Sunset Approaching for Gichokbeop Extension Proposal... "Make It Permanent at This Opportunity"

by Yoo Jaehoon

Published 11 Apr.2023 06:10(KST)

National Assembly Building stock photo / Photo by Moon Honam munonam@

With the sunset clause of the "Act on the Promotion of Corporate Restructuring" approaching this October, efforts are underway to extend the law. This comes as the financial health of Korean companies has sharply deteriorated due to the COVID-19 pandemic and the subsequent global tightening trend. Some argue that to ensure the stability of the system, it is necessary to consider making the Act permanent rather than merely extending its sunset clause.

According to the financial sector on the 11th, Yoon Chang-hyun, a member of the National Assembly's Political Affairs Committee from the People Power Party, introduced a partial amendment bill to the Act on October 4th. The amendment proposes extending the application period of the Act until December 31, 2027. This marks the sixth extension ahead of the October sunset.

The Act on the Promotion of Corporate Restructuring was introduced as a temporary law in 2001, following the Asian financial crisis, to support corporate restructuring by the market in addition to court-led rehabilitation and bankruptcy. Based on this law, the workout system can proceed if 75% of creditors agree, enabling faster corporate restructuring compared to court rehabilitation or voluntary agreements.

The push for the sixth extension of the Act is due to the worsening economic conditions. The COVID-19 pandemic and the subsequent tightening policies have made signs of corporate insolvency more apparent. According to the Financial Supervisory Service, the number of companies identified as showing signs of insolvency through regular credit risk assessments by creditor banks was 157 in 2020, 160 in 2021, and 185 in 2022.

Furthermore, court statistics show that while the number of corporate rehabilitation applications decreased by 12.09% to 1,047 cases last year compared to the previous year, bankruptcy applications increased by 5.1% to 1,004 cases. This indicates that many companies are bypassing court rehabilitation procedures and instead enduring with government support before heading straight to bankruptcy. The financial sector also analyzes that considering the "optical illusion effect" caused by COVID-19 measures such as maturity extensions and interest deferrals for small businesses and self-employed individuals, the actual situation is likely even worse.

There are repeated calls to make the Act permanent. Although the issue of permanent enactment has been discussed during the six extensions, it has repeatedly failed due to arguments for unification with the Integrated Insolvency Act and concerns about strong government intervention in restructuring.

A financial authority official stated, "Given the significant potential insolvency resulting from COVID-19, it seems more appropriate to focus on improving the system rather than spending effort on extending the Act each time," adding, "We believe that many of the issues raised during past discussions have been substantially addressed."

The business community, as a key party in corporate restructuring, also repeatedly emphasizes the need to make the Act permanent. Considering the considerable time required for court rehabilitation procedures and the stigma attached to rehabilitated companies, they argue that multiple options should be available and institutional stability should be secured through permanent enactment.

The Korea Economic Research Institute stated in a report published last year, "Corporate restructuring under the Act offers procedural convenience and a higher possibility of overcoming insolvency that is difficult to replace with other systems. The repeated renegotiations at the sunset point cause institutional instability, which may distort corporate restructuring plans," and added, "Rather than repeating discussions on unification with the Integrated Insolvency Act, the Act should be promptly institutionalized (made permanent)."

Korea's restructuring system has also received praise internationally. According to the International Monetary Fund (IMF) report titled "Policy Options for Supporting Firms and Restructuring in the Face of the COVID-19 Crisis," published last year, Korea ranked first among surveyed countries with a score of 84.0 in the "Indicator for Crisis Preparedness of Insolvency System." This high score was influenced by strong marks in various categories, including improvements in out-of-court debt restructuring (19.0 points).