FSC to overhaul system of corporate restructuring

South Korea‘s financial regulator said Thursday it will step up moves to revamp the procedures for the corporate restructuring system in a bid to prevent moral hazard often incurred by company owners.

Under the envisioned plan, the regulator will strengthen creditors’ rights by giving them more power to engage in the process of court receivership and debt workouts, according to the Financial Services Commission.

“We will look into improving the overall process so to avert moral hazard by stakeholders and allow a more swift and effective restructuring,” FSC Gov. Kim Seok-dong said at a meeting.

South Korea‘s corporate restructuring system is two-pronged.

One is a workout program under which a bankrupt company clears its debts through collaboration with its creditors. The other scheme is court receivership, overseen by a local court once it is requested by the insolvent firm through a filing.

The regulator’s move came as the court receivership system has been criticized after a company owner misused the procedure to retain his managerial rights, since the system allows a status quo of the company ownership and an immediate freeze in all debt transactions related to the company.

The FSC will seek to change the rules through discussion with the Ministry of Justice, Kim said, adding that the system should work to protect creditors.

The FSC‘s pledge came on the heels of the latest bankruptcy case of a local mid-sized builder and its holding company.

Kukdong Engineering & Construction Co. and Woongjin Holdings Co. both filed for court receivership on Sept. 26 after the builder failed to repay promissory notes worth 15 billion won ($13.4 million).

When it turned out that the head of the company had repaid some debts prior to the court receivership filing with an intent to keep his post, calls for changes in corporate restructuring rules emerged.

In an effort to reduce such flaws, the regulator said it will push to toughen approval procedures for court receivership, possibly including creditors’ mandatory participation in the process, the FSC said.

It will also seek to give creditors the right to file for a workout program, whereas now only the company can apply for it, the regulator added. 

(Yonhap News)