[Jeon Daegyu's 7 Wins 8 Losses] Restructuring Requires a Paradigm Shift

Jeon Dae-gyu, Chief Judge of Seoul Bankruptcy Court

It has been a long time since the court system institutionalized the ability to conduct corporate restructuring. However, for a considerable period, corporate restructuring through the courts existed mostly only in legal codes, with its role being quite limited. While this was partly due to the shadow of government-controlled finance, the courts themselves also lacked the experience and expertise to be fully prepared. Through events such as the 1997 International Monetary Fund (IMF) crisis and the 2008 financial crisis, the courts accumulated experience in corporate restructuring and gradually began to play a central role.

The role of the courts in corporate restructuring has varied somewhat depending on the era and economic circumstances. Before the enforcement of the "Debtor Rehabilitation and Bankruptcy Act" (Debtor Rehabilitation Act), during the so-called Company Reorganization Act era, the courts had full authority to manage and supervise companies while conducting corporate restructuring. This was the case after the 1997 IMF crisis. Therefore, corporate restructuring conducted by the courts at that time was called "court receivership." When a company applied for company reorganization (now rehabilitation procedures), the court, in principle, excluded the existing management and appointed a third party as the manager to run the company. The existing management was held responsible for management failure and was not allowed to be involved in management. As a result, there were few company reorganization cases, and the court's role in corporate restructuring was relatively minor. Instead, restructuring led by the government-centered financial sector was more common.

A significant change occurred with the enforcement of the Debtor Rehabilitation Act on April 1, 2006. Following the 2008 financial crisis, there was increasing demand for market-centered restructuring. Accordingly, the Debtor Rehabilitation Act adopted the principle of the existing management manager system, appointing the existing management as the manager unless they bore significant responsibility for the company's insolvency. (In practice, by not appointing a separate manager, the existing management was considered the manager.) This led companies to actively apply for rehabilitation procedures, and the courts generally guaranteed the management rights of the existing management unless there were special circumstances. However, in the early stages of enforcement, the lead in mergers and acquisitions was still held by creditor financial institutions (banks). Although the non-performing loan (NPL) market was activated, securitization companies that acquired bad loans were only interested in debt recovery, which became an obstacle to corporate restructuring through the courts.

Recently, a paradigm shift in corporate restructuring has begun. Under government policy support, restructuring is rapidly shifting from creditor financial institutions to capital markets. The private equity fund (PEF) market has been activated, and with the advent of the zero-interest-rate era, the role of the financial sector (banks) has significantly diminished. Various restructuring players have emerged based on large domestic and international funds. Most acquisition funds for companies undergoing rehabilitation procedures are raised based on private equity funds. These players are leading not only mergers and acquisitions conducted through the courts but also those outside the courts. The main reasons for this paradigm shift in corporate restructuring are the abundance of funds in the market due to lowered benchmark interest rates and the improved accounting transparency resulting from the implementation of the designated audit system and standard audit hours system, which have made corporate accounting information considerably accurate. Until a few years ago, accounting audits were poor, and risks such as window dressing and contingent liabilities were always lurking. Therefore, restructuring through the courts was attempted to reduce these risks.

The forms of restructuring have also evolved beyond ex-post restructuring to include ex-ante and even preventive restructuring. Companies are living entities, and the speed of restructuring determines their fate. Ex-post restructuring through the courts has already reached its limits, and the need for proactive restructuring is being emphasized. The problem is that systems suitable for these changes in restructuring paradigms have not yet been established. To meet market demand, various forms of restructuring systems are necessary. These include government-led corporate restructuring (administrative type), corporate restructuring through civil mediation (judicial type), and corporate restructuring led by restructuring experts (private type). Legal supplementation is needed to enable the formation of such diverse restructuring markets. The shift of the restructuring axis to capital markets and the accelerating timing of restructuring are unstoppable trends. The courts must also prepare for this paradigm shift in restructuring.