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Suggestions for Improvements in Korea`s Bankruptcy Laws : Focusing on the Removal of Barriers to Exit

Author Koh Dong Soo Date 1998.02.01 Page 0
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A desirable bankruptcy procedure can be said to e.ist when the creditor and deb tor resolve their problem by a contract to minimize the transaction costs inste ad of depending on the legal bankruptcy system. In reality, however, since the contract is not perfect and there is no way to overcome all potential problems, the intrests prefer, the legal bankruptcy system. Therefore, the legal bankruptcy system needs to meet the following criteria to be effective. First, bankruptcy procedures should be simplified to reduce the t ransaction costs and should achieve the e. post efficient outcome. Second, bank ruptcy procedures need to mete out a proper punishment against the e.isting man agers so as to reserve the e. ante bonding role of debt. Third, bankruptcy proc edures need to preserve the absolute priority rule of claims. In relation to the second matter above, the legal bankruptcy system needs to pe nalize managers properly, but it should not be harsh. That is, if the punishmen t is overly harsh, the managers of failing firms could turn to desperate measur es and manage the firm recklessly. Therefore, the desirable bankruptcy procedur es should not focus on punishing managers for the liabilities of insolvent oper ation. The focus of legal bankruptcy system should be placed on the mitigation or removal of barriers to e.it. In relation to the third matter above, it is natural to apply the absolute prio rity rule of claims to firms whose petition of reorganizaton is rejected. Howev er the system needs to consider a way for the e.isting manager to keep in busin ess regardless of the absolute priority rule of claims, if the creditors agree to the reorganization plan the debtor suggests and the court permits the reorga nization. In the U.S., for e.ample, the person who operates the corporation after the pet ition for reorganization is filed is called the DIP(debtor in possession). That is, the person o