I. Introduction
In the event that a company faces bankruptcy due to various reasons including the deterioration of management, each country has different systems to address such situations. In connection with the corporate bankruptcy system, Korea, a country which has experienced the slow development of capitalism, has followed the legal systems of other advanced countries which can be generally divided into bankruptcy, arrangement (Vergleichung in German) and corporate reorganization. In particular, respective laws have been enacted such as the Bankruptcy Act, the Arrangement Act and the Corporate Reorganization Act. The Bankruptcy Act is modelledor the German Konkursordnung, the Arrangement Act on the Austrian Vergleichungsordnung and the Corporate Reorganization Act on Chapter X of the Corporate Reorganization of the Federal Bankruptcy Act of the U.S.A. amended in 1938.

As in other areas, although Korea has adopted other countries' systems of corporate bankruptcy, in practice, corporate bankruptcy has been treated by taking into consideration the economic circumstances of Korea at the time.

Among the said three Acts, the Bankruptcy Act provides for methods and procedures for various creditors to share properties of a bankrupt corporation in proportion to the amount of claims. The Arrangement Act provides for methods and procedures for a corporation facing bankruptcy to seek revival by being granted a period of grace from the payment of debts to creditors and to prevent itself from being entered into bankruptcy. The Corporate Reorganization Act provides for methods and procedures for a stock company suffering financial difficulties to seek reorganization under the strong supervision and protection of a competent court.

Recently in Korea, some chaebol groups failed to pay their outstanding bills. With regard to ways to deal with such situations, there is controversy over which method between corporate reorganization and arrangement is more helpful for the revival of insolvent corporations. Provided below is an explanation of the system for corporate regeneration provided under the Arrangement Act and the Corporate Reorganization Act (excluding the Bankruptcy Act).

II. Corporate Reorganization System
The applicable party subject to corporate reorganization is limited to a stock company only. This is different from an arrangement in which the applicable party can be an individual or any type of company. Furthermore, all stock companies cannot be subject to the corporate reorganization system. Only large-sized companies where the bankruptcy thereof materially affects the social economy can be subject to the system. The Supreme Court of Korea set forth criteria on the size of the corporation, which are met if a stock company has capital of more than two billion won and has assets of more than 20 billion won. In practice, however, the Seoul District Court applies the system to larger sized companies than set forth above.

If a stock company applies for the commencement of corporate reorganization procedures to the court and the court accepts such application, the procedures proceed. During this time, creditors are prevented from exercising any of their rights or taking steps for compulsory enforcement. General creditors as well as creditors holding security are restricted in the exercise of their claims including even tax claims. If the court decides to accept an application for the procedure from a stock company, the court appoints a trustee who becomes responsible for the business affairs of the company. First of all, the trustee receives a report on the claims from creditors, confirms the effectiveness of such claims and then after holding negotiations with the creditors, makes a plan on when and how to pay the principal and the interest arising therefrom. Afterwards, the trustee holds a creditors' meeting to put the plan to a vote and if the plan is accepted, the plan on payment of the principal and interest becomes effective.

Statistically, the period for payment of debt under such a plan is usually 10 to 15 years, sometimes even more. On the other hand, the management and the major shareholders of a stock company which applies for the corporate reorganization resign by bearing responsibility therefor. With regard to the stocks of a company taking the corporate reorganization procedure, the court destructs stocks of the major shareholders and other shareholders who are responsible for the management failure and issues new shares which can not be acquired by the major shareholders but only by a third party. Accordingly, if a stock company engages in a corporate reorganization procedure, the owner is necessarily changed. In the past, the court did not strongly carry out the change of the major shareholders based on the theory that if the ownership of a corporation is changed, regeneration of the corporation would be troublesome. Recently, however, the court has changed its position. Based thereon, the owners of large sized corporations fear to regenerate the corporations through the said system, and look to the arrangement system as an alternative.

III. Arrangement System
In contrast to the above reorganization system, the arrangement system is available for not only a stock company but also for other types of company and for individuals as well. Basically, it is a system which seeks the regeneration of a company by granting a grace period from payment of debt by creditors' concession, and the procedure is similar to the corporate reorganization procedure. However, in contrast to the corporate reorganization system, a trustee is not appointed, the past management continues to manage the company, and thus the management right of the previous owner is protected. However, creditors with priority by holding security or tax claims, except general creditors, may exercise their rights and security independently of the arrangement procedures, and thus if full consent is not obtained from those creditors, the proceedings of the arrangement procedures can be very troublesome.

Also, based on negotiations with creditors, a compensation plan is developed to pay the principal and the interest. In comparison with the corporate reorganization procedure, a higher interest rate is applicable and the time to pay the principal and the interest is set earlier than that under the corporate reorganization procedure. That is, under the arrangement system, although the management of the major shareholders is protected, there is no strong protection by the court and the terms of repayment of debt is unfavorable to the company.

Finally, the arrangement procedure can only proceed smoothly only with concession from creditors and thus if concession is not obtained from a portion of the creditors, the arrangement proceedings can be difficult and accordingly regeneration of the company fails in many cases.

IV. Conclusion
Although the two systems have both strong points and weak points as mentioned above, for the purpose of regeneration of a stock company, the corporate reorganization system is actually more favorable than the arrangement system. However, those Korean enterprises which regard the rights of management as paramount would, more likely apply for the arrangement system than the corporate reorganization system.

Writer: In-Man Kim, Esq.

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BAE, KIM & LEE
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