As the Korean economy has developed, Korean companies have become more international, expanding their operations outside Korea to seek opportunities in today's globalised economy. When such companies experience financial difficulties and seek debtor protection under the rehabilitation proceeding or bankruptcy proceeding, the two court-supervised insolvency proceedings under Korean law (Korean Insolvency Proceedings), they may also need to seek protection of their assets and interests outside of Korea.
The simplest and most cost-efficient way of obtaining such protection is usually through recognition of the Korean Insolvency Proceedings in foreign jurisdictions. We discuss below the statutory basis under which a Korean debtor may seek recognition in foreign jurisdictions of its Korean Insolvency Proceeding and explore some of the issues that may arise in connection with the courts in the relevant foreign jurisdictions.
It should be said that cases of Korean companies seeking such recognition have so far been very rare. However, Kim & Chang represented Daewoo, which sought recognition of its Korean bankruptcy proceeding from the court in the US, and Samsun Logix, the first Korean company that sought recognition of a Korean rehabilitation proceeding in multiple foreign jurisdictions, including the US, UK, Australia, Singapore, Belgium and others. Our discussion below is based in part on our practical experiences representing Korean companies in connection with their efforts to obtain recognition abroad of their Korean Insolvency Proceedings.
Statutory basis
Until the Debtor Rehabilitation and Bankruptcy Law (DRBL) became effective in 2006, introducing various measures relating to international bankruptcy to Korea's insolvency regime, Korea maintained the principle of strict territoriality. (Under Article 4 of the old Corporate Reorganization Law and Article 3 of the old Bankruptcy Law, the insolvency proceedings presided over by Korean courts were only applicable to assets within the territory of Korea).
By promulgating the DRBL, Korea adopted the modified principle of universality based on the Uncitral Model Law on Cross-border Insolvency. Under the DRBL, a Korean Insolvency Proceeding may affect the debtor's assets in a foreign country, if and to the extent the Korean Insolvency Proceeding is recognised and enforced in that country. In some jurisdictions, such recognition may be nearly automatic, but more frequently an additional proceeding is required (for example in the US, Chapter 15 of the Bankruptcy Code permits a foreign representative to seek recognition by a US court of a foreign insolvency proceeding). Article 640 of the DRBL provides a basis for seeking such relief in the foreign jurisdiction by providing that a receiver, bankruptcy trustee or any other person approved by the court is authorised to act in a foreign country for the benefit of a Korean Insolvency Proceeding as permitted by the applicable foreign laws.
Under the authority of Article 640, a representative of the Korean proceeding, such as the receiver of the debtor company in a rehabilitation, may petition a foreign court for recognition and enforcement of the Korean proceeding in the foreign country in which the debtor company's assets or interests are located. If the foreign court recognises and enforces the Korean proceeding, payment out of the debtor's assets situated in the foreign country should be governed by and subject to the Korean Insolvency Proceeding to the extent recognised and enforced by such foreign court. So the DRBL provides a relatively simple but powerful tool for seeking protection abroad.
Why seek recognition?
Generally, a Korean debtor company may be interested in seeking recognition of the Korean Insolvency Proceeding in a foreign jurisdiction because it has or will have valuable assets there (for example a manufacturing company that has trade receivables in foreign countries or a shipping company whose vessels are or will be making port calls in foreign countries), or because legal actions are pending or threatened in the foreign jurisdiction. Although the DRBL provides for a stay of creditors' actions upon the commencement of an insolvency proceeding in Korea, in cases where the debtor's foreign assets are particularly valuable (for example, seafaring vessels would be the principal assets in case of a shipping company), it may be practically impossible to successfully proceed with the Korean Insolvency Proceeding without the protections granted by recognition of it in the relevant foreign jurisdictions since depletion of such core assets through creditors' enforcement actions would hinder the company's ability to restructure its business and prevent a fair distribution of the assets to all its creditors.
A possible alternative to a recognition proceeding is for the receiver, bankruptcy trustee or any other person approved by the court to commence a parallel insolvency proceeding in the foreign jurisdiction, but this may not be so attractive when several factors are considered. First, a parallel proceeding takes more time and is much more costly than a recognition proceeding. Furthermore, a parallel foreign insolvency proceeding may require appointment of a third party as the administrator rather than the incumbent management and ceding control over the debtor company's assets in the foreign jurisdiction to that administrator. This may be contrary to the provision of Article 74 of the DRBL which in principle requires the court to appoint the existing management as receiver. Finally, there is a potential risk that a parallel foreign proceeding may cause confusion or unwanted consequences if treatment of creditors is different than under the Korean Insolvency Proceeding in terms of admission of claims, voting rights and approval requirements for the rehabilitation plan or its equivalent.
