1. If insolvency proceedings must be commenced for the family of companies, does your law permit a joint proceeding, ie, a single court file, a single judge, a single list of creditors, single notice list, or must the case for each member of the family proceed separately with no practical acknowledgment of the related proceedings?
Joint proceedings are not permitted. Although the court may coordinate a proceeding with respect to one company with those of other affiliated companies, all documents, including the court files and the list of creditors, should be prepared separately.
(a) What if the members of the family are organised under, or operate in, different locations within your country? Can a company from a distant location in your country commence its bankruptcy proceeding where its affiliate is located, if the affiliate has already commenced its bankruptcy proceeding?
If a company’s ‘affiliate’, as such term is defined under the Monopoly and Fair Trade Law, has filed for liquidation or rehabilitation under the Act, Article 3, paragraph 4 of the Act allows the company to file for liquidation or rehabilitation in the court having jurisdiction over its affiliate, even if such court would not otherwise have jurisdiction over the company. Nevertheless, the actual insolvency proceedings themselves would remain separate proceedings.
(b) To the extent your country has different types of insolvency proceedings (such as Chapter 11 Reorganisation and Chapter 7 liquidation in the US), do the members of the corporate family all have to proceed under the same type of proceeding?
Members of the same corporate family do not all have to proceed under the same type of insolvency proceeding. Depending on their respective circumstances, each member may proceed under either a liquidation proceeding or a rehabilitation proceeding.
2. Does your law permit, or prohibit, a single administrator/trustee/ receiver to administer the assets and the liabilities of the entire corporate family?
Korean law neither permits nor prohibits a single trustee or receiver from administering the assets and the liabilities of multiple companies in the same corporate family that have all filed for relief under the Act. Therefore, it is theoretically possible for a court or courts to appoint the same person to act as trustee or receiver for more than one insolvent company in the same corporate family. In practice, however, it is uncommon for the courts to do so.
(a) If so, is there a hearing for the court to determine whether the administration by a single party is appropriate? Are secured and unsecured creditors or other parties in interest allowed to object or be heard at such hearing?
The court has very broad discretion within the scope of the law with respect to who it appoints as a trustee or receiver, and there would not generally be a hearing on this issue.
(b) What about joint representation by other professionals, such as law firms or accounting or auditing firms?
Professionals, such as law firms, accounting firms and auditing firms, are not prohibited from representing multiple members of the same corporate family in insolvency proceedings; however, as joint insolvency proceedings are not allowed, the simultaneous representation of each company is technically a separate representation as opposed to a joint representation.
3. Does your law encourage or discourage overlapping boards or management teams for separate members of a corporate family?
In general, Korean law neither encourages nor discourages overlapping boards or management teams for separate members of a corporate family. However, the laws governing certain industries (eg, the Bank Act, which governs the banking industry) prohibit the management of one company from serving for another company.
(a) If the directors of a parent company are not directors of the subsidiary, but they either directly or indirectly manage the affairs of the subsidiary anyway, do your country’s laws render such people de facto or ‘shadow’ directors of the subsidiary?
Under Article 401-2 of the Korean Commercial Code, the following persons face the same kind of civil liabilities as a director: (1) any person who instructs a director to conduct business by using his influence over the company; (2) any person who conducts business in person under the name of a director; and (3) any person other than a director who conducts the business of the company by using a title which may be recognised as being vested with the authority to conduct the business of the company, such as honorary chairman, chairman, president, vice-president, executive director, managing director, director, and the like.
(b) Do the duties or responsibilities of officers or directors of a family of companies change when the companies become insolvent? For example, does their duty shift from a responsibility to the shareholders to a responsibility to the creditors. What if only one of the companies is insolvent?
Under Korean law, officers and directors owe a fiduciary duty to the company or companies they work for. This technically does not change after the company or companies become insolvent. There is no shift of duty from the company to the creditors. However, after a company becomes insolvent, officers and directors have a duty to preserve the assets of the company so that no particular creditor is paid preferentially, which may have the effect of benefiting the creditors of that company as a whole.
4. Are there rules and do they change regarding members of the corporate family transferring assets among one another (such as by way of loans, capitalisation, other transactions) when the members are insolvent?
