis, South Korea experienced the 1997 Asian financial crisis, so-called “IMF Crisis.”13 The nation suffered enormously during the “IMF Crisis” from unprecedented unemployment and insolvencies. When the subprime mortgage crisis swept the nation, many Koreans were still haunted by the memory of suffering during the 1997 crisis. On the other hand, the government could use what it had learned about crisis management during the previous crisis. In order to gain a comprehensive understanding of the Korean crisis management policy, it is helpful to compare the crisis management policies of 2008 to those of 1997.
Table 1, which compares major economic indicators between 1997 and 2008, shows that the economic situation in 1997 was much more severe than that that of 2008. During the 1997 financial crisis, however, global economy was not as bad, so South Korean products had good sales in the global market, which was not the case during the subprime mortgage crisis of 2008.
|1997||Major Economic Indicators||2008|
|25.0%||Interest Rates of Certificates of Deposit||3.9%|
|1415.2||Foreign Exchange Ratio||1257.5|
|USD20.41 Billion||International Reserve||USD 201.22 Billion|
|7.04%||Bank’s BIS Ratio||12.31%|
|6.0%||Non Performing Loan Ratio||0.86%|
|424.6%||Corporate Debt Ratio||130.6%|
|1.2||Interest Coverage Ratio||3.2|
Most importantly, the South Korean government handled the situation under the subprime mortgage crisis without borrowing money from the international financial institutions, whereas the IMF loan was a critical measure in overcoming the 1997 crisis. Therefore, it was possible to implement measures without considering external pressure during the subprime mortgage crisis.
When the foreign currency crisis hit the nation in late 1997, the South Korean government took policy measures that appeared contradictory. It raised the interest rate to push financially ailing firms off the market; but at the same time, the government provided assistance, such as big deals, insolvency postponement scheme, cooperative loans program, and among others, the Workout.
Since the foreign currency crisis in 1997, the government tried to reduce insolvencies by doing mergers between duplicate industries among chaebols. These measures are called the Big Deals. The Big Deals consolidated excessively invested markets into a single company in order to reduce competition and to improve the company’s financial structure. It was a measure to boost the companies’ competitiveness through selection and concentration. It is not different from the industry rationalization policies in the 1970s and the 1980s that resulted in cartels between competing companies to solve redundancy and over-investment problems in the heavy chemical industry.
It is remarkable that those merger deals were decided by the government and high-profile politicians, instead of a bargaining process among the companies.14 Companies selected to be bought out tried to influence the government to prevent being bought out. The companies fought over the leadership if a new independent firm was formed as a result of the merger. Table 2 shows the progress of the Big Deals. It is apparent that the government or politicians were not over the old habit of the Industry Rationalization Plans.
|Industry||Big Deal Plans||Outcome|
|Semiconductor||Hyundai Electronics + LG Semiconductor||Acquisition by Hyundai|
|Generating Plant||Hyundai Heavy Indus.+ Hankook Heavy Indus. + Samsung Heavy Indus.||Acquisition by Hankook Heavy Indus.|
|Petrochemical||Hyundai Petrochemical + Samsung Petrochemical||Unsuccessful|
|Aircraft Manufacturing||Samsung Aero Indus. + Daewoo Heavy Indus + Hyundai Space Aero||A new entity established|
|Railroad Car||Hyundai Precision + Daewoo Heavy Indus. + Hanjin Heavy Indus.||A new entity established|
|Ship Engines||Hankook Heavy Indus. + Samsung Heavy Indus.||A new entity established|
|Oil Refinery||Hyundai Refinery + Hanwha Energy||Acquisition by Hyundai|
Insolvency Postponement Agreement
Since the insolvency of Hanbo Group15 in 1997, the public’s concern that there would be a domino effect grew. So the government introduced a new protective tool for companies that were suffering from temporary financial difficulties. On March 24, 1997, chief executive officers of commercial banks agreed to rescue financially sound companies from collapsing as a result of fund shortages based on a rumor about insolvency. On April 14, CEOs from 10 banks consented to form the Consultative Body of Financial Institutions for the Normalization of Business Firms.16 On April 18, CEOs from 35 banks gathered to sign the Agreement among Financial Institutions to Promote Normalization of Ailing Firms and to ensure Efficient Disposition of Non-Performing Loans (‘Insolvency Postponement Agreement’). Even though the agreement was purportedly self-induced by financial institutions, it was actually designed by the government.
The thrust of the agreement was to postpone the declaration of non-payment of notes, which resulted in the ban on bank transactions. Creditors also offered emergency funds. It opened the possibility for an ailing company to recover and normalize during the breathing spell, if it showed some potential. On April 21, 1997, Jinro Group17 was selected as the first target for the agreement, followed by Daenong group18 in May and Kia Group19 in July. From April to October, this Agreement was applied to a total of 25 companies; however, only one company, Saman Corporation, succeeded in reviving. Among the other 24 companies, eight companies20 filed for the corporate reorganization proceedings. The remaining 16 companies applied for the composition proceedings. Moreover, when the IMF asked the abolition of this scheme on December 5, 1997, it became more difficult to maintain the Insolvency Postponement Program and it disappeared after December.
Cooperative Loans Program
In October 1997, the government introduced a new measure, “Cooperative Loan Program,” to protect the national economy from the disastrous impact of a potential bankruptcy by big companies. If the Insolvency Postponement Agreement focused on reviving ailing companies on the verge of bankruptcy, the Cooperative Loan Program intended to aid companies suffering from temporary financial difficulties. Banks were already offering partial syndicate loans. However, it lacked enforcement so that it was difficult to unify opinions inside creditor banks. So, the government tried to systematize the measure.
