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How to Resist Transplanted Law: South Korea
Terry Halliday and Bruce Carruthers describe South Korea's ability to resist the bankruptcy reforms mandated by IFIs in response to the Asian economic crisis.
How did South Korea resist efforts of powerful international financial institutions (IFIs) to pressure it into reforming its bankruptcy system?
Scholars Terry Halliday and Bruce Carruthers argue that in response to the Asian economic crisis, the world’s powerful international financial institutions mobilized in “unprecedented fashion” to address the financial and legal situation of affected states. Part of the effort of these powerful agents was focused on reforming bankruptcy law.
Bankruptcy law is integral to market operation since it regulates property rights and increases predictability in financial crises. So, part of the effort of IFIs and some Western States to address the Asian economic crisis was to attempt to transplant aspects of Western bankruptcy law into the South Korean legal system.
Foiling Transplantation in South Korea
South Korea entered the Asian economic crisis in a much stronger economic position and with a more robust legal system than some other Asian countries (for example, Indonesia). However, asymmetries of power between the IFIs and South Korea did not lead to an automatic transplantation of Western bankruptcy law in South Korea. Korea was able to “foil” the efforts of IFIs to transplant Western style bankruptcy law.
This raises two questions:
Three situations in which South Korea successfully foiled outside efforts may help to answer these questions:
Korea entered the crisis with a much stronger economy than some other Asian countries. Korea had a technocratically sophisticated state and the foundations of a robust legal system. Additionally, South Korea had been admitted to the OECD in 1996.
Conditions for Transplant and Reform
Procedural Reforms and Limiting Judicial Discretion
Responding to the recommendations of the IMF, the South Korean government enacted a series of legal reforms. They put in place procedural restrictions on how bankruptcy was to occur (for example, an economic test to determine when a company must liquidate) and enacted laws to limit the discretion of judges. Judges were accused of being too lenient, and the expertise of generalist judges was thought to be limited in bankruptcy. The creation of a separate bankruptcy court was a key part of the remedy this problem.
Why Did Korea Resist Reforms?
The split between economists and lawyers along ministry lines lead some sectors of the Korean government to complain that the amendment to Korea’s bankruptcy law in 1998 amounted to an ‘economizing’ of a legal domain.
Several provisions of the bankruptcy reform directly attacked judicial discretion. Because real-world situations were complex, lawyers believed judicial discretion must always be available.
How Did Korea Resist Reforms?
The South Korean government instituted many of the suggested reforms, indicating its willingness to follow the IMF's lead. However, they resisted when it came to jurisdiction of judges and the creation of a new bankruptcy court.
Rather than simply refusing to create a new bankruptcy court, the Budget Office determined that it would be too expensive to create. Instead, the Supreme Court created a bankruptcy division within the Seoul District Court.
Creating Debt-Restructuring Mechanisms
Some alleged that the court was not competent to handle the biggest bankruptcy cases and that it would be best to catch company problems before they reached the liquidation phase. To this end, the IMF recommended that South Korea create an out-of-court mechanism for restructuring debt. When a large firm or conglomerate got into trouble, a lead bank would petition to bring together the major creditors and hammer out a Memorandum of Understanding with the debtor. This would bypass the courts.
Why Resist a Debt-Restructuring Mechanisms?
The authors state that we cannot know exactly why the scheme was foiled. However, three parties within the scheme—debtors, creditors and government—as well as parties excluded from the scheme, had reasons to undermine it.
The 2001 Corporate Restructuring Promotion Act (CRPA) provided that banks could force a company into restructuring and that only 75% of the creditors had to agree to the plan. Korean lawyers believed that this discriminated against minority interests and that it might even be unconstitutional.
On the one hand, since CRPA applied only to domestic banks and resident foreign banks, some felt it let foreign creditors off the hook and discriminated against domestic banks.
On the other hand, since foreign banks were almost always minority creditors, they felt discriminated against under CRPA.
How Did Korea Resist?
Unification of Bankruptcy Law
As of the time of the Asian economic crisis, South Korea had three separate bankruptcy laws. Part of the reform proposal was to unify these into a single law.
Why Would Korea Resist a Unified Bankruptcy Law?
There are several reasons for resistance.
Unification of the three laws pitted lawyers, judges and legal academics against powerful proponents (MOFE, the Ministry of Justice and the Blue House—analogous to the U.S. White House, )
There were strong institutionalized tendencies in the government, markets and law.
How Did Korea Resist?
Since South Korea did not feel a pressing need for external interference and models, and because high nationalist emotions were not a part of the equation, South Korea’s reforms were less contentious (both internally and externally) than some other Asian countries. Although agreeing in principle with many IFI proposals, South Korea was able to institute reforms largely on their own terms.
Data and Methods:
Based on interviews with actors involved in the development of international insolvency law.
American Bar Foundation.
Halliday, Terence C., and Bruce G. Carruthers. 2007. "Foiling the Hegemons: Limits to the Globalisation of Corporate Insolvency Regimes in Indonesia, Korea and China." Pp. 255-301 in Law and Globalization in Asia Since the Crisis, edited by Christoph Antons and Volkmar Gessner. Oxford: Hart Publishing.
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