Collateral

Collateral (담보/擔保) means specific property which a borrower grants to secure repayment of a loan to a lender. Collateral serves as protection for a lender against a borrower's default. So when the borrower fails to pay the principal and interest under the terms of a loan agreement, then the lender is entitled to enforce its security interest on the property.

In Korea, the collateral is categorized into lien (유치권/留置權), pledge (질권/質權) and mortgage (저당권/抵當權) under the Civil Act, and yangdo-dambo(양도담보/讓渡擔保), or fiduciary transfer of title, under the case law.

In principle, only one property right exists on a independent property (일물일권주의/一物一權主義). There are exceptions - factory foundation mortgage interest on a factory, and yangdo-dambo interest on a certain group of floating properties such as inventory in a warehouse.

Key words
collateral, lien, pledge, mortgage, yangdodambo, fiduciary transfer of title, chattel mortgage

Types of Collateral
There are four types of statutory collateral and one customary collateral.

Lien
Lien is a kind of statutory security interest like mechanic's lien in that a possessor may retain possession of the thing or instruments under his/her possession until his/her claim is satisfied. Article 320 of the Civil Act.

Pledge
A creditor may hold possession of the movables which he/she has received from the debtor or a third collateral grantor as security for his/her claim, and obtain satifaction of his claim out of the movables in preference to other creditors. Article 329 of the Civil Act.

Pledge may be created on a property right except the right to use and take the profit from the real estate. Article 345 of the Civil Act.

Mortgage
A creditor is entitled to obtain satisfaction of his/her claim in preference to other creditors out of the real estate which has been furnished by the debtor or by a third collateral grantor as security without transferring its possession. Article 356 of the Civil Act.

Keun (근/根, continuing) mortgage is created by settling only the maximum amount of the debt to be secured and reserving the determination of the debt in the future. In such case, the extinction or transfer of the debt prior to the determination of the debt cannot affect the mortgage. Article 357(1) of the Civil Act.

Chattel Mortgage
Effective from June 11, 2012, the Act on Security Interests in Movable Properties, Receivables, etc. (동산·채권등의 담보에 관한 법률) shall introduce, on the basis of electronic registration, brand-new security interests on movable properties, account receivables, and intellectual property rights (IPRs). Accordingly, there comes a new type of chattel mortgage, electronically registered movable collateral(동산담보/動産擔保), in addition to the conventional security interest such as lien, pledge, mortgage and yangdo-dambo.

Movable properties, including a number of movables or those to be acquired in the future, may be provided as collateral subject to electronic security registration. It gives rise to new conceptualization of security interest on personal properties, which is expected to benefit small- and medium sized enterprises.

At present, movable properties such as machinery and inventory may be granted as collateral in the form of the factory keun mortgage or yangdo-dambo. Once a pledge is employed, the movable property should be transferred to the possession of the creditor, placing the property no more in use.

Yangdo-dambo
Yangdo-dambo, which is created by transfering the title of the property of any kind to the creditor, has been recognized by the customary law and approved effective by the courts.

The Supreme Court has acknowledged yangdo-dambo as the fiduciary transfer of title. However, ever since the Act on Security by Provisional Registration, etc. (the "Provisional Registration Security Act") was enacted in December 1983, yangdo-dambo over the real estate or other property, which shall be effective subject to registration, regulated by the Provisional Registration Security Act has become a kind of security interest.