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14 July 2006
The Corporate Reorganization Act and the Composition Act regulated mainly reorganization proceedings, while the Bankruptcy Act and the Individual Debtor Rehabilitation Act governed liquidation proceedings and individual rehabilitation proceedings, respectively.
In addition, the Corporate Reorganization Promotion Act was repealed at the end of 2005. This act regulated the out-of-court restructuring process commonly referred to as the 'workout' process.
The corporate rehabilitation proceeding under the new act is based on the corporate reorganization proceeding prescribed by the Corporate Reorganization Act. Under the former legal regime, corporations could choose between corporate reorganization under the Corporate Reorganization Act and composition under the Composition Act; however, the new act abolishes composition.
The new act adopts a mechanism rather similar to the debtor-in-possession system under US bankruptcy law. If a corporate rehabilitation proceeding is commenced pursuant to the new act, as a default rule the court should appoint a receiver (who will administer the rehabilitation proceeding under the supervision of the court) from the existing management of the debtor company, unless:
This new mechanism contrasts with the prevalent practice under the Corporate Reorganization Act that existing management be replaced by a third-party receiver. Debtor companies retaining existing management will now be able to draw on the existing management's knowledge and accumulated experience of the company. In addition, this mechanism is expected to increase the number of companies that voluntarily and timely file for a rehabilitation proceeding under the new act by eliminating or reducing the reluctance or hesitancy of existing management.
The new act adopts the principle of 'the best interests of the creditors' in order to protect the interests of dissenting creditors. Thus, in order for a corporate rehabilitation plan to be confirmed by the court, the plan should entitle each creditor to receive at least what it would receive if the debtor were liquidated, unless the creditor consents otherwise.
Under the new act some leniency will be allowed in connection with the filing of claims. Under the Corporate Reorganization Act creditors were required to file their claims by a specified deadline; failure by a creditor to make a timely filing resulted in the final and conclusive denial of its claim. To mitigate this harshness, the new act, in addition to the claim filing system, now requires the receiver of a corporate rehabilitation proceeding to prepare and submit a list of creditors. The listed creditors are deemed to have filed claims (irrespective of whether they actually did).
The new act includes provisions to facilitate the rehabilitation of debtor companies through business transfers both before and after a rehabilitation plan is confirmed. Under the Corporate Reorganization Act a debtor company could sell or transfer a business unit only pursuant to the reorganization plan confirmed by the court. Accordingly, a debtor company was unable to sell or transfer a business unit prior to the confirmation of a reorganization plan. The new provisions, on the other hand, permit a debtor company to sell or transfer all or part of its business even before the court's confirmation of a rehabilitation plan, with the approval of the court and pursuant to the other relevant procedural requirements prescribed by applicable laws and regulations (eg, shareholder approval and the granting of appraisal rights to dissenting shareholders). Furthermore, in the case of a debtor company whose liabilities exceed its assets, the two procedural requirements (ie, shareholder approval and the granting of appraisal rights) may be dispensed with for a business transfer preceding the confirmation of a rehabilitation plan, provided that the court approves the business transfer.
The new act introduces a comprehensive stay order system. Like the former insolvency laws it replaced, it does not provide for an automatic stay mechanism (which suspends all or most activities of creditors regarding any financial obligations of the debtor upon the filing of a bankruptcy petition). As a result, the risk arises that a debtor may dispose of assets or make payments on debts, and creditors may enforce their rights against the debtor, during the period between the filing of a rehabilitation petition and the formal commencement of the rehabilitation proceeding. To reduce this risk, the new act allows the court to grant a comprehensive stay order by which all future enforcement actions by secured and unsecured rehabilitation creditors can be comprehensively barred during the period between the filing of a rehabilitation petition and the formal commencement of the rehabilitation proceeding. Under the Corporate Reorganization Act a debtor had to file a separate petition for an injunction against each creditor.
The new act includes new provisions to eliminate uncertainties over the permissibility of close-out netting. Thus, derivative transactions and certain other qualified financial transactions (including over-the-counter derivatives, securities lending transactions and securities repurchase transactions) entered into pursuant to a master agreement (eg, the International Swaps and Derivatives Association Master Agreement) will be enforceable in accordance with the terms of the transactions, and will not be subjected to the receiver's powers to avoid transactions or to assume or reject executory contracts under corporate rehabilitation or liquidation proceedings. In addition, the provision or disposition of collateral in connection with such transactions will also be exempt from avoidance in the absence of collusion between the debtor and the secured party.
The new act eliminates the principle of territoriality which was manifested by the former insolvency laws. Instead, the new act adopts an approach based upon the United Nations Commission for International Trade Model Law on Cross-Border Insolvency.
The new act provides for the recognition of a foreign insolvency proceeding and relief, support or assistance for a recognized foreign proceeding. Under the new act the representative of a foreign insolvency proceeding may apply to the Seoul Central District Court for the recognition of the foreign proceeding in Korea. Unlike the model law, the recognition of a foreign proceeding pursuant to the new act does not have any automatic staying effect on execution against the debtor's assets in Korea or the transfer, encumbering or disposition of the debtor's assets in Korea. However, upon or after the recognition of a foreign proceeding, the court, at its discretion or at the request of an interested party, may issue an order to stay or suspend:
As support for a foreign insolvency proceeding, the Korean court may appoint an international insolvency administrator and take other actions necessary to preserve the debtor's business and assets and protect creditors' interests.
The representative of a foreign insolvency proceeding recognized in Korea may apply to commence a rehabilitation or liquidation proceeding under the new act or participate in any proceeding in progress under the new act.
Provisions in the new act authorize cooperation and coordination among representatives and courts from different jurisdictions in cases of concurrent cross-border insolvency proceedings.
The new act adopts the 'hotchpot' rule for equal distribution of a debtor's
assets. Thus, in cases where domestic and foreign insolvency proceedings are
taking place concurrently regarding the same debtor, a creditor with priority
in the foreign proceeding's distribution may not claim a payment in the domestic
proceeding unless and until the other creditors in the same class in the domestic
proceeding are paid equally in proportion to their respective claim amounts.
For further information on this topic please contact Hee Woong Yoon or Myong Hyon Ryu at Woo Yun Kang Jeong & Han by telephone (+82 2528 5200) or by fax (+82 2528 5228) or by email (firstname.lastname@example.org or email@example.com).
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Hee Woong Yoon
Myong Hyon Ryu