SECTION H - WORK OUTS

The concept of the informal ‘work out’ might be said to be based on a combination of the following elements:

  • the fact that there is a significant size of debt owed to a number of different creditors (mostly these would be bank or other financial institution creditors) and the present inability of the corporate debtor to service that debt;
  • the attitude that it may be preferable to negotiate an arrangement for the financial difficulties of the debtor both between the debtor itself and the financiers (and perhaps other lesser creditors) and also between the financiers themselves;
  • the availability of relatively sophisticated refinancing, security and other commercial techniques that might be employed to alter, re-arrange or re-structure the debts of the corporate debtor or the corporate debtor itself;
  • the sanction that if the negotiation process cannot be started or breaks down there can be relatively swift and effective resort to the application of an insolvency law; and
  • the prospect that there may be a greater benefit for all through the negotiation process than by direct and immediate resort to the insolvency law.

In relation to these elements:

(a) identify which of these elements are appropriate and relevant to this economy;

(b) which of these elements might be considered absent, ineffectual or of little consequence in this economy?

 

(a) (b) All of these elements are appropriate and relevant to Korea. As for the fifth element, however, there might be a difference of opinion. For the creditors as a whole, the informal 'work out' may be better than resorting to the insolvency law. For the creditors with a security right, however, direct and immediate resort to the insolvency law may be better than a work out, because those creditors can exercise the security right and satisfy their credit in the procedures under the insolvency law before other creditors without a security right.

 

(c) which of these elements would be viewed as the least persuasive if a work out was contemplated?

The sanction (the fourth element) would be viewed as the least persuasive in contemplating a 'work out'. In Korea, a 'work out' is contemplated when a debtor and creditors do not want to resort to the procedures under the insolvency law. Therefore, when a 'work out' is proceeding, the procedures under the insolvency law are not usually taken into account. Creditors generally try not to apply for a formal bankruptcy or reorganization of the debtor. Of course, when the negotiation process breaks down, creditors will apply for dissolution pursuant to the insolvency law.

 

(d) are there any other elements that are relevant to this issue in this economy?

In Korea, the government plays an important role although the informal 'work out' is considered a private procedure between a debtor and its creditors. The Korean government prefers the informal 'work out' to the dissolution of a company pursuant to the insolvency law. It is partly because a 'work out' will preserve the debtor-company itself and jobs in spite of lay-offs accompanying a 'work out'. Also, it is partly because the bankruptcy of the debtor-company will weaken the creditor-financiers, and then result in the decline of the country's credibility. Therefore, the Korean government made the Company Reorganization Agreement (Agreement), and when the financiers are carrying out a 'work out', they ought to follow the Agreement.