All Remaining Joint-and-Several Guarantees at Public Institutions to Be Abolished

Joint-and-several guarantees by company representatives on KODIT-backed loans to be abolished
Representatives will no longer be liable for repayment even if their companies cannot repay loans
Concerns over reduced guarantee issuance and moral hazard as well

Financial authorities have decided to eliminate all remaining requirements at public institutions for company representatives to provide joint-and-several guarantees. Following small and medium-sized enterprises' (SMEs) primary collateralized bond obligations (P-CBOs) in September, they will expand the exemptions to include guarantees for business restarts and new ventures. The aim is to remove a system in which debt burdens resulting from business failures prevent company heads from making a fresh start.

According to relevant government agencies on Oct. 28, the Financial Services Commission and the Korea Credit Guarantee Fund (KODIT) will begin revising the system to abolish joint-and-several guarantees for guarantees related to business restarts and new ventures. Reflecting concerns raised during parliamentary audits, they plan to start drawing up detailed measures soon. However, preparations are expected to be needed before the changes can actually take effect.

A joint-and-several guarantee is a system under which guarantors, including company representatives, are also obligated to repay a company's debts if it cannot do so. In April 2018, the government in principle abolished joint-and-several guarantees for new guarantees to SMEs issued by public institutions. In September, it announced that exemptions from joint-and-several guarantees would also apply to SME P-CBOs issued by KODIT and the Korea Technology Finance Corporation (KIBO). Under the P-CBO system, bonds issued by companies that have difficulty issuing corporate bonds individually are bundled together to issue asset-backed securities, with guarantees from KODIT and other institutions added to help the companies raise funds. However, exceptions to the ban on joint-and-several guarantees remained for guarantees related to business restarts and new ventures, part of KODIT's business recovery support programs.

The latest measure follows the re-emergence of concerns about joint-and-several guarantees during a parliamentary audit of the National Assembly's Political Affairs Committee held on Oct. 15 at the Busan International Finance Center. Cho Junghoon of the People Power Party called for improvements to the system, saying company representatives still bear the burden of joint-and-several guarantees. Concerns were also raised that the Korea Asset Management Corporation (KAMCO) was preventing guarantors from making a fresh start by extending the statute of limitations on joint-and-several guarantee claims held by KODIT and other institutions that KAMCO had acquired in the past. At the time, KODIT Chairman Kang Seungjun said, "We completely abolished joint-and-several guarantees for new guarantees, but have retained them only for guarantees related to business restarts and new ventures," adding, "We will consider abolishing them."

Guarantees for business restarts and new ventures are designed to help companies and business owners who have experienced business failures or defaults in the past get back on their feet. They support new financing linked to the repayment of existing debt and debt restructuring. Financial authorities say they had retained joint-and-several guarantees for some programs to ensure that business owners remained responsible for repayment when providing guarantees again to companies that had previously defaulted. This time, they aim to expand the scope of exemptions from joint-and-several guarantees at public guarantee institutions by eliminating these exceptions as well.

However, management responsibility reviews will apply across the board to exemptions from joint-and-several guarantees. Companies applying for new guarantees must pass the review for their representatives to be exempted from joint-and-several guarantees. Companies that remain subject to joint-and-several guarantees under previous contracts will also undergo the same review when extending the term, with the review determining whether they qualify for an exemption. The system will expand eligibility while gradually reducing existing joint-and-several guarantees. Authorities plan to encourage companies that fail the review to repay a certain proportion of their debt regularly, while continuing to give them opportunities for reassessment.

There are also concerns that expanding the abolition of joint-and-several guarantees could lead to moral hazard. If a company representative is also exempted from joint-and-several guarantee liability on a loan guaranteed by a public institution, the representative will no longer be obligated, as a guarantor, to use personal assets to repay the debt even if the company cannot pay it back. However, the company's own obligation to repay its debt will remain. An industry official said, "If a company cannot repay a loan, the government not only pays on its behalf but also exempts the business owner from repayment liability. This could create moral hazard by encouraging excessive and deliberate debt evasion." It is also difficult to rule out the possibility that the supply of funds will contract if guarantee institutions or lending banks tighten their reviews out of concern about the risk of defaults. Chairman Kang also said during the parliamentary audit, "In some cases, companies have obtained exemptions from existing joint-and-several guarantees and immediately shut down," adding, "We will consider measures to address this while also looking at ways to ease the reviews."

Meanwhile, financial authorities said they were not separately discussing abolishing joint-and-several guarantees in the banking sector. Apart from guarantees provided by public institutions, joint-and-several guarantees remain in place for corporate loans issued by banks on their own. The Enforcement Decree of the current Financial Consumer Protection Act generally prohibits requiring third parties to provide joint-and-several guarantees for corporate loans, but allows exceptions for CEOs, controlling shareholders, and largest shareholders who meet certain requirements.

This content was produced with the assistance of AI translation services.