Starting from 50 billion won for Jinro in July 1997, a total of 3.4 trillion won was poured into 15 groups. However, normalization of those companies took more time than expected and additional aid was continuously needed. Therefore, the government and financial institutions understood that the Cooperative Loans Program were not sufficient to ease the difficulty.
3. The Workout
When big corporate firms continued to stay on the verge of bankruptcy in spite of the Insolvency Postponement Program and the Cooperative Loans Program, the government initiated a non-judicial restructuring program to save failing firms and, eventually, financial institutions. As the government worried about banks going bankrupt, which may result from massive bankruptcy of ailing business firms, a program which could prevent ailing firms from being put into judicial insolvency proceedings was required. The Workout program, which started in June 1998, was based on the Workout Agreement21 formed by all 210 domestic financial institutions. The agreement and its related rules specified the details of the process, standards of decisions, and even penalties making the Workout program a binding restructuring scheme. FSS in effect assumed a central role in establishing and implementing the Workout. Many large firms, including corporate groups, went under the Workout instead of judicial proceedings.22
In 1998, 104 firms were selected as target firms of the Workout, out of which eight firms were dropped, and the Workouts commenced against 96 firms. As of 2003, 44 firms graduated from the Workouts, 14 firms were under self-implementation, 7 firms were under the process and 18 firms unsuccessfully completed the Workout.
The total claims filed for the Workout in 1998 amounted to one quadrillion and 37 billion won, among which claims against Daewoo group was 64.1 percent (665 trillion won). The debt payment was delayed for 69 percent (719 trillion won) of that amount and 17.6 percent (182 trillion won) went for the conversion to equity. Considering that usually over 30 percent of claims were converted to equity investment in the judicial reorganization proceedings, the Workouts had relatively low conversion to investment rate.
Comparison of Policy Measures between 1997 and 2008
There are significant similarities between policy measures taken in 1997 and in 2008. During both crises, the executives showed clear and strong intention of taking the initiative. FSS was in charge of corporate restructuring and the Workout was a major tool of government-initiated corporate restructuring programs in both crises. As the Workout is a restructuring scheme among financial institutions, FSS has a voice in the Workout as a financial supervisory agency over financial institutions.
The Workout, however, had a different scope and nature during the two crises. The Workout during the 1997 crisis was implemented under the direct guidance of FSS without any statutory basis: it was only based on the workout Agreement for all domestic financial institutions, which was signed as a result of the urging of FSS on June 28, 1998. The secretariat of Corporate Restructuring Commission was located in the building of FSS and most high officers of Corporate Restructuring Commission came from FSS.
The Workout upon the subprime mortgage crisis was implemented based on the Corporate Restructuring Promotion Act (CRPA). Intervention of FSS was rather indirect in the sense that target firms were selected pursuant to the standard which was established in the process of financial supervision by FSS. Although it has been observed that FSS put its nose into the selection of target firms and decision making on the Workout plans in some cases, the scope of such intervention seemed to be limited to big firms and the degree of the intervention less strong.
The Workout during the 1997 crisis focused mainly on large firms, including conglomerates, such as the DAEWOO group. Most SME insolvency cases underwent judicial proceedings. The Workouts for SMEs started in 2000, when the Workouts for big firms decreased. During the subprime mortgage crisis, however, the Workout for SMEs became a routine process in handling non-performing loans of financial institutions. For example, IBK,23 which specializes in providing loans to SMEs, has more than 1,000 Workout cases for SMEs. This appears to be the reason why the number of judicial insolvency cases for business corporations did not increase as expected, even though the total number of judicial insolvency cases has increased as showed in Table 4.
|Delay of debt payment||Conversion of investment|
|Interest Rates Reduction||Normal Interest Rates||Total||Debt-for-Equity Swap||Acquisition of CB||Total||Misc.|
|Ratio (Ratio to total debt)||63.7%||5.1%||69.3%||14.4%||3.2%||17.6%||7.4%|
In both crises, the Workout played the main role in corporate restructuring. Even though the Workout of 1997 and 2008 vary in detail, they were largely similar in that they are both extra-judicial creditor-led procedures. The reason why the phenomenon occurred will be discussed further in the next section.
4. Backgrounds of Government Intervention
Insolvency Schemes of Korea
In most countries, restructuring of ailing firms is conducted through negotiations between creditors and debtors during the initial stages and through judicial insolvency proceedings in later stages. The government may provide some aid to restructuring through bailout loans, government guarantee or tax aid in certain cases.
Figure 4 illustrates the current insolvency scheme in Korea.24 Foreclosure is a typical measure of civil enforcement, which is regulated by the Civil Enforcement Act. As is the case in other countries, Korea has judicial insolvency schemes including the bankruptcy proceeding and the rehabilitation proceeding in addition to foreclosure process in non-insolvency situations. The bankruptcy proceeding and the rehabilitation proceeding are traditional procedures for liquidation and reorganization, respectively. The Debtor Rehabilitation and Bankruptcy Act (DRBA) of 2006 governs theses insolvency proceedings.25 Individual debtors can apply for a separate proceeding called the individual rehabilitation proceeding.
Figure 4.Insolvency Schemes of Korea
Figure 4 also shows another distinctive feature of Korea in insolvency schemes—government intervention.26 Most governments are tempted to intervene into insolvency situation of some business firms for various reasons, including the economic or political importance of firms, unemployment management, or the personal interests of decision makers. In most cases, government intervention is limited to a certain firm or industry for a certain period of time. But that is not the case in South Korea.
