Korea’s Experiences with Insolvency:
Lessons for Other Countries
Stijn Claessens
University of Amsterdam
Forum for Asian Insolvency Reform, Seoul,
November 10-11 2003
Korea’s experience with insolvency

Korea did well in restructuring, better perhaps than
expected

Insolvency threat mattered for SMEs, less so for
large firms and not much for many chaebols

Out of court procedures useful as a complement to
formal insolvency, but still needed formal threat

Needed to go through more than one round, to
“learn” and overcome political economy

But costs increased and assets ended up in similar
hands
Hard to generalize on insolvency
• No single approach, varies with stakeholders
(creditors, equity, labor, suppliers), social values
• Institutional context of country greatly matters
– Contract, secured, securities, criminal laws;
Extra-judicial options; Creditors, banks,
government, SMEs; Diversity of claims,
informational asymmetries, quality of
information; Financial and labor markets; Ease
of entry/exit; “Stigma” of bankruptcy
• Korea confirms importance of judicial system,
laws alone not sufficient. Korea did both well
Lessons for other countries
Loss containment, consistency, political economy
• Too big, too politically sensitive or too large to fail
or to ignore: design a conscious holding strategy:
don’t let the losses pile up
• Strategy is not just about insolvency, also hardbudget constraints, social safety net, etc.
• Restructuring needs to get assets in ‘right” hands.
Can “target” owners which support future reforms.
In the meantime, government perhaps needs to
hold assets, but do not attempt to restructure