In the beginning of the year 2000, the corporate insolvency laws and practices of Korea came into the spotlight for the following reasons: first, foreign creditor banks agreed to the workout plan for the ailing Daewoo Group, under which they would recover an average 39 to 40 percent of their loan portfolios on the brink of the overall bankruptcy of Daewoo companies; second, Kia Motors Co. obtained court approval that its corporate reorganization plan shall be terminated because the financial conditions of the company which once triggered the foreign currency crisis of Korea in 1997 have been improved to a normal level; third, the new amendments to three insolvency laws - the Corporate Reorganization Act, the Composition Act and the Bankruptcy Act - come into force in April, 2000; and fourth, the Seoul District Court has expanded its insolvency-specialized three-judge courts from two to four as from the middle of February, 2000 so as to handle the increasing number of bankruptcy cases.

In the case of Daewoo, when the business group turned out to be insolvent in July, 1999, its domestic creditor banks put 12 major subsidiaries of the financially troubled conglomerate under a debt workout plan last August. Without the consent of the foreign lenders, whose claims, unsecured as well as secured, amounted to U$6.75 billion, the workout program would not be operative. Otherwise, court receivership would have been inevitable for the flagship Daewoo Corp. So the Corporate Restructuring Coordination Committee which represents the Korean government and domestic lenders, and the foreign creditor banks had to make a deal in which Daewoo's domestic creditors will purchase unsecured loans up to U$4.84 billion from foreign creditors at the agreed-upon rate. Then domestic creditors will jointly establish a special purpose vehicle to buy non-performing loans from foreign lenders, while the state-run Korea Asset Management Corp. will in turn buy the debts at market price in order to alleviate the liquidity burden on Korean banks.

However, it should be noted the International Monetary Fund (IMF) called for the overall revision of insolvency laws of Korea with the objective of streamlining bankruptcy procedures when the IMF entered into the financial bail-out pact with the Korean government in December, 1997. Since then, the IMF and the World Bank (IBRD) have put the bankruptcy-related legislative developments in Korea under surveillance.

Overview of the Corporate Insolvency Regime

As shown in the Daewoo case above, when a debtor is unable to pay its debts, its creditor banks may select workout plans if and when the debtor company is sufficiently viable with its liabilities rescheduled or converted to equity. Otherwise, the creditors would go to the court to file either rehabilitation or liquidation proceedings. The creditor banks may arrange a third party takeover of the debt-ridden company. The overall landscape of corporate insolvency regimes in Korea is described in the diagram below.

How to Proceed with an Insolvent Company

                                                       +---  Rehabilitation
                 +---¡æ Workout plan ------------------+
                 |                                     +---  M&A or Reorganization
                 |
                 |               +---- Liquidation  -------  Liquidation(cheongsan),
                 |               |                           Bankruptcy(pasan)
                 |               |
                 |               |                     +---  Rehabilitation
  Insolvent¡æ Creditor¡æ Court---+---- Composition  ---+
   compnay     banks             |     (hwa-ui)        +---  Liquidation
      |                          |
      |                          |                     +---  Rehabilitation
      |                          +---- Corporate re- --+
      |                                organization    +---  Liquidation
      |                                (hoesa-jeongri)
      ¡é
     M&A -----¡æ Acquisition by a third party

A workout plan is a private restructuring agreement entered into among the creditor banks out of the courtroom and based upon party autonomy. The workout plan established by the creditor financial institutions on the basis of majority rule, includes, depending on the individual case, conversion of debt into equity, extension of maturity, rescheduling of principal and interest payments, write-off of principal or interest, provision of fresh capital, exemption of cross guarantee, reduction of paid-in capital, foreign capital borrowing and so on.

On the other hand, inside the courtroom, there are two types of insolvency proceedings. In one type of liquidation proceedings, a court acting through a liquidator appointed for the purpose under the Commercial Code takes charge of the assets of the insolvent or soon-to-be dissolved debtor company with a view to transforming non-monetary assets into a monetary form and distributing the proceeds proportionately to creditors (cheong-san).

But if a debtor becomes insolvent with liabilities far exceeding assets, or fails to pay or is stopped to pay its debts as they become due, it may be declared bankrupt by the court under the Bankruptcy Act, and a court-appointed trustee will expedite the bankruptcy proceedings liquidating the debtor as a commercial entity (pasan).

