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The Corporate Restructuring Promotion Act of Korea

The Corporate Restructuring Promotion Act of Korea has been performing an important role in domestic corporate restructuring ever since it was enacted in 2001. But the Act has also been criticised as a violation of private autonomy and an excessive restraint on property rights. At one point, the issue of whether or not the Act violated the Korean Constitution was raised at the Constitutional Court of Korea. As the Act faces expiration on December 31 2010, there are various discussions on the institutional function and validity of the Act.

The following touches upon the issues that are raised in connection with unconstitutionality of the Act. From the perspective of creditor financial institutions, the Act prescribes that it is obligatory for a creditor financial institution to join the council of creditor financial institutions in principle regardless of the financial institution's individual will (Article 19(1) of the Act).

Under the Act, if the Council resolves on claim readjustment or new extension of credit upon approval of creditor financial institutions that hold more than 75% of the extended credit, creditor financial institutions who are opposed to the resolution are considered to approve of the Council's resolution unless such institutions exercise their right to demand purchase of claims as prescribed in Article 24 of the Act. Accordingly, the creditor financial institutions must accept claim readjustment or are liable to provide fresh funds regardless of the financial institutions' will or capability (Article 12(1), Article 22(1) and Article 22(2) of the Act).

A considerable restraint is also imposed on private autonomy and property rights of the creditor financial institutions who do not wish to join the Council. This is because the right to demand purchase of claims is limited to those who were not present at the meeting of the Council or those who were present at the meeting and expressed their disapproval in writing. This is because the option to demand purchase of claims is virtually blocked as there is no system in place by which the creditor who did not attend the Council meeting can realise the right to demand purchase of claims at an appropriate price. In short, the Act is against the capitalist market economy order, private property system, and principle of private autonomy.

From the perspective of the debtor enterprise, the Act infringes upon shareholders' rights and private autonomy on corporate management under the Korean Commercial Code. In other words, the principal creditor bank may manage the debtor enterprise through the Council without any input from the debtor enterprise.

This means that the principal creditor bank holds the power over the fate of the debtor enterprise according to its discretion. However, the judgment criteria of the principal creditor bank are unclear and there can be mistakes in such judgments. On the other hand, considering the fact that shareholders are not granted voting rights under the Debtor Rehabilitation Act in the cases liabilities of the debtor enterprise exceed its assets, the principal creditor bank's failure to inquire about the intent of the shareholders may not be much of an issue. However, for the cases where assets exceed liabilities, the Act is a serious limitation on the rights of shareholders. Rehabilitation or liquidation of a debtor enterprise does not depend solely on the relationship with main creditor banks, but also depends on relationships with other stakeholders such as trade creditors, employees and sponsors, but relationships with these other stakeholders are disregarded.

For the mandatory nature of the rule to be reasonable, the process needs to be overseen by a disinterested third party. But neutrality is severely compromised because the Act is implemented by the creditor party of the agreement of the Council with the debtor enterprise and the whole process is overseen by the creditors or a principal creditor bank, which are interested parties.

There is no judicial appeal procedure for challenging the determination of the insolvency status of the debtor enterprise (Article 2(5) of the Act) by the debtor enterprise or by other interested parties including other creditors. There is neither judicial appeal procedure for disputing the amount of extended credit or for challenging claim readjustment. By excluding foreign financial institutions that do not have a branch office in Korea and general creditors other than financial institutions from the Agreement, creditor financial institutions are discriminated against for no justifiable reasons.

Not only are there disputes on the unconstitutionality of the Act as described above, but also there are arguments both for and against its revision in respect of specific appropriateness of the system. The outcome remains to be seen.

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