2017 Insolvency and Corporate Reorganisation Report: South Korea

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The filing of bankruptcy and rehabilitation proceedings by corporations in Korea has continued to increase in recent years. Restructuring and insolvency activity has been concentrated in the shipping and shipbuilding, steel, construction, leisure, and second-tier financial sectors.

With the benchmark interest rate being lowered to a record low by the Bank of Korea, some companies have been able to avoid restructuring by refinancing their debt. However, the number of financially distressed companies has continued to increase, and corporate and household debt levels remain a concern.

In terms of legislative changes, a recent amendment to the Corporate Restructuring Promotion Law may result in increased numbers of restructurings being handled out of court through a workout process.

Once one of the top ten shipping companies in the world, the insolvency of the Hanjin Shipping Co in Korea is a landmark insolvency case that was unprecedented in its size and breadth for the Korean shipping industry. After entering rehabilitation proceedings in September 2016, the rehabilitation court converted the rehabilitation proceedings into a corporate bankruptcy after determining that the liquidation value of the company was projected to be higher than the going concern value. As a result, all possibility of rehabilitating the fledging Hanjin Shipping extinguished and the remaining assets were prepared to be sold for final distribution to its creditors. The demise of the Hanjin Shipping company was widely reported throughout the world as a reminder of the struggling global shipping and shipbuilding industry, with fewer orders to sustain the viability of all existing players in the industry.

Another sign of distress in the industry is evident in the Daewoo Shipbuilding & Marine Engineering (DSME) situation, where past extensive debt restructuring has failed to ameliorate DSME's financial struggles. In the most recent proposed financial rescue package worth roughly $6 billion, the bank creditors, led by Korea Development Bank and Korea Export-Import Bank with other creditors, are planning to discuss the merits of additional cash injections, debt-to-equity swaps and other techniques that would extend a further lifeline to DSME.

Under the Debtor Rehabilitation and Bankruptcy Law (DRBL), there are two main proceedings for the insolvency of business entities: Chapter 2 rehabilitation proceedings, which are primarily for the rehabilitation of insolvent business entities; and Chapter 3 bankruptcy proceedings, which are for the liquidation of insolvent business entities.

Korea offers another insolvency-related law called the Corporate Restructuring Promotion Law (CRPL). The workout proceedings under the CRPL allow for the rescheduling of debts under out-of-court workout arrangements. The CRPL was recently amended to cover all creditors with financial claims against the debtor company, including foreign creditors holding financial claims and non-financial institutions holding claims that may be classified as financial claims.

Yes, though such a stay is not automatic in cases where a petition is filed with respect to a debtor company for rehabilitation or bankruptcy proceedings. Following the filing of the petition and before the commencement of any such proceedings, the court may grant a specific or comprehensive stay order. Following the commencement of rehabilitation proceedings, unsecured and secured rehabilitation claims are stayed, while common benefit claims are payable when due. Once bankruptcy proceedings have begun, unsecured creditors are stayed from enforcement, while secured creditors may enforce their securities at any time.

In a workout process under the CRPL, the creditors' committee determines whether to grant a grace period (with certain limits) for the exercising of claims, including secured claims.

Once the rehabilitation proceedings have begun, the receiver must prepare a draft rehabilitation plan. A rehabilitation plan may call for the rescheduling of the debtor's debt over a period not to exceed, in principle, ten years, except when corporate debentures are issued under the rehabilitation plan. Once it has been prepared, the interested parties vote on the draft rehabilitation plan. The plan must be approved by unsecured creditors representing two-thirds of the debtor company's unsecured debt and by secured creditors representing three-quarters of the debtor company's secured debt. If the debtor company's total assets exceed its liabilities, a majority of the debtor company's shareholders must also approve the rehabilitation plan. If the plan is approved by the creditors, and if necessary, the shareholders, the plan will be referred to the court for approval. Any secured rehabilitation claims and unsecured rehabilitation claims which were not recognised under the court-approved rehabilitation plan would be irrevocably extinguished even if the rehabilitation proceedings were subsequently terminated.

In the case of a workout under the CRPL, the prime bank of a debtor company may or (upon request by the creditors who collectively hold more than a quarter of the total amount of financial claims held by such creditors) must, call a meeting of the creditors' council by sending out a written notice regarding the first meeting. The creditors' council may approve a plan for rehabilitation of the debtor company and enter into an agreement with the debtor company for implementation of a rehabilitation plan. For this purpose, the creditors' council may adopt a debt restructuring plan and/or assistance with new credit with the approval of: at least three-quarters of the total amount of claims held by all creditors holding unsecured financial claims; and at least three-quarters of the total amount of the secured claims held by all creditors holding secured financial claims.