There are no such rules that apply, generally. However, large listed companies are subject to more rigorous scrutiny for related-party transactions. In addition, under Articles 9 and 102 of the Monopoly and Fair Trade Law, equity investments in and the provision of guarantees to members of the same corporate family are prohibited for certain large corporate families. These rules do not change when the members are insolvent. We note, however, in general that any asset transfers, including asset transfers to members of the same corporate family when the transferee is insolvent, may be avoided by the receiver or trustee in an insolvency proceeding if such asset transfers constitute a fraudulent conveyance or preference.
(a) Are cash sweep procedures allowed, that is, all cash from all subsidiaries is swept out to one account controlled by one of the family entities and then redistributed among the family members to pay bills?
As joint proceedings are not permitted, cash sweeps are not permitted.
(b) What if the redistribution results in a healthy subsidiary funding the shortfalls in another subsidiary that is losing money?
Not applicable.
5. How does your law treat claims of one member of a corporate family against other members of the corporate family?
(a) Are such claims invalid or unenforceable?
Claims of one member of a corporate family against other members of the corporate family (‘inter-company claims’) are not invalid or unenforceable simply by virtue of the fact that they are inter-company claims.
(b) If not, are such claims on equal footing with those of third party creditors, or are they subordinated, or is there other treatment required or permitted under your law?
Korean law does not specifically discriminate against inter-company claims. However in rehabilitation proceedings, as a matter of practice the payment terms for inter-company claims under the rehabilitation plan are generally inferior to the payment terms for other creditors. In fact, it is not uncommon for the rehabilitation plan to completely exempt payment on inter-company claims. According to the Court Practice Guidelines on Corporate Reorganisation published by the Seoul Central District Court: ‘[A]ccording to the prevailing view and practice, it is reasonable to subject claims held by the controlling shareholder or the controlling company to terms inferior to the claims held by ordinary creditors. In addition it is the practice of the Seoul Central District Court to subject claims held by other affiliate companies, not just the controlling company, to inferior repayment terms’ (p 315). On the other hand, in liquidation proceedings, inter-company claims are generally paid pari passu with the claims of other creditors, as Article 440 of the Insolvency Act requires equal treatment among the creditors of a class.
6. Does your law allow for the pooling of assets and liabilities of all members of the corporate family, so that a creditor of one member becomes, in essence, a creditor of all members sometimes referred to as ‘substantive consolidation’).
Korean law does not allow for the pooling of assets and liabilities of all members of the corporate family.
(a) If so, is such pooling automatic or does it require a factual showing and court involvement?
Not applicable.
(b) What proceedings (motion, request, trial, etc) are required for the court to order the pooling of assets and liabilities?
Not applicable.
(c) Does your country’s law contemplate any partial pooling of assets and liabilities?
No, partial pooling of assets and liabilities is not permitted.
(d) If the pooling of assets and liabilities is called for, are there any protections for certain types of creditors, such as creditors with a lien or other security interest in particular assets?
Not applicable.
7. How are secured creditors treated with respect to a family of companies? For instance, if a creditor has a security interest in the assets of one member of the family, and a guarantee from another member of the family, are both such claims valid in insolvency proceedings of the entire family?
The claims against each company would remain valid. However, as a matter of practice in the context of a company rehabilitation proceeding against the guarantor, guarantee claims are generally not paid until the creditor has exhausted all of its remedies against the primary obligor. Therefore, for example, where the primary obligor is under insolvency proceedings as well, generally the rehabilitation plan for the guarantor would provide that no payment is made by the guarantor until the amount to be paid by the primary obligor is fixed, either by the rehabilitation plan in a rehabilitation proceeding, or by the distribution of the sale proceeds of the secured asset to the secured creditor and the fixation by the trustee of the distribution ratio for unsecured claims with respect to any amount by which the secured creditor is unsecured in a liquidation proceeding. Also, in practice, the payment terms for guarantee claims in rehabilitation proceedings are generally less favourable than the payment terms for primary claims. Further, as discussed in question 5(b) above, typical rehabilitation plans provide that inter-company guarantee claims are written off or paid very little.
8. Do your laws or courts provide for post-insolvency commencement of new financing that allows continued operation of the business and provides adequate protection to the lender who made the loan? Explain.