In the other type of rehabilitation or reorganization proceedings, the purpose is not to liquidate the insolvent debtor company, but to allow it to overcome its financial difficulties and resume normal commercial operations. These proceedings are conducted under the supervision of a court acting through an administrator or receiver for that purpose. When the court plays the role of an arranger formulating the terms and conditions of a restructuring plan and leaving the proceedings to both the debtor and its unsecured creditors at large, it is called a "composition" (hwa-ui) or arrangement. But if the court controls and supervises the process against the nearly bankrupt corporation through a court-appointed receiver or interim receiver in every detail, it is called "corporate reorganization" (hoesa-jeongri) proceedings.

Comparison of Insolvency Proceedings

Some Perspectives

The rehabilitation proceedings are typically aimed at reaching an agreement between the debtor and its creditors about relief that should allow the debtor to restore its financial viability. However, the conditions and procedures of the composition and the corporate reorganization are so complicated that IMF/IBRD-initiated legislative efforts to consolidate these two proceedings as well as bankruptcy proceedings are under way, for instance, after the model of the German Insolvency Law(Insolvenzordnung) which came into force on January 1, 1999.

The lawyers, specialists and government officials are allegedly considering a fast track proceeding in which the court shall spend less than eight months in completing the whole corporate reorganization/composition procedures when some requirements are met. Also, on the agenda is an American-type prepackaged plan. Once a bankruptcy plan of reorganization has been negotiated and accepted by the requisite number of creditors in accordance with due process of law prior to the commencement of the proceedings, there is no need to repeat the time-consuming negotiations when the reorganization plan is submitted to the court. This means that, if the requisite number of creditors agree or disagree to the workout plan, those creditors need not give their opinions thereon to the court in charge of the reorganization case. The automatic stay in the U.S. Chapter 11 is an alternative to speed up the insolvency proceedings. Under the U.S. Bankruptcy Code, the filing of a petition automatically stays, i.e., restrains, creditors from taking further action against the debtor and the properties of the debtor to collect their claims. The automatic stay is believed to eliminate time-consuming procedures for the court to render protective measures.

Gist of the Latest Amendments to Insolvency Laws

After the global financial crises in 1997 and 1998, international forums on insolvency stressed that strong insolvency and debtor-creditor regimes were an important means for preventing or limiting financial crises and for facilitating rapid and orderly workouts from excessive indebtedness. In this regard, UNCITRAL has been regarded as an appropriate forum to deliberate over insolvency law in view of its universal membership, its previous successful work on cross-border insolvency and its established working relations with international organizations that have expertise and interest in the law of insolvency. So UNCITRAL has entrusted a working group with the development of a model law on corporate insolvency to foster and encourage the adoption of effective national corporate insolvency regimes.

In a preparatory note by the Secretariat released before the twenty-second session of the Commission, which was held in Vienna during December 6-17, 1999, UNCITRAL explained that there is broad agreement on the key objectives which are important to effective insolvency regimes. These objectives are (i) to maximize value of assets for the increasing possibility of rehabilitation of the debtor as an alternative to liquidation, (ii) to strike a balance between liquidation and rehabilitation, (iii) to treat similarly-situated creditors equitably, (iv) to provide for timely, efficient and impartial resolution of insolvencies, (v) to prevent premature dismemberment of the debtor's assets by creditors, (vi) to provide for a procedure that is predictable and transparent and which contains incentives for gathering and dispensing information, and (vii) to establish a framework for cross-border insolvency.

On the strong recommendation of IMF/IBRD acknowledging such global standards, the Korean government recently revised three insolvency laws for the purpose of (i) expediting the overall insolvency proceedings, (ii) forcing a swift exit of non-viable enterprises, (iii) improving the overall efficiency of insolvency proceedings, and (iv) striking a fair and equitable balance between interested parties, and so forth.

Take an example of the corporate reorganization proceedings. The first and foremost problem is that they take more than one year on the average in preparing, and then obtaining a court approval of, a reorganization plan, thereby having lost the proper timing to reorganize the operations of the insolvent company. But, from a different point of view, it is quite natural because the court has to consider each and every opinion of a multitude of interested parties including creditors and shareholders.