Policy Measures over Farmers’ Debts
The list of government intervention cases is quite lengthy, even before the 1997 crisis. The first instance was the intervention intended to manage farmers’ debts through high interest rates. In 1959, the government provided funds to replace the personal loans with high interest rates with moderate rates. Since then, measures to swipe high-rates loans with low-rates loans were repeatedly taken. The funds for farmers and fishermen were formed and were continuously supplied with low interest rates. The interest rate was lowered and the repayment date was extended for the return of late policy loans till now. Until recently, farmers’ debts were not regarded as ones which were to be subject to judicial insolvency proceedings. The fact that a bill was submitted lately to the National Assembly to write off debt of farm households through the insolvency proceedings shows the general awareness that it is no more expectable for the government to solve the debt problem.
Policy Measures over Ailing Firms in 1969
In the late 1960’s, the government faced the situation in which several big firms were on the edge of bankruptcy. It was the first time in Korea that the government saw an insolvency issue as a national agenda. The government saw the situation from the perspective of industrial policy and decided which firms should be saved and how. A task force was established at the Blue House and made its decision regarding about 100 ailing firms. Between 1969 and 1971, there were three instances of clear-outs: 30 ailing firms in 1969, 56 in 1970, and 26 firms in 1972. The task force decided whether to continue to provide loans or not. The Korea Development Bank and other major banks took charge of providing rescue loans to ailing debtor firms under instructions by the task force. In rare cases, the task force had some firms undergo the corporate reorganization proceeding.
Presidential Order of August 3, 1972
The Korean economy was heavily dependent on exports. The downturn of the world economy caused by the abolition of the U.S. gold standard in 1971 had a direct and serious impact on the Korean economy. Most firms were burdened by high interest rates. On August 3, 1972, the President issued the “Presidential Emergency Order for Economic Stability and Growth” of August 3, 1972 (“August 3rd Order”) pursuant to Article 73 of the 1969 Constitution.27 The order had the same binding force as a statute enacted by the National Assembly. The order required each debtor firm to report its debt from lenders who were not financial institutions to the tax authorities and banned loan repayment. Reported debts were exchanged for claims with 8 percent annual interests, which were to be repaid for 5 years after 3 years deposit. In those days, average interest rates between debtor firms and money lenders were over 2 percent a month.
The August 3rd Order resulted in a nation-wide stay over claims by private money lenders, the main source of loans in the country, who were notorious for their high interest rates. It dramatically illustrated the approach of the government toward insolvency issues. In the era of economic development, the fall of large firms was evil and the government was deemed to have such authority to adopt any measures to save ailing firms.
Industrial Rationalization Measures
Policy measures for restructuring targeting ailing large companies and major industries was undertaken under the Industry Rationalization Measures from early 1970’s to late 1980’s. When a certain industry or corporate group was in danger of bankruptcy, the government established and implemented Industrial Rationalization Measures. After assessing insolvent industries or companies, the government decided whether to allow the company to stay in the market, so that it could offer extensions, debt-exemption, relief loans or tax benefits. The Industry Rationalization Plans were employed four times—in 1972, 1982, 1984 and 1986.28
The Presidential Emergency Order on August 3, 1972 offered financial aid to 61 industries that were chosen under the Industry Rationalization Plan tried to improve facilities, systemize, merge or be bought out, improve financial structures or develop new technologies.
Excessive focus on heavy and chemical industries since the late 1970’s led to over-investment and weakened the overall financial health of those industries. The government aimed to ameliorate redundancy and over-investment in the industries through mergers or manufacturing specialization. During the investment control period, governmental support continued through relief loans and financial relief packages in 1982. The government saved target firms from bankruptcy by the provision of rescue loans, tax-cuts and reduction in competition, all under the name of Industrial Rationalization Measures. Industrial Rationalization Measures were adopted again in the 1980’s when shipping and overseas construction industries were in danger of bankruptcy.
From 1984 to 1985, the government implemented Depressed Industry Rationalization Measures. These measures were applied to the shipping industry and overseas construction industry; companies in these industries were subject to merger or third-party takeover. The government provided support if these firms took the designated measures. The words “rescue loans” became popular in those days.
From 1986 to 1988, the government divided insolvent companies into two groups: individual insolvent companies and companies subject to rationalization. Out of 57 individual insolvent companies, 49 companies were subject to rationalization under “Tax Reduction Act” and eight companies were subject to third-party takeover. And 21 companies were taken care of as rationalization measures by industry to complement rationalization of shipping and oversees construction rationalization.
The Industry Rationalization Measure was not taken after the 1990’s because of political opposition. Also, there was certain pressure for the government to engage each company directly and openly. However, financial aid in the form of relief loans appeared sporadically after this period.
Background of Government’s Intervention29
The reasons for such government intervention can be found in South Korea’s economic development strategy. The government has always led economic development in South Korea: the government decided where to invest, who manages the firms, and how to fund financial projects. This approach reappears in the debtor and creditor relationship. The government decided to handle bad debts of distressed corporations from the industrial policy perspective. In other words, the government regarded the foreclosure of large companies to be a failure of its industrial policy.
Intervention was possible because the government substantially controlled most financial institutions. While implementing the economic development plans, the government had control over the governance of most financial institutions, including banks, so that the banks could finance bailouts. In this so-called government-led banking, the government practically plays the role of a creditor.
5. Evaluation of the Workout
As mentioned earlier, the South Korean government has experience with solving the issues of distressed companies (especially large companies) by government intervention since 1960. Therefore, few Koreans found government intervention during the 1997 financial crisis or the 2008 subprime mortgage crisis disturbing. The Workout is just an extension of the past industry rationalization process in a varied form. In the following section, the characteristics of the Workout are analyzed in order to determine whether it was more effective than judicial insolvency proceedings.
