SEOUL — Mr. Oh (40), who runs an auto parts manufacturing company in Yesan, Chungcheongnam-do, was on the verge of closing his business in 2018. Having borrowed around 5 billion won from banks to invest in hybrid vehicle parts production, orders fell short of expectations as the automotive market rapidly shifted toward electric vehicles. Even after offering his factory site for sale to repay the debt, he found no buyers. Ultimately, Oh applied for a "workout" (corporate restructuring process) through consultations with creditor banks, which lowered interest rates and extended maturities.

Thanks to the workout, Oh's company managed without paying back the principal for four years, and his loan interest rate dropped from 7–8% down to the 4% range. In the meantime, he streamlined unprofitable products and adjusted supply prices, returning the company to a net profit last year for the first time in five years. "Without the workout, the company would have gone bankrupt," Oh said.

As struggling companies face the year-end expiration of the Corporate Restructuring Promotion Act (CRPA)—which allows them to adjust debts through workouts without entering court-led receivership—concerns are rising that distressed firms may miss timely opportunities for restructuring. This comes at a time when "zombie companies," defined as firms unable to cover their interest expenses with operating profits for three consecutive years, surged to 5,632 last year.

The CRPA Set to Expire at Year-End

According to the National Assembly and the financial sector on the 6th, the CRPA is slated to sunset on December 26. Although bills have been introduced in parliament to extend its validity by three years or make it permanent, they have yet to pass the National Assembly's National Policy Committee.

Under the CRPA, distressed companies can negotiate debt adjustments with financial creditors, such as banks, prior to initiating court rehabilitation procedures. If creditors holding at least 75% of the total financial credit agree, restructuring measures such as maturity extensions or interest rate cuts can be implemented.

First introduced in 2001, the CRPA has been repeatedly enacted and expired as a temporary law six times. In October 2023, the law lapsed, causing a two-month vacuum before being re-enacted in December of that year.

Even if the CRPA expires, companies currently undergoing workouts can continue the process. The problem lies with businesses that need to initiate new restructuring going forward.

While court rehabilitation procedures are available, they impose heavy burdens on companies. Because court-led proceedings are officially announced to the public, financial distress easily becomes known externally. Mr. Yoo (47), an executive at a metropolitan auto parts manufacturer, noted, "Once a company enters court rehabilitation, clients begin looking for alternative suppliers out of fear that parts shipments will be halted. Raw materials become harder to purchase on credit, and employees worry the company might fail and consider leaving."

The effectiveness of workouts in driving management normalization has also been verified. According to an analysis by IBK Industrial Bank of Korea covering 776 client companies that entered workouts or court rehabilitation between 2019 and last year, 42.5% of workout companies successfully normalized management and graduated from the process. In contrast, only 13.1% of companies undergoing court rehabilitation were paying back their debts normally according to their rehabilitation plans.

Jung Dae-hee, vice president at Alvarez & Marsal, a global restructuring consulting firm, pointed out, "In the U.S., companies and creditors voluntarily engage in restructuring before heading to court, but in South Korea, companies often wait until financial distress becomes severe. If the CRPA disappears, we risk losing the opportunity to restructure companies in a timely manner."

One in Five Companies Struggling to Pay Interest

The core issue is the growing number of companies facing financial distress. According to the Bank of Korea, zombie companies (marginal firms) whose operating profits failed to cover interest expenses for three consecutive years reached 5,632 at the end of last year—an increase of 707 firms (14.4%) from the previous year. This accounts for 19.1% of all external audit target companies, meaning roughly one in five businesses falls into this category.

Furthermore, companies deemed at risk of insolvency and subjected to intensive bank inspections increased from 4,028 in 2024 to 4,482 last year. While the demand for corporate restructuring is rising, the institutional framework supporting it is on the verge of disappearing.

Professor Seok Byoung-hoon of Ewha Womans University stated, "As growth momentum concentrates heavily on large enterprises in sectors like semiconductors, the number of struggling small and medium-sized enterprises is growing. Rather than repeatedly extending the CRPA on a temporary basis, it is necessary to make it a permanent fixture for stable long-term operation."

[ⓒ Global Economic Times. 무단전재-재배포 금지]