'Gichokbeop' to Normalize Companies Showing Signs of Insolvency - 'Jibaegujobeop' for Financial Firms' Internal Control Passed in Plenary Session

Passage of Major Financial Services Commission Bills in the Plenary Session on the 8th

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The bill for the "Act on the Promotion of Corporate Restructuring" (hereinafter referred to as the ‘Corporate Restructuring Act’), which supports the swift normalization of distressed companies centered on a creditors' council composed of financial creditors, passed the National Assembly plenary session on the 8th.

Enacted as a temporary law in 2001, the Corporate Restructuring Act serves as the legal basis for workouts. It was the foundation for the normalization of major companies such as Hynix and Hyundai Construction. Although it has expired several times, it has been maintained through six enactments and amendments up to the previous Corporate Restructuring Act, which expired this October, recognizing it as a useful system for prompt corporate normalization.

Amid recent difficulties caused by the three highs (high inflation, high interest rates, and high exchange rates), concerns about the expansion of insolvency, including an increase in marginal companies mainly among vulnerable small and medium-sized enterprises, have highlighted the importance of the Corporate Restructuring Act. Accordingly, two amendment bills to extend the expiration of the previous Corporate Restructuring Act were proposed in the first half of this year (proposed by Assemblymen Yoon Chang-hyun and Kim Jong-min). Re-legislation has been pursued with consensus from the financial sector and economic organizations on the necessity of the workout system even after expiration.

This Corporate Restructuring Act largely maintains the contents of the existing Act, such as corporate credit risk evaluation and the workout system. It also grants priority repayment rights when a third party provides new credit to expand financial support for workout companies. Additionally, it includes expanded exemption requirements for restructuring officers. However, it was enacted as a temporary law with a three-year sunset period. According to the supplementary opinion of the Political Affairs Committee, the Financial Services Commission must prepare institutional improvement plans, including expanding the role of the courts, by the end of 2025.

Yoon Young-eun, Director of Structural Improvement Policy at the Financial Services Commission, stated, "With the announcement of this year's corporate credit risk evaluation results scheduled for December, small and medium-sized enterprises selected as distressed companies will be able to utilize the workout system in a timely manner," adding, "We plan to promptly form a task force composed of experts from the financial sector, academia, and the legal community to review institutional improvement measures for restructuring, such as supporting smooth consultations between creditors and debtors during the workout process of small and medium-sized enterprises."

The bill is expected to be enforced from early January next year after going through the government's legal promulgation procedures.

On the same day, the National Assembly plenary session also passed the "Amendment to the Act on the Governance of Financial Companies" to improve internal control systems of financial companies. It includes strengthening the internal control obligations of financial companies and their executives to prevent large-scale financial accidents such as massive embezzlement or incomplete fund sales. Accordingly, a "Responsibility Structure Chart" system specifying the roles of executives will be introduced, and an internal control committee will be newly established within the board of directors.

The Responsibility Structure Chart assigns executives the obligation to manage internal controls in their respective areas, and grants overall internal control management obligations to representatives such as holding company chairpersons and bank presidents, who must take responsibility if problems arise. The bill will be enforced six months after promulgation.

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