[Viewpoint] What Should Be Done About Workouts?

Recently, a private equity fund CEO I met spoke firmly. “Is the workout system still necessary? Market-driven restructuring is now fully possible. Just take a look at how many companies have applied for workouts in recent years.”

Kim Joo-hyun, the Financial Services Commission chairman who advocates the necessity of workouts, appealed, “I deeply regret that the Corporate Restructuring Promotion Act (CRPA), which has contributed to the normalization of companies struggling under difficult economic conditions, will expire today .”

The debate over whether to extend the CRPA, which expired last month on the 15th, is intense. This has happened five times over the past 20 years. It is only a matter of time before it is extended again. As always.

The CRPA is the legal basis for the familiar term “workout.” Now, the only restructuring option left for companies in crisis is court receivership based on the Integrated Insolvency Act. Court receivership is a harsher grip than workouts. Companies are reluctant to enter it (※Once under court receivership, there are repercussions such as contract cancellations, suspension of letter of credit transactions, freezing of commercial claims beyond financial claims, and above all, a high possibility of losing management control).

With the expiration of the workout system creating an immediate gap, financial authorities and creditor financial institutions have taken temporary measures. They decided to implement “restructuring through voluntary agreements” as an urgent measure. However, since it lacks legal enforceability or binding power, the speed and results of restructuring fall far short of those under workouts (※Companies rated credit C or below are classified by authorities as “signs of insolvency,” and if over 75% of creditors agree, they enter workouts. Extensions of maturity, interest reductions, and new funding support proceed swiftly. In the case of voluntary agreements, if financial institutions not participating in the agreement pursue debt recovery, there is no countermeasure).

This is why government authorities, business circles, and financial sectors strongly urge the swift re-extension of the CRPA, as Chairman Kim Joo-hyun did earlier. How long will re-legislation take? Looking at the past five cases, it took as little as three months and as long as one year and ten months. There is considerable opposition mainly from the legal community. They argue that it violates the principle of private autonomy and infringes on property rights. Notably, some lawmakers with legal backgrounds (Democratic Party’s Oh Ki-hyung and Cho Eung-cheon) also voice opposition. They belong to the National Assembly’s Political Affairs Committee’s bill review subcommittee, which guards the legislative gateway.

Let’s look at the numbers. According to the National Assembly and the Financial Services Commission, the number of companies rated credit C or below increased from 66 in 2020 to 79 in 2021 and 84 in 2022, but the number of new workout applicants was only 8, 8, and 3 respectively. Going further back, there were 32 cases in 2017, 25 in 2018, and 20 in 2019, showing a clear downward trend. This means the system is being neglected.

There is a need to supplement and reinforce it. Alternatives exist. The Bank of Korea suggested in a report last year that “creditor-led workouts focus more on principal and interest preservation than growth. A fair and neutral third party is needed.” The Korea Federation of SMEs and the Korean Academy of Small and Medium Business also recently raised the necessity of a “private restructuring system led by a third-party institution” at a forum. Japan’s “Small and Medium Enterprise Revitalization Council” serves as a model.

If we hurry from now, we can reorganize the lineup as “workout ? private restructuring system ? court receivership” by the next expiration. We must not expect different results by repeating the same actions. According to Einstein, that is insanity.

This content was produced with the assistance of AI translation services.