A. Insolvency/Bankruptcy Deferral Agreement 1.What is the Insolvency / Bankruptcy Deferral Agreement? While the Korean chaebols under one or another form of insolvency protection have increased in unprecedented numbers during this year, their financial troubles began to surface a few years ago. In response to market reaction, certain Korean financial institutions entered into "the Agreement to Facilitate the Normalization of Operations of Financially Troubled Companies and the Efficient Repayment of Bad Debts" ("Insolvency Deferral Agreement") in April 1997. The Insolvency Deferral Agreement, as amended in September 1997 and which is further open for amendment and supplement in the course of implementation of the procedures available thereunder, requires all Korean banks, merchant banks and life insurance companies to be parties to it. Other financial institutions such as insurance companies (other than life insurance companies), securities companies, the Korean branches of foreign banks and other financial institutions may opt to enter into this Insolvency Deferral Agreement, but are not required to be a party to it. Financial institutions party to this Insolvency Deferral Agreement will not be allowed to require repayment of outstanding debts by a borrower having liabilities to banks exceeding 250 billion won and designated by its main correspondent bank as being a company subject to the agreement. Such companies will also be exempted from the suspension of clearing privileges notwithstanding the inability to honor their checks and promissory notes during the grace period (often two months) established by the creditors. 2. What Claims Can Creditors Make Against the Insolvent Companies While They Are Subject to Insolvency Deferral Protection? To date, Jinro, Dainong, Kia, and Taeil Media group companies have come under the protection of the Insolvency Deferral Agreement. As foreign financial institutions are not bound by the Insolvency Deferral Agreement, they may attempt to enforce their rights pursuant to the underlying contract. However, since the maximum grace period available to the insolvent company is two months, the creditors may find it difficult to adjudicate their claims and enforce the judgment prior to the expiration of the grace period at which time the future of the insolvent company is put to a vote by the creditors. If the committee decides that the normalization is not feasible, the committee will vote as to whether, among other things, to sell off the company to a third party, or initiate corporate reorganization procedures or bankruptcy proceedings. Approval by 75 percent or more of the votes, in proportionate terms relative to the outstanding loan amount of unsecured creditors, is required to take action. Further, it should be noted that at the time of filing the complaint, the plaintiff will be required to make payment of the stamp tax in the amount of 0.5 percent of the claim amount. It should also be noted that once the composition or corporate reorganization proceeding is initiated, all court actions involving the insolvent company for debt repayment will be stayed. The foreign creditors will instead have to report their claim with the court in charge of the composition or corporate reorganization proceeding as one of the creditors of the insolvent company. In this case, the creditors will receive payment of principal and interest through and only in accordance with the reorganization plan. Further, filing of a lawsuit against the subject companies will not place the creditors who filed such lawsuit in priority of payment to other creditors if the business of the troubled company is later taken over by a third party or a bankruptcy proceeding is filed against them.
B. Corporate Reorganization and
Composition 1. What Are the Major Differences between a Korean Corporate Reorganization and a Composition Proceeding? The major characteristic distinguishing a corporate reorganization proceeding from a composition proceeding is that in the case of latter, the management retains control over the operation of the insolvent corporation, while in the case of former, the managerial right is overtaken by a court-appointed trustee. This characteristic prompts the insolvent company to choose composition over corporate reorganization. Further, while the court retains strict supervision over the corporate reorganization proceeding, the court's involvement in the case of composition is rather limited and the restructuring plan or schedule is left to the creditors and the debtor to reconcile. Also, while the creditors or the insolvent company or its major shareholders may file for corporate reorganization, only the insolvent company has the option to file for composition. 2. Procedures under Corporate Reorganization Korean Corporate Reorganization Act is somewhat similar to Chapter 11 of the 1978 Bankruptcy Act of the U.S. During the period when the application for court reorganization (which may be filed by the debtor company, its major shareholders or certain of its creditors) is being deliberated, the court may, at its own discretion or upon the request of a creditor or debtor company, issue a preservation order, which is issued usually within one to three weeks from the application. Upon the issuance of a preservation order, disposition of assets of the debtor company, repayment of its debts and any legal proceeding involving the debtor company will be stayed, and a court-appointed interim receiver will generally take charge of the debtor company's business. The court usually makes its decision as to whether to commence corporate reorganization proceedings within three to six months from the date of filing of an application therefor. After the court issues the commencement order, the interim receiver will be replaced by a permanent receiver who will be entrusted with the drafting of a reorganization plan. When the reorganization proceeding commences, the operation of the debtor company? business will be carried out by the permanent receiver under the supervision of the court and the subject company will, in general, benefit from postponement of tax liabilities as well as the restructuring of debt liabilities for a certain grace period. If a reorganization proceeding is initiated, the creditors will be permitted to participate in the proceeding and will be entitled to receive all notices regarding the proceeding. The court will not send the notices to foreign creditors unless the foreign creditor requests the court to do so. The court will, however, ask all the creditors to report their claims to the court. Foreign creditors should follow the court proceedings in Korea, whether through their Korean office or by appointing a counsel in Korea, and ensure that they are given an opportunity to file their claims. 3. Procedures under Composition If the application for composition filed by the debtor company is accepted and the composition procedure commences, the debts of the insolvent company will be restructured pursuant to an agreement reached between the creditors and debtor. If the subject company obtains court approval in respect of the commencement of composition procedure, they must agree with their creditors on the grace period for the debt repayment schedule, the negotiations for which generally require about three to six months. Any interested party may immediately file for appeal in respect of the determination to commence composition. Once the composition proceeding commences, all the creditors will be asked to submit their claim against the debtor company at which time the foreign creditors will be also asked to submit their opinion on the restructuring plan. The restructuring plan is subject to approval of at least 75 percent (by the amount of debt owed) of total unsecured creditors and final approval of the court. 4. Status of Creditors under Corporate Reorganization and Composition The payment of principal and interest due from the insolvent company will generally not be made for approximately three to five years in the case of composition, and approximately five to 10 years in the case of corporate reorganization. Further, the restructuring plan will often provide for the payment of reduced or no interest under the loan advanced to the insolvent company.
C. Bankruptcy Another insolvency law of Korea which may be applicable to an insolvent corporation and which may further limit the rights of the creditors is the Bankruptcy Act of Korea. While the Composition Act and the Corporate Reorganization Act are designed to restructure or reorganize the debts of insolvent companies, the Korean Bankruptcy Act covers the liquidation of such an insolvent company. Therefore, financially troubled corporations do not generally opt to become subject to the Bankruptcy Act. Generally, once the bankruptcy proceeding commences, the creditors have to report their claim to the bankruptcy court and their recovery is limited to the proceeds from the sale of the assets of the bankrupt corporation.
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Recent financial difficulties experienced by large Korean business groups (or chaebols), particularly since early 1997, are raising concerns among foreign financial institutions that have invested in these corporations. Due to over-leveraged expansion and rapid diversification, a number of Korean chaebols, beginning with Hanbo, followed by Sammi, Jinro, Dainong, Kia, New Core, and many other comparatively smaller corporations have filed this year for bankruptcy protection with courts in Korea or have become subject to the protection under the insolvency deferral agreement discussed below.