There is no cram-down procedure in the rehabilitation proceedings per se by which secured creditors can legally force the junior claim holders (that is, unsecured creditors and shareholders) to accept the terms of the proposed rehabilitation plan approved by the secured creditors. However, if certain creditor groups do not approve the rehabilitation plan, the court may approve the plan by modifying it to prescribe additional terms which protect the rights of the group of creditors that did not vote in favour of the plan

The CRPL does not provide for a cram-down mechanism. However, the creditors holding financial claims who opposed the restructuring under the CRPL are authorised to demand that the creditors' committee buy their claims. If the opposing creditors do not exercise that demand, they will be bound by the restructuring plan.

In the case of rehabilitation proceedings, the court-appointed receiver has the power to dispose of the debtor's assets as part of the restructuring, though any asset sales usually require approval of the court. Purchasers who purchase any assets sold by the receiver generally receive good title, free and clear of claims. Creditors are generally permitted to credit bid in such sales subject to the court approval for the repayment of the creditor's claim outside of the rehabilitation plan.

In the case of bankruptcy proceedings, the court-appointed trustee has the power to dispose of the debtor's assets under the supervision of the court. This is done mainly through public auction. Purchasers who purchase any assets sold by the trustee generally receive good title, free and clear of claims. Creditors are generally permitted to credit bid in these sales. It is also possible for the trustee to dispose of the asset through a private contract as long as the process is transparent and the price is reasonable.

In the case of a workout under the CRPL, the prime bank submits a plan for the business normalisation of the company for discussion and approval by the creditors' committee. The plan may also include sales of assets and other similar restructuring measures.

Directors owe a fiduciary duty to their company under the Commercial Code. If the directors act in contravention of the requirements of law or the company's articles of incorporation, or if they neglect to perform their duties, they will be jointly and severally liable for damages incurred by the company as a result. A breach of fiduciary duty can also potentially raise a criminal law issue under Korean law.

If a company is financially distressed and continuing business without obtaining court protection to an extent that would only increase the company's losses, in compliance with their fiduciary duty, the directors can take measures to protect the company. There is, however, no case precedent to date where the directors' failure to apply for bankruptcy or rehabilitation proceedings has actually been deemed to be a breach of their fiduciary duty to the company.

Before the onset of formal insolvency proceedings, under article 406 of the Korean Civil Code, a creditor of a company may apply to the court for the cancellation and restitution of any legal act as a fraudulent conveyance if that act is detrimental to the company's creditors and both the company and the counterparty of the act had knowledge that the act would be detrimental to the company's creditors. A transaction is deemed detrimental to creditors if the company becomes insolvent due to the relevant transaction, or if the company was already insolvent at the time of the relevant transaction, or if the financial condition of the insolvent company worsens due to the transaction.

Certain transactions entered into by a debtor may also be challenged after the debtor enters into formal insolvency proceedings on the grounds that preferential treatment of certain creditors by a debtor may be a basis for avoidance under Korean insolvency law.

In rehabilitation proceedings, common benefit claims have priority and are payable when due. They include: new borrowing that was approved by the court after the commencement of the proceedings; administration expenses; tax claims which arose after the commencement of the rehabilitation proceedings; employee salaries and severance pay; and, disaster and accident compensation. In workout proceedings under the CRPL, creditors who hold non-financial claims are not bound by the workout and can exercise their claims as normal.

If new money is injected after the commencement of rehabilitation proceedings, any related claim would be regarded as a common benefit claim payable when due. A new injection can be secured by the assets of the company, if the company still has any unencumbered assets. The receiver must obtain advance court approval for new borrowing or for granting any security.

In the case of a workout under the CRPL, super-priority is not necessarily accorded to new loans. Creditors willing to provide new funding may ask for security, however distressed companies often do not have many assets left with meaningful security value. New loans, if extended, are provided by creditor banks which participate in the out-of-court restructuring in proportion to their claim amounts.

No. The treatment of credit institutions and investment firms depends mainly on the type of their investment (for example, secured credit, unsecured credit, equity investment, and so on) and whether it is bound by the relevant proceedings. However, when preparing a rehabilitation plan, the receiver in rehabilitation proceedings has discretion to differentiate between certain subclasses of creditors (for example, unsecured trade creditors might be treated a bit differently than unsecured financial creditors, and so on).