The London Approach
The South Korean government explained to the public that the Workout was something similar to the London Approach.30 In the mid 1970s, Britain’s inflation and unemployment rose, causing companies serious financial difficulties. Banks directly engaged companies’ restructuring to deal with bad debts. However, the attempt was not very successful because they lacked experience and the insolvency law was inadequate. The Bank of England took the role of a proactive mediator. Its role was to facilitate a dialogue between creditor banks. Even though there was no legal base for the Bank of England to participate in restructuring, it was broadly accepted by the general trust about its independency, discretion and fairness.
After 1989, the United Kingdom experienced another recession because financial institutions ran short-term bonds to protect capital and which resulted in serious liquidity crisis for companies. Then, the Bank of England participated again in corporate restructuring. This process is known as the London Approach. The biggest feature of the London Approach was voluntary participation by the creditor banks, while the Bank of England participated minimally. Due to financial liberalization, many foreign financial institutions became creditors. Thus, it was both controversial and practically impossible to give aid to specific entities, such as large domestic banks.
In the early 1990s, the Bank of England was involved in 160 workouts and helped out by advising on restructuring schemes, if creditor banks requested assistance. If the creditor bank did not want the help, the Bank of England would not intervene. In fact, creditor banks often executed workouts independently. Even though the Bank of England did not exercise legal enforceability during the workouts, it played the role of a mediator through its moral authority.
Under the London Approach, the workouts occurred extra-judicially and creditors made decisions unanimously while debtors continued to conduct business. The debtor company continued to deal with and negotiated with creditor banks. CPAs independently decided whether the indebted companies were viable. The indebted company exchanged information and documents with creditors. Main creditors and debtor companies discussed whether to continue long-term aid and under what conditions. To facilitate the discussion, a bank would function as a representative; sometimes a joint conference of creditors would be held to decide important issues. If companies suffered from lack of liquidity, creditor banks would lend more funds. The discussions led to business solutions, such as due extension, additional funds or, if necessary, even the change of board of directors, asset sales, and takeover.
The London Approach is different from the Korean Workouts in two respects. One is the role of the financial supervisory authority. In the London Approach, the Bank of England created an opportunity for all creditors to gather and give neutral opinions and make requests, whereas in the South Korean Workouts, the Financial Supervisory Service (FSS) took the lead in assessing the financial health of the debtor companies and in planning during the 1997 crisis or at least urged financial institutions to decide which firms should undergo Workouts during the 2008 crisis. It is not unusual for the FSS to express its opinion to financial institutions about a certain issue, including the details of the Workout Plans or voting of a creditor bank. Considering the dynamics between the government and financial institutions, it was difficult for creditor financial institutions to make the decision with which the FSS did not agree.
Another difference between the programs was procedural structure. The London Approach did not require a particular style or sequence in negotiation for restructuring between a debtor firm and creditor banks or between banks. The process differed depending on the circumstances of each case. The details of the Korean Workout, however, were established in detail by the Workout Agreement or CRPA. For these reasons, it is not fair to say that the Workout was similar to the London Approach. Rather, the Workout had the spirit of the Industrial Rationalization Measure and structure of an insolvency proceeding wearing a hat of the London Approach.
Comparison of Workout and Judicial Rehabilitation Proceeding
The Workout was born in the aftermath of 1997 crisis by econocrats. They either did not have faith in the capacity of the courts to handle big failing firms or did not want to give up their control over them. Although the Workout process is similar to that of the reorganization proceedings, the Workout is an insolvency proceeding independent of judicial proceedings. It is helpful to compare its principles with those of judicial proceedings—particularly, the rehabilitation proceeding.31 The Workout has some crucial differences with the rehabilitation proceeding. First difference is the automatic stay. When a main bank calls for a meeting of creditor financial institutions, member financial institutions are not allowed to exercise their claims.32 The scope of automatic stay upon the call for the meeting is more extensive than those under the U.S. Bankruptcy Code as there is virtually no exception to or relief from the stay in the Workout. The automatic stay, however, is not allowed under the DRBA. Secondly, the board of directors principally maintains control even after the Workout has begun. It is highly similar to debtor-in-possession (DIP) in the U.S. Bankruptcy Code. In the judicial rehabilitation proceeding, the authority to dispose and manage debtor’s business is vested in the receivers appointed by the court. Third difference is protection of the debtor’s guarantor. In the Workout, creditor financial institutions do not exercise their claims against the debtor’s guarantor. In the judicial rehabilitation proceeding, however, guarantors receive no protection.
As a matter of fact, these three measures are very attractive to debtor companies, so there was an effort to embrace them in the judicial insolvency proceedings, while the new insolvency law (DRBA) was drafted. And it is somewhat ironic that the very econocrats who designed the Workout, which employed these principles, ardently opposed the adoption of those measures into the DRBA.
The Evolution of the Workout
The Workout has evolved during the last ten years. When it was first introduced in 1998, it was based on the Workout Agreement among domestic financial institutions. The lack of statutory grounds hindered the efficacy of the Workout program, and legal disputes were inevitable. As foreign financial institutions were not bound by the Workout Agreement, they insisted on more repayment than that to domestic financial institutions. To overcome such deficiencies in the Workout resulting from lack of statutory grounds, the government enacted the CRPA in 2001 (CRPA I)33 to give statutory grounds to the Workout program. The CRPA I contained almost the same or even somewhat more elaborate contents than the original Workout Agreement. Twenty-five companies newly underwent the workout program under the CRPA I, officially called a bank administration process.