So the latest amendments to the Corporate Reorganization Act provide for a mandatory timetable that a court shall render a decision to commence the proceedings within one month after the application for the corporate reorganization. When the court makes a decision whether or not it will commence the proceedings, it shall take into consideration only formal requirements. This means that, if there is no reason to turn down the petition, the court has to commence the proceedings.

If the corporate reorganization fails to proceed further, the proceedings until then shall be transferred intact to the bankruptcy procedure, not requiring the repetition of the procedures. Also, if the court deems the company unviable, and decides to reject the corporate reorganization, then it shall declare the company bankrupt upon its own decision.

It should be noted that in the 1998 Amendments to the Corporate Reorganization Law a management committee was established to assist the court in conducting corporate reorganization proceedings. This committee is to provide experts' testimony to the court and to help the court with routine managerial work. The committee consists of three to fifteen members, each of whom must be either a licensed attorney, a certified public accountant or someone who has served as an officer in a listed company or in a financial institution. It advises the court (currently only the Seoul District Court) on matters concerning the debtor company, and is expected to play a substantial role in managing the day-to-day operation of each proceeding.

Recent Amendments to Insolvency Laws at a Glance

A. The Amendments of 1998

¡ß The Corporate Reorganization Act
- To fix the process time (e.g., filing claims within two (formerly four) months and submitting a draft reorganization plan within four months from the claim-filing deadline) so as to speed up the proceedings(Arts. 6i, 39, 45-2, 189)
- To establish a management committee to assist the court in conducting corporate reorganization proceedings(Arts.93-2¡­93-4) and creditors' consulting committee for the purpose of enhancing fairness and equity(Arts.173-2¡­173-4)
- To allow the debtor company to pay where it helps the company to maintain clients base(Art.112-2)
- To prevent set-off in order to preserve the equality among creditors(Art.163 ii)
- To force capital reduction where the paid-in capital becomes negative, and thereby facilitating the third party takeover(Art.221(2))
- To allow the court to revoke the temporary attachment or injunction for the rehabilitation of the company(Art.37(6))
- To enable the court to demand necessary information for the proceedings(Art.30(3))

¡ß The Composition Act
- To alleviate entrance barriers where there is strong possibility of bankruptcy(Art.12(1))
- To enforce the dismissal of the petition to commence the composition in cases where the corporate managers intentionally made the company bankrupt(Art.19-2)
- To prevent the applicant from withdrawing the petition after the court's protection measures(Art.20(9))
- To consolidate the jurisdiction of composition into the court in charge of corporate reorganization cases(Art.3)
- To make use of the management committee for the corporate reorganization cases(Art.11-2)
- To fix the process time (e.g., filing claims within two (formerly four) months and making a resolution within two months from the first creditors' meeting) as to speed up the proceedings(Art.26-2, 27, 63ii)
- To reinforce the power of the administrator e.g., demanding reports or corrective measures, etc.(Arts.31(5), 36(1))
- To establish a management committee to assist the court in conducting composition proceedings (Arts.11-2) and creditors' consulting committee for the purpose of enhancing fairness and equity (Arts.49-2¡­49-4)
- To allow the debtor company to borrow from banks on condition to repay by priority(Art.31(3)(4))

¡ß The Bankruptcy Act
- To consolidate the bankruptcy jurisdiction into the court in charge of corporate reorganization and composition cases
- To make use of the management committee for alternative opinions or supervision of the proceedings

B. The Amendments of 1999/2000

¡ß The Corporate Reorganization Act (Dec.31, 1999)
- To obligate the court to render a decision whether or not it commence the proceedings within one month of the applicant's filing of a petition (Art.45-2)
- To eliminate the time-consuming investigation procedure, thereby commencing the proceedings if there is no reason to dismiss the petition (Arts.38)
- To force the court to declare bankrupt the non-viable company which has received a confirmed decision of discontinuance/disapproval of the corporate proceedings and to maintain the effects of already-implemented procedures where the rehabilitation proceedings are transferred to the bankruptcy (Arts.23-24)
- To allow the court to render a decision to discontinue the proceedings where it deems the normal implementation of rehabilitation proceedings is not likely to happen (Art.271-3)
- To allow the court to give an order to demand the receiver draft a corporate reorganization plan, including the split-up/split-and-merger of the debtor company, only when it deems the going concern value of the company is greater than its value in liquidation (Arts.189(1), 258-2), otherwise a draft plan for liquidation (Art.191(1))
- To reduce the majority requirement for the resolution of secured creditors from 4/5 to 3/4 to stave off the hold-out of those creditors (Art.205)
- To obligate the court to hear the opinions of the management committee when it decides to dismiss the petition to commence the proceedings(Art.38)
- To obligate the receiver to investigate the going concern value and liquidation value, and report thereon to the management committee as well as to the court (Art.179iii)
- To allow the debtor company to retain specialists with respect to advanced management and M&A (Art.186)
- To let the court demand that the receiver exercise its right of avoidance for an extended period up to 60 days (formerly 30 days) upon the request of creditors when the receiver is hesitant to do so (Arts.82(2), 78(1)iii)