Bankruptcy proceedings could be commenced with respect to a foreign debtor if that debtor had assets in Korea. Theoretically, rehabilitation proceedings might also be possible if the foreign debtor company had business in Korea. Further, under the DRBL, it is possible for domestic insolvency proceedings (either rehabilitation or bankruptcy proceedings) to be commenced against the debtor separately or in parallel with the foreign insolvency proceedings recognised in Korea, under a petition by the debtor, a creditor, or any other qualified interested party.

Yes. Articles 630 and 631 of the DRBL provide that the petition for the recognition of foreign insolvency proceedings can be made by a representative of the foreign insolvency proceedings. Foreign insolvency proceedings can be recognised if there is sufficient evidence of those proceedings having duly taken place, and the recognition of those proceedings would not have an adverse effect on public order in Korea.

The recognition decision of the court is merely a basis for subsequently granting relief orders. Therefore, the foreign insolvency proceedings would affect Korean business and assets only through relief orders issued by a Korean court upon the petition by an interested party (including the representative of the foreign insolvency proceedings) or at its discretion. The cross-border insolvency receiver appointed by the relief order of the Korean court will have the exclusive authority and power to control and dispose of the debtor's business and assets in Korea (including the transfer of assets to a foreign country, disposition of assets and distribution), subject to the approval of the Korean court.

The Korean government has been closely monitoring economic conditions. The Korea Development Bank, a wholly state-owned policy bank, provides credit to various domestic companies and often takes the lead in facilitating the normalisation of larger troubled companies through a private workout process or the workout process under the CRPL.

Specific to the Korean shipping and shipbuilding industry, 2016 was a year of worsening conditions where staple companies such as Hanjin Shipping and DSME have either entered into bankruptcy or showed signs of financial distress. We expect this trend to continue for the next 12 months with other companies in the same and related industries.

As mentioned above, restructuring and insolvency activity has been concentrated in the steel, construction, leisure, shipping and shipbuilding, and second tier financial sectors.

Among the factors which may have contributed to the elevated level of insolvencies and restructurings has been the recent slowdown in economic growth in China, Korea's largest trade partner, and the devaluation of the Japanese yen, which has hurt the relative competitiveness of Korean exports. Further, recent Supreme Court decisions regarding the definition of ordinary wage, which is used to calculate various employment-related entitlements, has resulted in a significant obstacle to the companies' efforts to reduce labour costs.

The Bank of Korea has lowered the benchmark interest rate to a record low, which may have helped some companies avoid restructuring by lowering their debt-servicing burden. However, economic growth has fallen below the longer term trend in recent years and corporate and household debt levels remain a concern.

In other market developments, the main purchasers of non-performing loans (NPLs) in Korea have traditionally included the United Asset Management Company (Uamco), a temporary bad bank funded by six domestic banks for purchasing and managing NPLs, and Korea Asset Management Corporation (Kamco), a quasi-public corporation established in response to the effects of the Asian financial crisis of 1997-98, which is dedicated to purchasing and resolving NPLs from financial institutions. However, interest in Korean NPLs has been growing among private investors as the size of the NPL market has increased. According to the Financial Supervisory Services, the total value of NPLs extended by banks reached KRW23.2 trillion ($20.3 billion) in the third quarter of 2015, which is almost equal to the amount for the whole of 2014.

With the increased rehabilitation and bankruptcy activities in Korea, we expect the legal advice sought in relation to the court proceedings as well as distressed debt investment to increase commensurately.

About the author
		Jin Yeong Chung Senior attorney, Kim & Chang Seoul, South Korea T: +82 2 3703 1108 F: +82 2 737 9091/9092 E: jychung@kimchang.com W: www.kimchang.com Jin Yeong Chung leads the firm's cross-border litigation practice group and the insolvency and restructuring practice group. He has over 25 years of experience representing high-profile restructuring and insolvency matters in Korea. Areas of expertise include litigation, insolvency and restructuring, finance disputes, international arbitration and cross-border litigation, corporate and M&A litigation and banking and finance litigation. Chung has served on a number of governmental committees, including the Mutual Savings Banks Evaluation Committee, the Commercial Banks Evaluation Committee, and the Merchant Banks Evaluation Committee. Since 2001, Chung has also lectured on financial transactions at the Judicial Research and Training Institute, the only educational and training institution which everyone who passes the Korean Bar Exam has been required to attend before joining the bench or the Bar. He has authored a number of Insolvency related articles in industry publications.