Timing is of the essence
The timing of filing a petition for recognition is critical because the debtor company may be vulnerable in the foreign jurisdiction if the commencement of a Korean Insolvency Proceeding becomes public prior to the recognition of the Proceeding abroad. Before the relevant foreign courts grant the requested debtor protection, creditors may try to take unilateral actions to enforce their claims after seizing the Korean debtor's valuable assets in the foreign jurisdiction. Such attachments may later cause thorny issues for the debtor even if recognition is subsequently granted, and they could seriously impair the orderly processing of the Korean Insolvency Proceeding. Accordingly, receiving recognition as quickly as possible in the jurisdiction where key assets are located may be essential to the company's business. However, the need to promptly file a petition for recognition of the Korean Insolvency Proceeding must be balanced against the potential risks of rejection because it was filed too early without sufficient basis.
Article 49 of the DRBL provides that the court has up to one month to decide whether or not to approve the commencement of the rehabilitation proceeding and appoint a receiver after the filing of the petition. During this interim period the incumbent management remains responsible for management of the debtor. The problem that frequently arises is that courts in many jurisdictions, including the US, tend to regard only a receiver appointed by the Korean court (or bankruptcy trustee in the case of a bankruptcy proceeding) as the representative of the company that can seek recognition from a foreign court, and may be reluctant to grant recognition applied for by the incumbent management before the appointment of a receiver. This can delay the application for recognition of the Korean Insolvency Proceeding until the commencement order is issued by the Korean court, which can take an entire month. Moreover, if the regulations governing the recognition process of a foreign insolvency proceeding are not well organised or developed, or if recognition proceedings are rare in the foreign jurisdiction, the process can take additional weeks or months. (For example, Samsun Logix's recent recognition petition in Belgium was apparently the first such petition presided over by the Belgian judge, and he reviewed the novel issues for quite some time before finally recognising the Korean Insolvency Proceeding.)
As a potential means of accelerating the process, it can be worthwhile to explore the possibility of seeking recognition on the basis of certain interim orders that may be issued by the Korean court after the petition for a Korean Insolvency Proceeding is received but before the commencement order is issued. Such orders include the order to appoint an interim receiver, stay orders, including a comprehensive stay order, and a preservation order that prohibits repayment of debt, making borrowings, and disposing of the assets of the debtor, without the approval of the court. If the foreign court is willing to issue recognition based on such interim orders, however, it may also later require a further recognition proceeding once the commencement order is issued.
A further consideration that may affect how quickly recognition is received is that, under Article 61 of the DRBL, the receiver or bankruptcy trustee needs to obtain prior court approval before making any payment in excess of a certain amount as decided by the court, and it can sometimes take as long as a week or two. Accordingly, it is important to plan the recognition process carefully so that there is sufficient time to coordinate with the Korean court to receive the relevant approvals if any payment exceeding the court-determined threshold is required in relation to the recognition proceeding, including payment to foreign counsel for their advice about the recognition proceeding.
Effect of recognition
Although the specific effects of recognition may vary from jurisdiction to jurisdiction, the most important issue from the debtor's perspective will be whether the recognition provides immediate and sufficient protection against creditors' attempts to enforce their claims against the debtor's assets. An immediate comprehensive stay order, which prohibits creditors from taking legal actions against the debtor and its assets, is the typical relief sought by a debtor. If a stay is gained by virtue of the recognition, the next questions would be whether it will remove the attachments that had been already made prior to the recognition and whether foreign creditors will be bound by the Korean Insolvency Proceeding. Such questions are particularly relevant in the case of a debtor subject to a rehabilitation proceeding that aims to save the debtor company from going out of business through restructuring of its debts. Such debtor will want to know whether it will eventually be freed from its old debts not only in Korea but also in the foreign jurisdictions where its assets are located. Uncertainty may hinder the debtor's ability to prepare and present a rehabilitation plan that treats all creditors equally.