¡ß The Composition Act (Jan.12, 2000)
- To obligate the court to render a decision whether or not it commence the proceedings within one month since applicant's filing of a petition (Art.26-2)
- To eliminate the time-consuming investigation procedure, thereby commencing the proceedings if there is no reason to dismiss the petition (Arts.27, 39-2)
- To maintain the effects of already-implemented procedures where the composition plan is stopped, disapproved or cancelled, and the proceedings are transferred to the bankruptcy procedure(Arts.23-24)
- To allow the court to render a decision to discontinue the proceedings where it deems the normal implementation of rehabilitation proceedings is not likely to happen, or the management is proved to have caused the failure of the company (Arts.63, 64)
- To let the court dismiss the petition to commence the composition in cases where the officers and directors are responsible for the mismanagement of the company (Art.19(2))

¡ß The Bankruptcy Act (Jan.12, 2000)
- To activate such quick and simple proceedings as petit bankruptcy where the value of the bankruptcy estate is less than 200 million won (Art.330)
- To let the court demand that the trustee exercise its right of avoidance for an extended period up to 60 days (formerly 30 days) upon the request of creditors when the trustee is hesitant to do so (Arts.68(2), 64iv)

Formal Insolvency Proceedings

As mentioned before, three statutes are applicable to insolvency: the Bankruptcy Act (BA) deals with the liquidation of individuals and companies; the Composition Act (CA) provides composition proceedings for individuals and companies; and the Corporate Reorganization Act (CRA) covers the reorganization process of joint stock companies. Since these statutes were first enacted in 1962, there had been no meaningful amendments until 1998, nor significant number of cases where the insolvency laws were applied. This was because the Civil Procedure Act was usually used for debt collection on an individual basis. In most cases, specific collection measures were not necessary because most assets of a debtor were already subject to mortgage or security.

While the majority of insolvent companies were liquidated on a non-judicial basis, a handful of rehabilitation cases, where the current management was expected to be kept intact were filed at the court. So it would be appropriate to explain the corporate reorganization/composition proceedings first, and then the bankruptcy proceedings which purports to terminate the commercial operations of the debtor.

Filing of Petition
Corporate reorganization proceedings are normally initiated with a petition for the commencement to the competent court by the insolvent corporation. This process is for the joint stock company only. The petition may be filed by at least one of the creditors whose claims against the company are no less than 10 percent of the issued shares of the company(CRA Art.30). The Act does not penalize a late filing. This means a debtor company does not have a legal obligation to file a corporate reorganization petition under this Act. Members of the board of directors, however, have duty of care or fiduciary duty on corporate matters in a general sense under the Commercial Code.

As the Act does not allow automatic stay, the applicant simultaneously files a petition for issuing a provisional protection order, whereby an interim receiver is appointed; the disposal of assets and repayment of debt by the insolvent company are prohibited; and/or other enforcement procedures are stopped(CRA Arts.37, 39). When the court renders a provisional protection order after reviewing petition documents and interviewing applicants, it nominates an interim receiver and one or more examiners to make assessments for the next stage of the proceedings.

While the interim receiver takes charge of the applicant company, the court deliberates whether to render the order of the commencement of the reorganization process. Without the order of commencement, the reorganization procedure cannot start. The court shall reject any petition for the commencement of proceedings in cases where the value in liquidation of the debtor company is greater than its going concern value, or petitioners fraudulently file a petition with the intention of obtaining some benefit from the proceedings or evading bankruptcy or tax obligations(Art.38).

