This study analyzes Korea’s bankruptcy proceedings from an economic perspective and suggests policy directions to improve the proceedings.
The issue of insolvent enterprises will remain as one of the most pressing economic issues facing Korea in the foreseeable future. Systems and practices should be reformed in such a way that large enterprises are less likely to go bankrupt, the interested parties obtain access to the information as quickly as possible once bankruptcy has been filed, and decisions regarding the faltering firms can be made quickly based on an economic efficiency standard.
The most important and urgent task is to make more efficient the current proceedings that deal with insolvent firms as set forth in three bankruptcy laws. For company reorganization, the process should be completed in a short period of time, large-scale debt-for-equity swaps should be allowed, and court enforcement should be expanded. Although it is not clear whether or not the three bankruptcy laws should be integrated, distinctions among the three systems should be made much clearer. Introducing a DIP (Debtor in possession) process, which some have argued for, is premature given the present ownership structures of Korea’s large enterprises. Rather, an SME-centered institution is more appropriate.
More important than improving the bankruptcy system is to normalize the ownership structures of large enterprises and banks. Large enterprises are prone to bankruptcy if their management is allowed to recklessly pursue high-risk projects against the shareholders’ interests, take out excessive amounts of loans, or stand surety for other companies with which the dominant shareholders of the insuring company are involved. The distorted ownership structure of banks also contributes to inefficient outcomes. Therefore, many state-owned banks should be quickly privatized, sound financial supervision should be established, and regulations to ensure reasonable ownership structures should be put into place.
In the short run, government intervention in dealing with insolvent firms may be inevitable. In the long run, however, the ultimate focus should be on allowing profit motives to govern insolvent enterprises.
도산제도의 경제적 분석(Economic analysis of Korea’s bankruptcy proceedings)
|Series Title; No||연구보고서 / 2001-03|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Financial Policy|
|Holding||한국개발연구원; KDI 국제정책대학원|