After CRPA I expired in 2005 as scheduled, financial institutions established a voluntary agreement that carried provisions replicated from the CRPA I. Six big firms went under the Workout process based on this voluntary agreement among creditor financial institutions between 2005 and 2006.
In 2007, the Ministry of Finance and Economy succeeded in reenacting CRPA II, bearing almost the same content as the CRPA I. The current CRPA II provides rules on management procedures of creditor financial institutions or main creditor banks of ailing firms. It is fair to say that the CRPA II, which institutes an insolvency procedure, is a non-judicial insolvency process in Korea.
The Workout consolidated its position as the new leading insolvency procedure while its legal founding moved from agreements to legislation, and to agreements and then again to legislation. When the Workout was introduced, even the econocrats who initiated the procedure thought it would be temporary. The fact that CRPA I and CRPA II were both enacted with expiration date attests to this fact. However, the creditor financial institutions were more favorable to this system.34 Moreover, the opposition diminished. Thus, the econocrats are now preparing to enact the law permanently, as it is expected to expire at the end of 2010.
The targets of the Workout also show how the Workout has evolved. When it was introduced in 1998, it was applied to only 64 corporate groups. However, from 2000, the limit of application expanded to those companies whose total credit is more than 50 Billion won. This standard was specified in CRPA I. As a matter of fact, the Workout is applied to almost all debtor companies because they are subject to debt adjustment procedure under financial institution agreement, which is practically identical to the Workout. Meanwhile, only domestic financial institutions were subject to the Workout in 1998, whereas the scope of the CRPA I and CRPA II expanded to include financial institutions doing business in the country.
The government’s role with regard to the Workout has also evolved. In 1998, the FSS led the Workout so that the Corporate Restructuring Coordination Committee (CRCC) was formed in FSS and employees from the FSS were handling the Workout for each company. However, when the corporate restructuring was almost completed after the financial crisis of 1997, the FSS became a mere guardian. The CRCC was abolished and the Conciliation Committee of Financial Institution was newly established to settle disputes among financial institutions. The Korean Financial Investment Association, General Insurance Association of Korea, Korea Chamber of Commerce and Industry, Korea Institute of Certified Public Accountants, Korean Bar Association and Korean Federation of Banks recommended the members of the Committee. Generally, a former FSS executive was appointed as its chairperson.
The evolution aimed to reduce governmental intervention and increase initiatives by creditor financial institutions. Until 1998, Korean financial institutions did conduct restructuring. The Workout changed this by paving the path for financial institutions to restructure voluntarily. It is very important to eliminate the involvement of the government in restructuring and insolvency process because the intervention of the government inevitably distorts the fair allocation of resources.
Even if the Workout becomes a voluntary restructuring process, a workout in its daily expression, there remains a question whether the Workout is an efficient scheme for restructuring.
Efficiency of the Workout
The most important issue is whether the Workout is an efficient restructuring scheme. The author conducted empirical research in order to assess the performance of the Workout.35 The followings are the summary of those findings.
Expediency of Proceedings
From the beginning till the completion, the Workout took 4.77 years and the reorganization proceeding took 4.77 years. So there is no statistically significant difference (p = 0.859). The composition proceeding took 6.18 years, which is longer than the time required for the Workout or the reorganization proceeding (p = 0.002). This result disproves the argument that the Workout is much faster than the reorganization proceeding. It shows that the courts’ effort to conclude proceedings promptly is actually working. Also, the Workouts take as much time as the reorganization proceedings, even though the Workout has a systematic, majority-led debt adjustment procedure. Therefore, the efficiency of the Workout is cast in doubt.
Maintenance of Business
Workout gives another chance to ailing companies that show some signs of viability. Thus, it is helpful to know how many ailing companies have actually turned around. Among 60 listed companies that were subject to the Workout, 38 of them have totally normalized, 11 were suspended, and 11 were delisted. The revival rate for the Workout is higher than the revival rates for companies that underwent other procedures. It is because companies that are subject to the Workout had sounder financial status than companies that underwent liquidation or composition. After the Workout was introduced, most companies which were eligible for the Workout were put into the workout instead of the judicial insolvency proceedings.
Restructuring processes other than a liquidation type bankruptcy mean to share the going concern value of the indebted company. When the debtor cannot repay its debt, the creditor will obtain the whole or part of future values in exchange of credit exemption or postponement of payment. Some debts might be discharged, but others would be exchanged to equity, in which case the creditor might acquire some or the whole future value of the company.
Table 7 illustrates the change in major shareholders among the listed companies that underwent the Workout, the reorganization proceeding and the composition proceeding, respectively.36 During the Workout, 33 companies out of all 48 saw change in major shareholders; but in reorganization proceedings, major shareholders changed for 43 companies out of 45. Reorganization emphasized sale of enterprises to third parties. The Court had receivers dispose of reorganized companies. Thus, in the reorganization proceeding, it was very common to use measures such as amortization of outstanding stocks, third party acquisition of new stocks, and debt-for-equity swap. However, in the Workout, it was very important for indebted companies to maintain liquidity. This also shows that enterprises that were subject to the Workout were in better shape than those that underwent the reorganization process; it also explains that the Workout was helpful for the major shareholders to protect their control over the company.
|1982||Heavy and Chemical Industries|
|1984-1986||Shipping and Oversee Construction Industries|
|1986-1988||57 Firms, Shipping and Oversee Construction Industries|
|Workout||38 (63%)||11 (18%)||11 (18%)||60 (100%)|
|Reorganization||29 (50%)||10 (17%)||19 33%)||58 (100%)|
|Composition||20 (54%)||7 (19%)||10 (27%)||37 (100%)|
|Total||87 (56%)||28 (18%)||40 (26%)||155 (100%)|
|Change||Not Known||No Change||Total|
If a listed company satisfies the listing requirement, the company is considered to be running normally. Only 28 percent of Workout companies were delisted which is lower rate than companies that underwent reorganization or the composition process. It is because those companies have relatively healthier financial health so that it is easier to maintain the business.