Following the provisional protection measures, the court appoints an examiner to hear opinions on the situation of the applicant corporation and suitability to the proceedings requirements. The examiner's task includes due diligence investigation and appreciation of the corporate value. The Act does not prescribe any specific method of calculating those values. Discount, net present value or any other reasonable methods is possible.

Flow of the Corporate Reorganization Proceedings

 Receiver, etc.         Interested Parties               Court

                            Filing of Petition             Dismissal

                                                           Temporary Protection Measures
Appointment of Interim Receiver

Due Diligence of Inspector

Appointment of Receiver                                    Order of Commencement           
                       

                            Filing of Claims               List of Claimants
                            secured or unsecured  

                            First Meeting of 
                            Interested Parties
                                                           Examination of Claims
           Submission of the draft
           Reorganization Plan

                            Second Meeting of
                            Interested Parties

Modification of the                                        Review of the draft Plan 
draft Plan
                            Third Meeting of
                            Interested Parties

                            Endorsement of the
                            Reorganization Plan
                                                           Approval/Rejection of
                                                           the Reorganization Plan 

Implementation
of the Plan                                                Modification of the Plan

          
Conclusion                                                 Discontinuance                

The interim receiver acts as the legal representative of the insolvent company and performs the daily functions of the company(CRA Arts.39-3, 53). Banks, other financial institutions as well as individuals may be appointed as the interim receiver. It must obtain the approval of the court to perform certain actions specified by the court, such as disposing of the company's assets.

In the composition proceedings, on the contrary, only the debtor - an individual or a company - is eligible for the petition. A petition for commencement of composition should state the terms and conditions of the composition(CA Art.13), which may be modified under the approval of the court. When the court issues temporary protection measures, it usually appoints an interim administrator and/or prohibits the insolvent company from disposing of assets and repaying debts. The court also appoints an examiner to prepare a report on the feasibility of commencing with composition proceedings. On the basis of such a report, the court will decide whether to approve the petition for commencement.

Commencement of the Proceedings
When ordering the commencement of the reorganization proceedings, the court also appoints one or more receivers and fixes the period for the filing of claims, the date of the first meeting of interested parties, and the date of examining the claims. All creditors are required to file their claims with the court within the period. Shareholders also file their stock with the court within the same period. The court will then examine each of the filed claims. Failure to file claims results in the loss of the claims and excludes the creditors from the reorganization plan.

Under the reorganization proceedings, creditors are classified into three categories according to their priority: (i) creditors of common benefit claims, (ii) reorganization security holders with secured claims, and (iii) reorganization creditors with unsecured claims. The common benefit claims, including administrative fees, employee's salary and claims which occur after the commencement under the approval of the court(Art.208), are to be repaid irrespective of the reorganization plan and have priority over secured claims and unsecured claims. These two kinds of claims are subject to the corporate reorganization plan except when the court approves separate payments. There shall be fair and equal discrimination among the same sort of creditors and shareholders(CRA Art.228).

In the composition case, the process is a little different from the reorganization proceedings. Though the creditors have to file their claims by the fixed date, there is no process for the confirmation of claims(CA Art.51). Likewise, the administrator does not have full authority to manage, or dispose of, the assets of the debtor. He or she has only to monitor the activities of the debtor while assisting the court to handle the composition procedure. The filing is just for the participation in the creditors' meeting and for exercising voting rights. None- or late filing creditors do not lose their claims at all. The secured claims with appropriate collateral, which are usually called "byeol-je-kwon", are out of the scope of the composition procedure(BA Art.84, CA Art.44).

Avoidance, Set-off, etc.
While doing his job under the Corporate Reorganization Act, the receiver has the authority to set aside the following transactions(CRA Art.78(1)), i.e., preferences of the company:

a. Any act that the debtor company undertook with the knowledge that it would cause harm to its creditors except when the beneficiary of such an act did not know at the time of the act that it would prejudice those creditors;

b. Provision of security, discharge of debt, or any other act done by the debtor company prejudicial to its creditors, which took place after the suspension of payments or the filing of the insolvency proceedings, except where the beneficiary of such an act did not know at the time of the act that there was the suspension of payments or the filing of such petition;

c. Provision of security, discharge of debt by the debtor company which took place either after, or within 30 days of, the suspension of payments or the filing of the petition of the insolvency proceedings when the company was not obligated to do so; and

d. Any act by the debtor company without any consideration or compensation or with only nominal consideration which took place whether after, or within six months of, the suspension of payments or the filing of the petition of the insolvency proceedings.

