Insolvency proceedings

When a Korean company is unable to pay off its debts, it may apply for insolvency proceedings (도산절차/倒産節次). Under the Act on Debtor's Rehabilitation and Bankruptcy (hereinafter the "Act" 채무자 회생 및 파산에 관한 법률/債務者回生法), there are two conditions - default and overindebtedness - that insolvency preceedings shall start.

These conditions relate to the financial status of the business and have found their way into the law as valid reasons for insolvency. The reasons include failure to pay, or default (Article 305 (1) of the Act), overindebtedness (Articles 306 and 307) and, suspension of payment, especially imminent default or illiquidity. Article 305 (2) of the Act.

Key words
insolvency, bankruptcy, moratorium, principle of par condicio creditorum, discharge, corporate reorganization, debtor's rehabilitation, debtor in possession (DIP)

Korean Insolvency Regime
Before the so-called "IMF Crisis" in 1997, three insolvency-related laws regulated the insolvency proceedings - the Corporate Reorganisation Act (회사정리법/會社整理法), the Composition Act (화의법/和議法) and the Bankruptcy Act (파산법/破産法). In other words, there were three entrances to the insolvency proceedings, i.e., corporate reorganisation similar to Chapter 11 of the US Bankruptcy Code, composition, and bankruptcy.

However, the conditions and procedures of these proceedings were so complicated and eroded the relevancy of, and the flexibility between, the proceedings. After years of legislative preparation financed by the World Bank, the new insolvency law, which consolidated three entrances into one gate with two exits of rehabilitation or bankruptcy in the name of the Act on Debtor's Rehabilitation and Bankruptcy, was finally adopted in March 31, 2005 and came into force on April 1, 2006.

In the meantime, the Personal Debtor Rehabilitation Act (개인채무자회생법/個人債務者回生法) was enacted in March 2004 (Act No. 7198) and implemented for the period from September 23, 2004 to March 31, 2006, to handle efficiently the personal bankrupcy cases. Thereafter, this repealed Act was incorporated into the Act on Debtor's Rehabilitation and Bankruptcy.

Principle and Purpose of the Act
An insolvency law is a part of the law of enforcement and so regulates the coordinated, comprehensive enforcement on the assets of the debtor for all creditors. The essential purpose of Korean insolvency law is the satisfaction of the creditors. This primary aspect of the enforecement is limited only to a smaller extent by the principles protecting the debtor.

Recent Developments
Since its entry into force, the Act has been on the legislative agenda for improvement of the status quo.

In an attempt to capture going concern value, modern insolvency systems have developed procedures that, rather than simply liquidate the corporation's assets, provide mechanisms to reorganize or sell the on-going business as a whole. What is at issue is whether to adopt the concepts of automatic stay and absolute priority rule into the rehabilitation procedures.

Framework of the Act
The insolvency proceedings are stipulated in the following articles of the Act:
 * General provisions: Articles 1-33
 * Rehabilitation procedures: Articles 34-293
 * Bankruptcy procedures: Articles 294-578
 * Personal rehabilitation procedures: Articles 579-627
 * International bankruptcy: Articles 628-642
 * Penal provisions: Articles 643-660.