Articles 180 and 473 of the Act provide that common benefit/estate claims, which are claims that arise after the commencement of an insolvency proceeding, may be satisfied at any time notwithstanding the insolvency proceeding and shall take preference over ordinary rehabilitation claims/bankruptcy claims. This forms the basis on which post-insolvency commencement new financing can be obtained and adequate protection is provided to the lender who makes the loan. For example, a claim for repayment of new financing provided to the debtor at the request of the receiver or trustee and approved by the court after the commencement of rehabilitation or liquidation proceedings against the debtor will be treated as a common benefit claim (in the case of rehabilitation proceedings) or an estate claim (in the case of liquidation proceedings). In the case of a common benefit claim, the claim has priority over pre-rehabilitation secured and unsecured claims and should be repaid in full outside the rehabilitation plan in accordance with the terms and conditions on which the new financing was provided. Although the same principle will apply to an estate claim in theory, it is very unlikely that the court would allow new financing for a company in a liquidation proceeding, since the whole purpose of the liquidation proceeding is to liquidate the company.
9. Are directors and officers subject to civil or criminal sanctions if:
(a) Fraud or misrepresentation of a company’s finances are discovered?
Directors and officers involved in fraud or misrepresentation of a company’s finances are subject to civil liability under Article 750 of the Korean Civil Code and/or criminal liability under Article 347 of the Korean Criminal Code.
(b) They allow the company to continue to operate while knowing it does not have the ability to pay the debt being incurred?
Simply to continue the operation of the company would not be grounds for civil or criminal liability to arise. However, depending on the degree of intent or negligence in harming other parties, the directors and officers may be subject to civil and/or criminal liability as discussed above.
(c) Same as (b) above but the directors believe that if some event occurs (eg, chance to obtain new contract in prospect, new equity infusion, or new financing) it will be able to save the company and pay its bills?
If the directors have reasonable grounds to believe that the company’s business may turn around, we do not believe they would be liable for allowing the company to continue to operate. Whether the directors had reasonable grounds to believe that the company’s business would turn around or whether the directors were negligent (and if so to what degree) or intended to harm other parties by continuing to operate the company will be determined by the court on a case-by-case basis considering all related circumstances.
1. If one or more members of the corporate family is incorporated under or governed by the laws of another country, does that change your answers to any of the questions set forth above?
No.
2. If insolvency/restructuring proceedings are instituted for corporate family members in different countries:
(a) What controls as to where the case must be filed (eg, centre of main interests, principal place of business, location of parent, etc)?
According to the Act, the case must be filed with a court having jurisdiction over the principal office of the relevant company.
(b) Do the courts attempt to exercise jurisdiction over the assets of the company filing domestically no matter where located (for example, overseas), or do they limit their jurisdiction to only those assets located in your country?
Although the court would not attempt to exercise jurisdiction over the assets of a company filing domestically that are located overseas, Article 640 of the Act allows a receiver or a trustee in a rehabilitation proceeding or a liquidation proceeding to act outside Korea to the extent the law of another jurisdiction permits.
(c) Would your courts enforce a court order from a foreign country that attempted to exercise jurisdiction over assets located in your country but owned by the company that is subject to the foreign insolvency proceedings?
A Korean court would not, sua sponte, enforce a court order from a foreign country to exercise jurisdiction over assets located in Korea but owned by a company that is subject to the foreign insolvency proceedings, however the Act provides that a representative of a foreign insolvency proceeding can apply for recognition of the foreign insolvency proceeding, and if the court recognises the proceeding, in order to protect the debtor’s assets or interests, the Korean court is authorised to issue orders in support of the foreign proceedings, such as orders suspending any litigation or proceeding over the debtor’s assets, or prohibiting the transfer, collateralisation or disposal of the debtor’s assets in Korea, provided that doing so would not be ‘contrary to the public morals and social order of Korea.’ (See Act on Rehabilitation and Bankruptcy of Debtors, Arts 631, 632 and 636.) The Act also contemplates participation.
(d) Has your country adopted any procedures (such as the Model Law on Cross-Border Insolvency) to address the various issues that arise in dealing with cases of cross-border insolvency?
The Act newly includes an ‘International Insolvency’ section, which, in principle, follows the Model Law on Cross-Border Insolvency. However, the International Insolvency section of the Act differs from the Model Law in the following respects: (1) Recognition of a foreign insolvency proceeding does not lead to an automatic stay. Instead, a separate stay order must be sought. (2) A representative of foreign insolvency proceedings cannot petition for a domestic insolvency proceeding unless the foreign insolvency proceeding is first recognised by the Korean court. (3) The Insolvency Law does not differentiate ‘main’ foreign insolvency proceedings from ‘non-main’ foreign insolvency proceedings.