The receiver also has the authority to decide whether to perform or terminate any executory contract under which there remain obligations to be performed by the company and the counterparty(CRA Arts.103, 104). He may exercise this power in such a manner as to allow contracts that are advantageous to the insolvent company and terminate those unfavorable to the company.

Creditors are entitled to set off debt owed to the company against their claim to the company(CRA Art.162) except: (i) where the creditor's debt to the company was incurred after the commencement of the corporate reorganization proceedings, (ii) where the creditor acquired a third party's claim against the company after the commencement of the corporate reorganization proceedings, or (iii) where the creditor acquired a claim knowing that there was a suspension of payments by the company or a petition for the corporate reorganization proceedings was filed, unless the claim was acquired by operation of law, or is based on a cause that arose prior to the creditor's becoming aware of the suspension of payments or the filing of the petition, or on any other cause that arose one year or more prior to the commencement of the corporate reorganization proceedings(CRA Art.163).
The creditor's right of set-off must be exercised on or before the last day of the period specified for filing the claims(CRA Art.162).

In the composition case, the creditors may also set aside any act taken by the insolvent debtor, which is not in the ordinary course of debtor's business, after the filing of the petition without the required consent of the administrator(CA Art.31). Such right of the creditors has no effect on a secured creditor's right to foreclose on the collateral.

Reorganization/Composition Plan
Based upon the confirmed claims and the result of due diligence investigation, the receiver makes the draft reorganization plan. The plan shall be presented to the court within the period prescribed by the court. The period shall not exceed four months from the expiration date of filing claims but extensible for another two-month period, as the case may be(CRA Arts.189, 190). For small and medium-sized companies, however, it shall not exceed one month for a speed-up resolution.

The draft reorganization plan shall include the method of payment and business operations of the debtor company(CRA Arts.189, 211). The court shall convene the meetings of interested parties so that they may examine the plan. At the meetings of interested parties, each group of reorganization creditors, reorganization security holders and shareholders shall adopt a resolution(CRA Arts.192, 200, 204) approving the draft reorganization plan(CRA Art.205).

There are usually a series of three meetings. The first meeting is for presentation of the receiver's report on the company's financial conditions and examination of the filed claims. The second meeting is for deliberation of a draft reorganization plan. The third meeting is for the adoption of a resolution approving the draft plan.

Once a draft reorganization plan has been admitted at the meeting of interested parties, the court determines whether or not to approve it. The consent of employees is not required for the approval of the plan by the court. Public interest is not a factor to be considered either. Instead, the court shall examine whether the draft reorganization plan satisfies all the statutory requirements(CRA Art.233), for example, if the program is fair, equitable and feasible. Finally, the court shall decide whether it approves the draft plan consented by the groups of interested parties(CRA Arts.232).

The court is authorized to approve the draft plan under Article 233 of the Act even though a group of interested parties fails to reach an agreement on the proposed reorganization plan on condition that the court determines and inserts the clauses in the reorganization plan to protect the rights of disagreeing interested parties.

In cases where the ruling disapproving the reorganization plan has become final and conclusive, the reorganization proceedings shall be stopped and settled in accordance with Articles 281 to 287 of the Act. When the court renders a ruling which approves the reorganization plan, the rights of interested parties shall be modified in accordance with the provisions of the plan.

In the composition proceedings, the creditors meet on a date fixed by the court to review the reports and opinions of the administrator and the examiner, and then vote on the proposed terms of the composition(CA Arts.52, 53). The composition plan, accepted by a majority of creditors at the creditors' meeting, will be examined by the court to see if it satisfies all the legal requirements(CA Art.55). Anyhow, creditors with priority claims are not subject to the approved composition plan. A secured creditor may foreclose collateral at any time. Therefore, a debtor would usually prefer that secured creditors, in other words byeol-je-kwon-ja, be involved in the composition plan.

Implementation of the Rehabilitation Plan
Once the corporate reorganization proceedings begin, the authority to manage the operations and assets of the company is vested exclusively with the receiver subject to the court supervision(CRA Art.53). The court would not permit the former owner or officers of the troubled company to regain the management of the company.

