Hi all the readers 🙂 I am coming back after a while, and bringing an issue which attracts a bit serious attention. This blog post is about ‘Revising Corporate Restructuring Regulation and Practices’.
In the wake of court receivership request by a conglomerate, financial authority set up the review of corporate restructuring regulation, which is known as an efficient and effective corporate turnaround program for years. Allegedly the current practices somehow let owners to evade their responsibility and cause moral hazard.
In order to fix the loophole of corporate restructuring regulation and practices, financial authority will revise the related regulation and fix the practices to prevent from any misuse or wrongdoing.
After a series of economic and financial trouble, the government installed corporate turnaround programs under the two acts of regulation: Corporate Restructuring Promotion Act(CRPA) and Consolidated Insolvency Act(CIA).
Any corporate who is likely to fall in financial trouble, however, it is reasonably acceptable to revive itself if there is a bit of concession by creditors, i.e. defer debt payment schedule, exempt interest payment, debt-to-equity swap, shall be in the Workout program under CRPA.
Under the law, creditors, usually financial institutions such as banks, are in charge of corporate restructuring. With forming a committee, creditors hold a major discussion and make a key decision with respect to the corporate management. As long as there is no conflict among creditors, this program is considered to be relatively faster and effective tools for corporate turnaround practices. Accordingly, Hyundai E&C, Hynix, SK Networks are the notable examples of workout program under CRPA.
Under CIA, respective courts are to initiate the process from the beginning upon court receivership request by the corporate itself. Typically it takes a considerable period of time and all debts and payables shall be put on hold until detailed plan produced and confirmed.
According to CIA, the court will be able to appoint an administrator based on DIP (Debt In Possession). DIP means that the present owner or executive officer shall be an appointee since his/her management knowhow and mental responsibility for reviving his/her company might help to turnaround more effectively. According to the stats, the number of corporate who applied the court receivership soared up to more than 600 in annual. Among them, approximately 85% of applicants appointed the present CEO as administrators under DIP clause.
Recent debate over DIP is derived from the fact that the present management might be able to take advantage of DIP rule in order to not only evade debt obligation, but retain the management right. Even though there is a certain condition that third person shall be nominated in case that the current management is responsible for criminal acts against the corporate, such as embezzlement, negligence and causing business failure, DIP rule still stand in accordance with CIA at present.
In response to arising complaints over DIP rule, financial authority begins to review the current practice of corporate restructuring and pledge to revise the regulation if necessary.
As for CRPA, creditors should be allowed to apply the workout program while the corporate itself is only qualified to apply so far. Also consider the regular workout program in place to prepare the rainy days in advance.
In terms of CIA, creditors expect to have more monitoring channel and more strict measurement for the management to prohibit moral hazard of them. In addition, the market specialists mentioned that new kind of corporate turnaround program is necessary to be introduced; which the program let allow all related creditors to plan out the restructuring plan. While the court only oversees the process, creditors are able to take a follow-up management.