Article 131 of the DRBL provides that, in a rehabilitation proceeding all secured and unsecured creditor claims (except for certain preferred claims which are payable when due) can only be satisfied through the rehabilitation plan approved by the court. Because claims not contained in the rehabilitation plan are discharged, creditors that fail to file their claims pursuant to the DRBL are permanently prevented from seeking to bring them after the rehabilitation plan has been approved. To stop creditors avoiding filing their claims in the Korean rehabilitation proceeding and later applying for a lifting of the stay to press their claims against the company's assets in the foreign jurisdiction after the debtor has emerged from the rehabilitation proceeding, the debtor will want to verify the scope and effect of the recognition in the foreign jurisdiction. Particularly, it will be important to know whether the stay will be permanent and whether creditors in the foreign jurisdiction will also be bound by the Korean rehabilitation plan or, if not, what further measures may need to be taken to bind such foreign creditors. (In the UK, a series of cases seem to conclude that a creditor's rights under an English law contract will not be affected by foreign insolvency law unless the creditor has in some way participated in and assented to the foreign insolvency proceedings so as to become bound by the laws of the country where those proceedings have been commenced.)
The issue of whether or not the debtor is granted a stay, the scope of the stay, and the further effects of recognition will depend on the laws of the particular jurisdiction. However, the nature of the protections afforded to the Korean debtor under the DRBL can be relevant to determining such effects of the recognition because the foreign court will often grant the same or similar protections as are available under the Korean Insolvency Proceeding and may be reluctant in principle to grant more protection than could be obtained in Korea. So the foreign court often requests from the debtor evidence or affidavits about various aspects of the Korean Insolvency Proceeding.
The other issue for the debtor is the effect of the recognition on new and existing creditor attachments. Since under the DRBL, a commencement order will prevent new attachments from being levied but will not automatically dissolve existing attachments, the Korean debtor can usually expect the same effect in the foreign jurisdiction with respect to creditor attachments. This will usually mean that some additional procedure to release seized or frozen assets in the foreign jurisdiction may be required after recognition is granted. In connection therewith, Article 44 of the DRBL provides that the receiver may petition the court for a cancellation order with respect to a specific attachment in order to have the attachment lifted. A similar motion or petition may need to be filed, if possible, in the foreign jurisdiction if any assets were attached or seized prior to the recognition.
While recognition of the Korean Insolvency Proceeding is the necessary first measure for achieving the debtor's aim of protecting its assets in the foreign jurisdiction, it can sometimes set the stage for further legal battles to free the debtor's assets if they have been previously seized by creditors in that jurisdiction.
| Author biographies |
Jin Yeong Chung
Chung is a partner in Kim & Chang's finance department and leads the firm's insolvency and restructuring practice group and cross-border litigation practice group. He advises clients in connection with all aspects of insolvency, including bankruptcy and rehabilitation proceedings, out-of-court workouts and restructurings, investments in financially troubled businesses, and disputes arising in connection with insolvency. He has published extensively about insolvency matters and spoken about such issues in a number of forums. He has served on a number of Korean governmental committees, including the Mutual Savings Banks Evaluation Committee, the Commercial Banks Evaluation Committee, and Merchant Banks Evaluation Committee, and has lectured since 2001 at Korea's Judicial Research and Training Institute. Chung received his B Jur from Seoul National University, College of Law in 1984, was educated at the Judicial Research and Training Institute of the Supreme Court of Korea from 1984 to 1985, and received his LLM from Yale Law School in 1994. He served as a Judge Advocate in the Republic of Korea Air Force from 1986 to 1989. He is a member of the Korean Bar Association and the New York Bar Association to which he was admitted in 1985 and 1995, respectively.
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Milosz Zurkowski
Milosz Zurkowski is a foreign legal consultant at Kim & Chang in the firm's insolvency and restructuring practice group. Zurkowski has extensive experience at Kim & Chang in practice areas relating to insolvency and restructuring, including bankruptcy and rehabilitation proceedings, international bankruptcy, protection of creditors' rights in insolvency, and acquisition of financially troubled companies. He has also worked at Simpson Thacher & Bartlett LLP, New York from 2000 to 2002. Zurkowski has been a member of the New York Bar since 2001. Zurkowski graduated cum laude from Columbia College with a BA in political science in 1996 and received his JD from New York University School of Law in 2000. |