"Industry Practice Broken"... Fair Trade Commission's Crackdown Shakes Up 'Free Guarantees' in Construction [Why&next]

"Jungheung Construction's 'Free Guarantee' for 3.2 Trillion KRW Sanctioned as Unfair Support"
Fair Trade Commission Takes Tough Stance on Unpaid Guarantees After Hoban Case
"Industry Practice Broken"... Internal Transactions Under Stricter Scrutiny

The long-standing practice of "free credit guarantees" in the construction industry has been halted. On June 9, the Fair Trade Commission determined that Jungheung Construction had provided a capital supplementation agreement worth trillions of KRW to its affiliate, Jungheung Togeon, free of charge, and judged this as "unfair support." The commission imposed a fine and referred the case to the prosecution. This is expected to inevitably bring changes to the overall practice of credit enhancement among construction companies.

The headquarters building of Jungheung Construction, which received a fine of 18 billion KRW and was referred to the prosecution by the Fair Trade Commission for supporting the controlling family through a "capital supplementation agreement." Jungheung Construction.

"Jungheung Construction Supported Chairman's Son's Succession with a 'Free Guarantee'"

The Fair Trade Commission found that the 3.2 trillion KRW worth of capital supplementation agreements Jungheung Construction provided to Jungheung Togeon and six other affiliates over the past ten years, from 2015 to February this year, constituted a "free guarantee outside the scope of normal business practices." The problem was that Jungheung Construction provided these capital supplementation agreements without receiving any construction stake or guarantee fees in its development projects. The commission viewed this as Jungheung Construction effectively supporting the private interests of Jungheung Togeon, controlled by Vice Chairman Jung Wonjoo, the second-generation owner, under the pretext of management succession. A fine of 18 billion KRW was imposed, and Jungheung Construction was referred to the prosecution.

A capital supplementation agreement is a promise by Company B to provide additional funds if Company A faces difficulties in repaying principal and interest during a project financing (PF) loan process. This is essentially equivalent to a joint guarantee. The Fair Trade Commission stated, "This is the first case where unfair support and private interest provision through a capital supplementation agreement for the controlling family has been sanctioned," sending a strong warning to the market. However, Jung Changsun, the founder and current chairman of Jungheung Construction Group, was excluded from referral due to insufficient evidence.

A Jungheung Construction Group representative countered, saying, "Free guarantees through capital supplementation agreements have long been a cooperative practice across the industry." He emphasized, "Would we have violated the law just to save 18 billion KRW? This was a strategic investment at the group level, and since business opportunities were actually shared, it was not unilateral support."

This is not an isolated case at Jungheung Construction. Hoban Group was also fined 14.9 billion KRW by the Fair Trade Commission in 2023 for allegedly providing PF loans totaling 2.6 trillion KRW free of charge to 13 affiliates between 2014 and 2018. This case came to light during an investigation into so-called "swarm bidding," where multiple affiliates were mobilized to win public land bids. Hoban argued, "Non-affiliated companies also did not receive fees, so this is not preferential treatment," and is pursuing administrative litigation to have the fine canceled. However, the appellate court did not accept Hoban's argument. The case is currently pending before the Supreme Court.

Will "Free Capital Supplementation Agreements" Between Affiliates Disappear?

Although both companies claim this is an industry practice, the Fair Trade Commission's stance remains consistent. If credit enhancement is provided "free of charge," it can be regarded as unfair support. This is expected to impact the overall practice of credit enhancement in the construction industry. An official from a construction company explained, "For mid-sized construction companies, rather than large ones with high credit ratings, 'free guarantees' have been a common way to support affiliate growth and foster internal cooperation. From now on, providing guarantees without fees or construction stakes could be seen as a legal risk."

The industry is paying attention to the fact that the Fair Trade Commission's action is not a one-time crackdown but a structural warning. Another official said, "While we agree with the need for fairness and transparency, punishments that are out of touch with reality will only cause confusion," and stressed, "There is an urgent need to establish clear guidelines."

Meanwhile, in both the Jungheung and Hoban cases, the Fair Trade Commission calculated fines based on the guarantee fee rates of the Korea Housing Finance Corporation (KHFC). Some point out that "KHFC is a specialized financial guarantee institution, so applying its standards directly to internal transactions of general construction companies is unreasonable." There are concerns that such a uniform standard, which does not take into account the unique characteristics of private transactions involving various forms of negotiation, could continue to be controversial in the future.