Research on Regulatory Implementation of the Recapitalization by Private Sectors for the Distressed Systemically Important Firms: Focusing on the Constitutional Court Cases in Korea

Abstract

Constitutional Law of Korea has a judiciary supremacy over any general statute in Korea. While this supremacy of constitutional law provides the ground of authority for the bail-in measures to the regulators, it provides them limitations not to breach constitutional provisions without justifications. Therefore, regardless of where the bail-in mechanism would be set in place, bail-in measure should be harmonized with constitutional provisions including rights of property, due process, equal protection, and other rights protected under constitutional law. If the measure breaches those provision without justification, it would be null and void. Since the potential bail-in regime provides the tool for swift recapitalizing of a financial firm as a going concern without the approval of stakeholders, there might a concern that it may deprive of the property rights attributed to stakeholders. In case a regulatory authority takes actions infringing the rights of shareholders and creditors, what kind of or to what extend those rights may be detrimental are issues that could be subject to the interpretation of the lower courts, since constitutional issues usually prevail over general statue in most legal systems including Korea and United States. Korean regulator has implemented some strong measures that would apply large scope of restrictions on stakeholders’ rights of the distressed financial institutions under existing Korean Law. For example, in Korea, Article 12(3) of the Act on the Structural Improvement of the Financial Industry (the “ASIFI”) describes the capital reduction order by regulator (Financial Services Commission, the “FSC”) for the distressed financial institutions. Such resolution measures and provisions of relevant acts have raised many arguments, having some cases brought to the Supreme Court or Constitutional Court of Korea. This paper will find out some constitutional barriers to the implementation of bail-in regime within Korean resolution process, analyze those in a comparison with the issues discussed in Korean Cases focusing on rights attributed to shareholder, investors, and other parties in contractual relationships with financial institutions subject to the restrictions. I hope this study would be helpful for regulator or policy makers in reviewing the implementation of the bail-in regime and provide some implications for establishing optimal bail-in framework for Korea.