Financial statements of listed companies that filed for Workout, the reorganization proceeding or the composition proceeding were used to assess change in financial status between 1997 and 2004.37 There were significant differences in business profits at the time of the beginning and the completion. As of the time when the process began, the average profit of the companies under the Workout was 28.1 billion won whereas the companies under the reorganization proceeding had lost 10 billion won. And the companies under the composition marked 3.3 billion won (p = 0.040).
|Target Companies||Delisted Companies|
However, the situation turned by the time of completion. The companies that completed the reorganization proceeding reported profits of 30 billion won, whereas the Workout companies reported 13 billion won and composition companies reported only 5.2 billion. The reorganization companies grew even more through the reorganization proceeding, reporting 40 billion won of additional growth. However, the Workout companies lost 15 billion won and composition companies reported growth in business profits of 1.9 billion won.
The difference permits a holistic understanding of the result of restructuring. If reorganized companies performed far better than those that completed the Workout, it means that the restructuring in the reorganization proceeding was much more effective. Until now, the advocates of the Workout criticized the reorganization proceeding because the Workout reduces the company’s value by handicapping the business. However, the statistics point in the other direction.
These empirical findings show that the Workout is not necessarily more effective than the reorganization proceeding. The Workout does not achieve significant improvement in profits after the completion of the process and it requires a similar length of time. Companies that completed the Workout show the same level of achievement as the companies that completed composition.
The Workout is basically led by the creditors. Thus, it is inevitable that its result is more favorable to creditors. That is the main reason why debt exemptions or a debt-for-equity were executed less frequently than in judicial insolvency proceedings. Creditor financial institutions tend to maintain status quo as much as possible. Also, the main creditor bank, as the leading organ of the process, inevitably works in its favor. Therefore, it is not surprising that several avoidance actions are brought in cases that were sent to judicial insolvency proceeding after failing in the Workout.
Even though the Workout played a major role in corporate restructuring in 1997 and in 2008, it is crucial to note that judicial proceedings commenced in earnest at the same time. The 1997 crisis brought judicial proceedings to the front line of the national economy. Judicial insolvency proceedings appeared on the front page of daily newspapers and the number of filed cases increased drastically. Before the crisis in 1997, they did not take a major role as an insolvency scheme, as shown in Table 9.
Considering the quantity, the Workout has dealt with many more debt adjustment cases than judicial proceedings since 1997. Several thousand ailing firms went under the Workout whereas the total number of judicial insolvency cases is less than a few thousand. This is also true as regards the amount of debts which is restructured through the process. As the Workout targeted big firms from the beginning, the total mounts of debts handed by the court was less than the Workout. Even though a few big corporate groups, such as Kia, Hanbo and Jinro, were under the court proceedings, the largest one, Daewoo, was under the Workout. Such a phenomenon was magnified when the scope of the Workout was extended in 2001 and the quasi Workout was implemented after 2005. It is fair to say that the Workout is the most frequently applied insolvency scheme in Korea.
However, the increase in court awareness is a trend that is hard to ignore. Public opinion demands legitimacy of policy measures by the government. As executive measures are not free from judicial review, econocrats desired to establish statutory grounds for their functioning. The judiciary became more active in handling insolvency cases. Along with the increase in awareness, the society in general changed, so that insolvency became must less stigmatized.
Figure 5.The Learning Curve over the Past 50 Years
Many factors must be considered in deciding whether it is desirable that Korean corporate restructuring was concentrated in the Workout. A tentative conclusion can be drawn based on generally accepted assumptions, even though it is difficult to judge so decisively because of changes in Korean economic situation over the past ten years and the evolution of the Workout.
The following assumptions would be generally accepted in the corporate restructuring of ailing companies. First, it is important that the market moves according to predictable patterns. It also applies to companies leaving the market or corporate restructuring of ailing companies. Second, it is crucial that corporate restructuring is done swiftly. If non-performing loans are accumulated instead of being swiped out, it will harm creditor financial institutions and the national economic health. Third, even though there are times that the government can or should take measures to save a particular company from insolvency or from mass insolvency during the time of crises, those measures should not distort the insolvency system. The distortion causes counter-effects, such as concealment of insolvency.
During times of economic crises, the government has two options; one is to implement executive measures and the other is to put ailing firms into judicial insolvency proceedings. One may glean a better understanding by comparing executive measures and judicial proceedings. Preemptive measures are feasible only as executive measures. Executive measures are vulnerable because they lack legitimacy. An empirical study reveals that Workout was slightly faster than the reorganization proceedings, but the judicial proceeding was more effective in restructuring. Judicial proceedings apparently sent a clearer message to the market.
During crises, the government wants to save financial institutions—banks, in particular—to protect the whole economic system. Saving banks can be a good reason for saving ailing firms. Saving ailing firms, however, has the potential danger of causing business firms to accumulate bad debts and of causing banks to accumulate non-performing loans, which might eventually cause more serious problems.
Even in non-crisis situations, government’s intervention in insolvency of business firms has a tendency to prevent ailing firms from leaving the market. The government is tempted to prevent reorganization because the entire society suffers from unemployment or readjustment of debt for a while. Also, distressed companies try harder to exert influence if they think there is a possibility that the government might save them from reorganization. Financial institutions are reluctant to reveal insolvent credit because it has bad influence on its financial soundness.
