[Invest&Law] 28 Years of 'SME Delinquency = Bad Debt' Under the IMF Framework... Japanese-Style Pre-Packaged Restructuring Still Distant as 99% of Companies Struggle

Japanese-Style Pre-Packaged Restructuring Needed for Struggling SMEs
Large Corporations and Individuals Have Options, But Not SMEs
Bank Loans Classified as NPLs Without Creditor Consultation
Since the Financial Crisis, Seen as 'Bad Debts to

As a growing number of small and medium-sized enterprises (SMEs) are going bankrupt due to a flood of cheap Chinese imports and soaring labor costs, there is a rising call within the legal community for the introduction of a Japanese-style preemptive restructuring system. Large corporations can utilize workout programs, and individuals can seek help from the Credit Counseling & Recovery Service, but SMEs lack an appropriate consultative body to organize their creditors.

Although SMEs can undergo rehabilitation procedures in court, which serves as the final dispute resolution institution, the process involves complicated steps and suspends transactions and bidding, making survival difficult once the process begins. As a result, financially weaker SMEs are frequently pushed into bankruptcy. This is why there is a growing demand for the introduction of a preemptive restructuring system tailored to SMEs.

The Perception That "SME Delinquency = Non-Performing Loan" Is the Problem

Experts in insolvency law cite the lack of a preemptive restructuring system as a reason for the recent increase in SME bankruptcies, alongside the economic slowdown. Typically, when SMEs face financial difficulties, their bank loans are classified as non-performing loans (NPLs) and transferred to the Special Purpose Company (SPC) asset securitization market without any creditor consultation. This is due to domestic banks’ strict adherence to Basel capital adequacy ratio (BIS ratio) management, which became entrenched after the International Monetary Fund (IMF) bailout. Creditor banks prioritize debt recovery over corporate normalization.

An attorney specializing in corporate rehabilitation stated, "For the 28 years since the foreign exchange crisis, banks have viewed struggling SMEs as 'bad loans to be cleared,' never as targets for restructuring," adding, "Except for large-scale companies like petrochemical firms currently undergoing voluntary agreements led by the government, creditor-led restructuring is virtually non-existent." As a result, the 99% of companies that are SMEs face the threat of default as soon as they encounter a management crisis.

Bankruptcies are on the rise. According to the Court Statistics Monthly Report released on August 27, a total of 1,314 corporate bankruptcy declarations were made at the 14 rehabilitation courts nationwide in July, more than doubling from 505 cases in 2021. As of the end of May, the SME delinquency rate stood at 1.03%, surpassing the 1% mark for the first time since 2017. Many companies are shutting down their factories after defaulting on debts due to stagnant orders. In fact, in June, Winia Electronics Manufacturing, an affiliate of the Daewoo Winia Group, declared bankruptcy. DLT, once considered a promising SME, also closed last year. Woosung Tech and TIEL, a small semiconductor equipment company, filed for bankruptcy in August last year following a sharp deterioration in performance.

Japanese-Style Preemptive Restructuring Absent in Korea

Experts have diagnosed that Korea should take Japan’s preemptive restructuring system as a model. Since the early 2000s, the Japanese government has established various customized preemptive restructuring systems for SMEs, including out-of-court dispute resolution procedures and SME Revitalization Councils. SMEs based in local regions have worked closely with regional banks to pursue proactive restructuring aimed at revitalizing the local economy.

In particular, the Japanese SME Revitalization Council operates by having experts and third parties intervene before a company reaches the threshold of the court, facilitating debt restructuring and business reorganization. As of the end of 2023, the cumulative number of consultations handled by the 47 SME Revitalization Councils across Japan exceeded 67,411 cases. They completed 18,704 business rehabilitation plans and 2,618 profitability improvement plans. In Korean terms, this is akin to a "SME version of the Credit Counseling & Recovery Service," playing a preemptive restructuring role. In 2022, for example, Marelli Holdings, an automotive parts supplier, attempted to reach an agreement with creditors using an out-of-court dispute resolution process. About 95% of creditors agreed, and opposition from some overseas financial institutions was resolved through a simplified civil rehabilitation procedure approved by the court. These systems are conducted entirely in private, and trade credit, unlike financial debt, can continue to be repaid normally. Business continuity is ensured, listing status can be maintained, and tax benefits are also available.

Jeon Daegyu, a former presiding judge at the Seoul Bankruptcy Court and now an attorney, said, "Although we cannot adopt the Japanese system wholesale, it is worth considering the introduction of a system tailored to SMEs, which account for 99% of companies in Korea, to enhance their stability and resilience, rather than relying solely on court receivership."

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