The Corporate Restructuring Promotion Act (“CRPA”) which facilitates out-of-court restructuring for participating financial creditors and “insolvency-symptomatic company” (or “distressed company”, defined in the CRPA as a company unable to repay its debt without external financial assistance) is once again in place. The latest CRPA which came into effect on March 18, 2016 is the fifth revived version of the original CRPA enacted in 2001. As in the case of earlier CRPAs, the new CRPA contains a sunset clause and is scheduled to expire on June 30, 2018. The subordinate regulations to the new CRPA, i.e., the Presidential Decree and the Rules on Supervision of Financial Institutions to Promote Corporate Restructuring also came into effect on April 29, 2016 and May 3, 2016, respectively.
The following is a summary of some of the key aspects of the new CRPA and its subordinate regulations:
Expansion of scope of creditors subject to CRPA: While the workout proceedings under the earlier CRPAs were only binding on certain specified financial creditors licensed under Korean law, the latest CRPA expands the scope of creditors subject to the act to all financial creditors. The financial and operational measures implemented by voluntary workout arrangement between the participating financial creditors and the distressed company under the CRPA include rescheduling of claims, such as deferral of repayment dates, reduction of principal and/or interest, conversion of exempted debt into equity, capital restructuring, and other similar debt restructuring. Furthermore, in this statutory workout procedure, participating creditor financial institutions often voluntarily agree to extend new credit to the distressed company. However, given that not all financial creditors were subject to the CRPA in the past, the debt rescheduling plan and any agreement to extend new credit were not binding on the non-participating creditors such as foreign financial institutions and certain other creditors. As a result, the non-participating creditors continued to retain their full claim amount and were repaid in accordance with their existing contractual terms originally entered into with the distressed company and were not subject to any obligation to provide new credit. The new CRPA expands the scope of creditors subject to the workout proceedings to all financial creditors of the distressed company, other than trade creditors and non-financial creditors whose claims are unrelated to credit-based transaction. In other words, the scope of financial creditors includes any creditor who has extended credit in the form of, including, without limitation, loan, note, bond, certain lease, and payment guarantee. As a result, financial creditors, including foreign financial institutions, pension funds and mutual aid associations are also obligated to participate in the workout proceedings if they have extended credit to the distressed company.
Recognizing that such expansion of the scope of workout creditors may hinder quick and efficient progressing of the workout procedures, the new CRPA affords the main creditor bank with the authority to not invite certain creditors, such as financial creditors not engaged in the financing business, or certain financial creditors holding less than 1% claim, or other creditors that it deems warrant exclusion, to the first meeting of the financial creditors council. Nevertheless, if the creditor who was not invited to the first meeting of the financial creditors council wishes to attend the meeting (and thereby be bound by the workout plan), under the new CRPA, such creditor is allowed to attend.
Expansion of distressed companies subject to CRPA: The earlier CRPAs only applied where the distressed company had at least KRW 50 billion of debt, but there is no such minimum debt threshold amount under the new CRPA and any distressed company can take advantage of the benefits available under the act, with the exception of the following debtors: (i) public institutions, (ii) certain banks and finance companies, (iii) foreign corporations, and (iv) any company who has not received credit risk assessment by its creditor bank for reasons such as having credit exposure of less than KRW 5 billion.
Strengthening of the right of minority creditors: If creditors with voting rights corresponding to at least three-quarters of the total voting rights in the council of financial institutions consent to the agenda proposed for adoption, under the earlier CRPAs, all members of the council (including dissenters, unless they exercise their buy out right discussed below) were bound by the resolutions and the claims of such creditors had to be repaid only in accordance with the terms of the workout agreement adopted by the creditors. However, under the new CRPA, rather than requiring only the approval of creditors having at least three-quarters of the total voting rights to approve the proposed workout plan, if a single creditor’s claim amount exceeds three-quarters of the total claim amount, approval of two-fifths of the total number of creditors which compose the financial creditors council is also required, thereby prohibiting a single creditor from taking any unilateral action.
Strengthening of the right of opposing creditors: If a creditor financial institution dissents to the resolution to commence joint management of the distressed company or to extend additional credit to the distressed company, and does not wish to be bound by the CRPA, the dissenting creditor is entitled to demand that other members buy out its claims against the distressed company. The remaining consenting creditors usually buy out, or upon agreement between the consenting creditors and the dissenting creditor, cause the distressed company to buy out, the claims held by the dissenting creditor. The foregoing right of dissenting creditors was recognized under the earlier CRPAs, but the CRPAs prior to the recent amendment did not provide for any formula for calculating the exit price of the dissenting creditor’s claim. Therefore, under the old CRPAs, it was market practice for the creditors to negotiate the purchase price among themselves, considering the type, character and scope of claim subject to sale, as well as the assets and liabilities of the debtor company, and under the basic understanding that the claim should be sold at a price at least equal to the liquidation value of such claim. In the latest CRPA that became effective in March 2016, specific provisions on calculating the exit price were newly incorporated, thereby enabling identification of distinct rights of the dissenting creditors. The new CRPA further expands the scope of actions or resolutions that trigger dissenting creditor’s right to sell its claim. In addition to the resolution to commence joint management or to extend additional loan, or the resolution approving the debt rescheduling, any creditor who dissents to the proposed workout plan or any amendment to the plan, extension of joint management, or any other action or resolution set by the financial creditors council, can also require the remaining consenting creditors to buy out its claim.
Judicial recourse for substantive defect in the creditor resolution: Under the earlier CRPAs, the creditor financial institutions or the distressed company had the option to file suit to revoke resolution of the council of financial institutions within 14 days for any procedural defect, such as defect in the procedure for convening of the meeting or defect in the voting method that violated the CRPA. In addition to such procedural challenge, the new CRPA additionally allows judicial recourse for certain substantive defects in the resolution of the financial creditors council, such as where the resolution for debt rescheduling or extension of new credit was adopted in violation of the new CRPA, in which case the statute of limitation to file such suit is one month.
Enforceability of additional financing commitment: The new CRPA provides that the resolution of the financial creditors council to extend additional credit to the distressed company takes effect upon signing of the agreement by the financial creditors and the distressed company. If a consenting creditor fails to fund additional credit following its commitment to do so, the financial creditors council may resolve to impose penalty on such creditor, or request such creditor to compensate other creditors for damages. This is understood as a legislative reaction to the Supreme Court decision of 2014, which held that the council of financial institutions does not have the power to require the creditor who fails to perform its commitment in breach of the resolution to provide additional financing under the earlier CRPAs.
* This update is intended as a summary news report only, and not as advice. For legal advice, please inquire with your contact at Bae, Kim & Lee LLC, or the following authors:
Dong Woo SEO
T: +82 2 3404 0129
dongwoo.seo@bkl.co.kr
Jeena KIM
T: 82 2 3404 0698
jeena.kim@bkl.co.kr
Annie Eunah LEE’
T: +82 2 3404 0258
annie.lee@bkl.co.kr
Kyu Sang CHUNG
T: +82 2 3404 0280
kyusang.chung@bkl.co.kr