The most obvious standard for distressed companies is the insolvency law. Legal norms discard government’s arbitrary decision. Therefore, it is most desirable for distressed companies to be handled according to insolvency laws. For the same reason, it was not desirable that the government intervened in insolvencies since 1969. Certainly, one can argue that the government had to intervene because the insolvency law or insolvency practices are not reliable. However, it is difficult to find signs of efforts to improve the insolvency law and its practice before 1997.
During the past fifty years, it can be said that the South Korean solution for the economic crises has been government intervention; but at the same time, the role of insolvency laws has also expanded while the awareness about the importance of legal norms for dealing with distressed companies increased.
This curve shows how the Korean government mixed the two options. Even though insolvency laws were enacted in 1962, they did not play any significant role during the economic development era. Econocrats believed that they had the authority and competency to handle debt issues of certain magnitudes. Even the court did not realize the importance of judicial insolvency proceedings in the order of the market until the 1990s. And the court enacted Supreme Court Rules to overcome criticism against the reorganization proceeding.
The Asian crisis of 1997 changed the stream and a flood of consumer bankruptcy ensued. The government, however, took executive measures again in 2008 subprime mortgage crisis, instead of pushing financial institutions to clear out their non-performing loans. The function of judicial proceeding has recently expanded and the executive branch has started to recognize this new trend.
Econocrats wanted statutory grounds for their power exercise. There are some examples, such as 1986 Industrial Development Act for industrial rationalization measures, 1997 Financial Industry Restructuring Act, 2001 Act on Special Measures for the Relief of Agricultural and Fishing Households’ Debts, 2001 and 2007 Corporate Reorganization Promotion Act for Workouts.
The judiciary also became more concerned with insolvency issues. In the past, the court regarded big insolvency cases as a matter of economic policy, but not anymore. The court took initiative in renovating reorganization proceedings by enacting the Supreme Court Rules in 1992 and 1996. It established insolvency divisions and dispatched the most competent judges to advance insolvency practices. Practice Guides published by the Insolvency Division of Seoul District Court set the standard for insolvency practice nationwide.
The Korean government intervened in the bankruptcy situation of individuals, business firms, and financial institutions during the past 50 years. Such intervention can be interpreted in different ways. The crises were too serious to be handled by the court, which might not have been competent to handle the cases. Or econocrats were so eager to maintain their control over big economic issues. It was evident that econocrats did not have faith in judicial proceedings as far as serious insolvency issues were concerned.
Considering these trends, two key factors can be drawn for successful restructuring in emergency situations: clear rules and overall write-off of debts. The more discretionary the government exercises are, the more distorted the market order becomes. Without overall write-off of debts, restructuring cannot be successful. Farmers’ debts are an eminent example.
The South Korean government established and executed seven five-year economic development plans from 1962 to 1996. These Five-year Economic Development Plans symbolize a government-led economic development model.
The difference in GNP and per capita income between 1962, when the first five-year economic development plan was implemented, and 1996, when South Korea joined the OECD after the seventh plan, is remarkable. GNP grew from $2.3 billion to $572.8 billion and per capita income grew from $82 to $12,197.
Some argue that the first oil shock of 1973, the second oil shock of 1979, the Asian financial crisis of 1979 and the subprime mortgage crisis of 2008 are the four major crises that have so far threatened the nation’s economy. Cho, Dong-Sung, “Four Crises and Four Opportunities,” Korean Bar Association News, Feb. 15 2010, at 7.
South Korea paid back the balance of $140 million to the IMF on August 23, 2001.
Annual International Reserves (In millions of US dollars)
Yeonho Lee, “An Empirical Study on Optimal International Reserves in Korea,” Korean Journal of Economics, vol. 49, no, 2 (2001), at 5; Finance and Economy Committee of National Assembly, Adequate Management and Risk management of International Reserve (2004), Sang-In Hwang, “The Analysis of International Reserves in Korea after Financial Crisis,” Journal of Economic Development (Korean Development Economics Association, 2005), vol. 11, no. 2, at 1.
Le Figaro reported on November 18, 2009: “South Korean economy rose to an annual rate of 2.9 percent in the third quarter. The world witnessed the fastest economic recovery among OECD member states.” German Handelsblatt reported on November 30, 2009 that South Korea overcame the global financial crisis. It quoted an IMF official that many economic indices show that South Korean economy has begun growing before the other countries. The official also stated that South Korea made the most efficient and clear recovery. Financial Times reported on February 25, 2010: “South Korea has had a good crisis. While most other countries fell into recession or staved off collapse by putting themselves in hock, it is already back to robust growth.”
The table below shows GDP real growth rate of some OECD countries after the subprime mortgage crisis of 2008.
FSS is a governmental agency in charge of supervising financial institutions. http://www.fss.or.kr/
CRPA provides a structured debt rescheduling process among creditor financial institutions. Details are discussed below at 14.
Private equity funds were utilized to buy non-performing claims of ailing firms.
KAMCO is a government-owned corporation specializing in acquiring and disposing of non-performing loans issued by financial institutions. http://www.kamco.or.kr/eng/index.jsp
South Koreans call the Asian Financial Crisis the “IMF crisis.” On December 3, 1997, the government promised to follow the policies suggested by IMF in return for a relief loan. The media expressed lament about the loss of economic sovereignty, comparing it to the day Korea was colonized by the Japanese on August 29, 1910.
The Big Deals were resolved at the Dialogue of Government and Business Circle in July 1998 under the strong demand of the president Kim Dae Jung.
