The purpose of this research is to examine issues and determine methods to improve the company reorganization system after analyzing the current status of limited companies and the corporate bankruptcies that have occurred recently.
Since 1991, a greater number of limited companies are becoming insolvent due to poor management, inefficient production structure, lack of competitiveness and profitability, and the decline of debt redemption capability. As of 1991, five large listed companies and 2,008 small- to middle-sized companies were declared bankrupt. In 1992, six large listed companies and 4,567 small to middle-sized businesses became insolvent, mostly from the manufacturing, construction, wholesale and retail, accommodations, electricity, gas and water supply, finance, and insurance industries. In addition, non-performing loans increased from KRW 1.9 trillion in 1990 to KRW 2.1 trillion in 1991 and up to KRW 2.4 trillion in 1992. The primary cause of bankruptcy is sluggish sales, delay of proceeds of sales collection, investment failures, bankruptcy of associated companies, and failure of the fund’s supply and demand plan. Corporation instability means that the Korean economy will lose its competitiveness.
In the course of decline of profitability and payment capability due to incapacity of management structure, production and finance structure, marginal companies are subject to the suspension of management, default of payments, payment suspensions, or debt payment rescheduling. In accordance with the magnitude of insolvency, creditor banks help companies to improve their financial structure. They may also finance corporate funds after the bank purchases shares of major shareholders based on the collection of insolvent obligation and financial support. However, when insolvent companies are incapable of repayment, they have no choice but submit to the control of the court. Even though few companies seem to be efficiently run, there are many cases where companies have declared bankruptcy due to temporary economic downturn or financial distress, so a much more effective corporation reorganization process—such as the M&A between insolvent companies and creditor banks, rather than the court management method—is necessary.
According to a specific agreement with the borrower company, if the creditor banks of limited companies demonstrate the need, they are allowed to participate in running the business through the operation trust of corporations, to partially participate in management, and to partially manage the corporation’s capital and security by dispatching an employee to the company. However, this bank management system may have a negative impact on the regulation of management companies, as it is used in producing profit for the bank, not for both the creditor bank and the borrower company as originally intended. Meanwhile, with the decision management system, the court manager needs to report to the judge regarding the reorganization plan every month, and the degree to which it has been implemented. Since a new judge is in charge of the follow-up management every two years, the lack of specific familiarity can cause issues.
In order to address the problems of limited companies and their reorganization system, the government-directed financing towards banks during the selection process of bank management should be avoided, and financial companies should be more responsible for their own financing. When supporting the normalization of enterprises, it is necessary to set an appropriate scale of loans and support by considering the financial situation of the business, as well as provide intensive management or an early warning by identifying the companies with signs of insolvency, providing scientific analysis on the trends in management investment funds of companies in debt, introducing flexible bad debt write-off systems, and managing legal administrators effectively and responsibly.
한계기업의 도산 및 퇴출관련제도의 개선방향 (To improve company liquidation systems and the bankruptcy of limited companies)
법정관리제도를 중심으로 (Based on court management system)
서울 : 한국개발연구원
|Series Title; No||정책연구시리즈 / 94-22|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Industry and Technology < Entrepreneurship|
|Holding||KDI; KDI School|