The 1998 Amendments to the Corporate Reorganization Act introduced the creditors' conference as a channel between creditors and the company(CRA Arts.173-2¡­173-4). As the receiver is responsible to the court, not to the creditors, creditors did not have an appropriate way to communicate with the court and the receiver. The creditors' conference consists of up to 10 major creditors, and may diffuse the information to creditors and hand over the opinion of creditors to the court.

If the reorganization plan has been implemented completely or if it is deemed certain that the plan will be successfully implemented, the court may conclude the reorganization proceedings(CRA Art.271). M&A might be the common cause of the early conclusion of the plan, as witnessed in the Kia Motors case. Upon the conclusion of the process, the authority to operate the company reverts to the company's directors.

If, on the other hand, it becomes apparent, either before or after the approval of a reorganization plan, that the company cannot be rehabilitated, the court may decide to discontinue the reorganization proceedings(CRA Arts.272, 273). Even with the cessation of the procedure, the change of claims or discharge according to the plan is effective for good.

However, the composition proceedings are quite different from those of the corporate reorganization once the rehabilitation plan is approved by the court(CA Art.58). As a matter of fact, the composition proceedings have been terminated upon the approval of the court. This means the composition-initiated debtor may run its business without any interference by the court or creditors. The court has also discretion to discontinue composition proceedings even before it renders a decision on the approval of the composition plan, if it finds that the debtor has not met, or may not in the future be able to meet, repayment obligations(CA Arts.63, 64).

Bankruptcy Proceedings
Bankruptcy proceedings are intended to collect debtor's assets and distribute the proceeds to its creditors in the event of insolvency, i.e., inability to pay, of a debtor, whether corporate or personal(BA Art.116). If the entire assets of a corporation fail to cover its debts as a whole, it may be declared bankrupt by the court(BA Art. 117).

A petition for bankruptcy may be filed by the debtor, its creditor or by a third party(BA Art.122). In the case of a corporation, it may be filed by a director of the company. Upon review of a petition for bankruptcy, the court will declare the debtor bankrupt if it determines that grounds for bankruptcy exist based on the information included in the petition and further examination by the court(BA Art.133). Otherwise, the court will dismiss the petition.

At the time of adjudication of bankruptcy, the court appoints a trustee and sets the period for the filing of claims, the date of the first meeting of creditors, and the date of the examination of claims. The court must also notify the appropriate government office or agency, where relevant, as well as the public prosecutor of the adjudication of bankruptcy(BA Arts.133, 134).

Upon the court's adjudication of bankruptcy, the right to manage and dispose of the bankruptcy estate is vested exclusively with the trustee subject to court supervision(BA Art.152). The bankruptcy estate is composed of the attachable properties the debtor possessed within the nation at the time of the court's declaration of bankruptcy(BA Art.6). The trustee shall take possession of and manage the bankruptcy estate. The trustee has the right to set aside transactions in the bankruptcy proceedings, which are largely analogous to those of the corporate reorganization(BA Art.64).

All creditors are required to file their claims with the court within the period fixed by the court. The Bankruptcy Act provides a hierarchy of five separate categories of claims(BA Arts.31-37), secured claims, bankruptcy estate-related claims(BA Arts.40, 41), claims given preference by other law, general claims and less preferred claims.

At the first meeting of creditors, the trustee reports on the circumstances which led to the adjudication of bankruptcy, interim developments and the current status of the debtor and the bankruptcy estate. The validity of claims filed by the creditor will also be examined at the first meeting of creditors. A resolution at the creditors' meeting must be approved by a majority of the creditors present.

The trustee has the discretionary right to liquidate the bankruptcy estate and determine when and how such liquidation should be done. The trustee distributes the proceeds from the bankruptcy estate to the creditors in proportion to their claims. A public notice of the total amount of distribution to the entitled creditors is required to be given by the trustee.

A bankruptcy proceeding is conclusive with a court decision after the trustee has made final distributions and presented a report thereof at the creditors' meeting. A bankruptcy proceeding may also be discontinued by a court decision based on the application of the debtor or trustee, as the case may be.
(Source: KDB Economic & Industrial Focus, March 2000)