Hanbo group was the 14th largest conglomerate in total sales volume when it went bankrupt in 1997.
This body was the first organization among financial institutions for handling non-performing loans and restructuring of debtor firms.
Jinro group was the 19th largest conglomerate in total sales volume in 1997.
Daenong group was the 35th largest conglomerate in total sales volume in 1997.
Kia group was the 8th largest conglomerate in total sales volume in 1997.
Kia Motors, Asia Motors, Daenong Corp, Daenong Heavy Industry, and Midopa.
The official title of the agreement was “Financial Institutions Agreement for Promotion of Corporate Restructuring.” The agreement expired in 2000.
After the 1997 financial crisis, corporate restructuring had been conducted in a different way depending on the size of the firm. Five of the largest corporate groups entered agreements for the improvement of financial structure based on voluntary negotiation. Six to sixty-four of the largest groups were subjected to the Workout, if necessary. Small and medium size enterprises were restructured and financially supported by individual financial institutions. Since 2000, the Workout has been applied to firms with debt of more than fifty billion won.
The former Industrial Bank of Korea.
Figure 4 also supports the assertion that bankruptcy, reorganization, Workout and voluntary rescheduling can be implemented only if each proceeding assures better outcomes to creditors and debtors than other proceedings below.
DRBA replaced the previously enacted Corporate Reorganization Act of 1962, the Composition Act of 1962, the Bankruptcy Act of 1962, and the Individual Debtor Rehabilitation Act of 2004. It consists of six parts: Part I General Provisions (jurisdiction, notice, service, management committee, creditors’ council, and registration), Part II Rehabilitation Proceeding (rehabilitation process for all legal entities), Part III Bankruptcy Proceeding (liquidation process for all legal entities), Part IV Individual Rehabilitation Proceeding (consumer bankruptcy process), Part V Cross-border Insolvency, and Part VI Penalties. For more details on the DRBA, see Soogeun Oh, “An Overview of the New Korean Insolvency Law” Norton Journal of Bankruptcy Law and Practice, vol. 16, no. 5 (2007. 10).
The Workout, introduced in 1988, is another example of government intervention. The Workout, however, became a statutory insolvency proceeding when CRPA I was enacted in 2001. Although the government still has some control over the practice, it is fair to put it in the category of statutory insolvency proceeding, which is out of direct government intervention.
Article 73 of the Constitution of 1969: “(1) In case of internal turmoil, external menace, natural calamity or a grave financial or economic crisis, the President may take minimum necessary financial and economic actions or issue, in this regard, orders having the effect of Act, only when it is required to take urgent measures for maintenance of national security or public peace and order, and there is no time to await convening of the National Assembly. (2) In case of grave state of hostilities affecting national security, the President may issue orders having the effect of Act, only when it is required to preserve the integrity of the nation, and it is impossible to convene the National Assembly. (3) If the President has taken any action or issues any order pursuant to paragraphs (1) and (2), he/she shall promptly notify it to the National Assembly and obtain its approval. (4) If the President failed to obtain the approval as referred to in paragraph (3), the action or the order shall lose effect forthwith. In such case, the Acts which were amended or abolished by the order in question shall automatically regain their original effect at the moment the order failed to obtain approval. (5) The President shall, without delay, put the developments under paragraphs (3) and (4) on public notice.”
Some literature put the policy measures on ailing firms from 1969 to 1971 in the category of Industrial Rationalization Measures.
For more details on this issue, see Soogeun Oh, Corporate Restructuring and Rule of Law, Public Law Journal, vol. 29, no. 2 (Korea Public Law Association, Feb. 2001).
The terminology of “London Approach” stemmed from “London Rules” first named by Financial Times. The Bank of England changed it to London Approach to emphasize unofficial nature of the measure.
When the workout was introduced in 1998 and CRPA I was enacted in 2001, the judicial proceedings for rehabilitation were the corporate reorganization proceeding and the composition proceeding. When CRPA II was enacted in 2007, the DRBA provides one rehabilitation proceeding.
CRPA Article 9 (Suspension of Exercise of Rights to Claims).
In order to distinguish CRPA of 2001 and CRPA of 2007, this paper refers to CRPA of 2001 as CRPA I and CRPA of 2007 as CRPA II.
There are more reasons that the Workout is more favorable to creditor financial institutions than the rehabilitation procedures. First, while creditor financial institutions play a leading role in drawing the plan in the Workout, creditor financial institutions have a very limited role in the rehabilitation procedure because the administrator and the court take the lead. Second, in rehabilitation procedures, the credit is frozen during the repayment period (ten years maximum) and is to hurt asset soundness. Third, it is normal that there is debt exemption in rehabilitation procedure whereas creditor financial institutions are not very fond of it.
The full version of this empirical research was published at “A Study on Workout (Corporate Restructuring),” Commercial Law Review, vol. 24, no. 4 (Korea Commercial Law Association, 2006). The sample of research was 38 Workout firms, 29 reorganization firms and 20 composition firms, which were listed firms in the Korean Securities Exchange during between 1997 and 2004.
This chart is based on the “major shareholders’ status” in the business report disclosed by each company. If the report lacked information or was unclear about it, the information was obtained directly or left “unspecified.”
Financial statements before and after the process commenced were obtained from the database of the Korea Listed Companies Association database and Data Analysis Retrieval and Transfer System (DART) of the Financial Supervisory Service. Financial information on a total of 87 companies was available (30 completed, four in the process and nine suspended in the Workout; 17 completed and 10 in process in the reorganization proceeding; ten completed and six in process in the composition proceeding).