Vol 7 (2010) - Issue 4

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Out-of-Court Workout in the Republic of Korea: Focusing on Workout under the Corporate Restructuring Promotion Law

Introduction
Overview of insolvency law regime in Korea

The main insolvency legislation in the Republic of Korea ('Korea') is the Debtor Rehabilitation and Bankruptcy Law ('DRBL') which became effective on 1 April 2006 and consolidated several previously existing insolvency laws governing court-supervised insolvency proceedings. The DRBL sets forth three court-supervised insolvency proceedings:
(a) rehabilitation proceedings primarily for insolvent business entities, which are analogous to Chapter 11 proceedings under the U.S. Bankruptcy Code;
(b) bankruptcy proceedings for the liquidation of insolvent business entities and individuals, which are analogous to Chapter 7 proceedings under the U.S. Bankruptcy Code; and
(c) rehabilitation proceedings for individuals. In line with international efforts for harmonisation of cross-border insolvency regimes, the DRBL also includes provisions concerning cross-border insolvency, which address, among other things, the recognition and enforcement of foreign insolvency proceedings in Korea and the outbound effect of Korean insolvency proceedings.

Korea offers another insolvency-related proceeding through the Corporate Restructuring Promotion Law ('CRPL') which provides for procedures to restructure the indebtedness of a debtor company pursuant to an out-of-court workout arrangement. As discussed in further detail below, the CRPL applies only to debt owed by a company to its financial institution creditors. Further, the proceeding outlined by the CRPL is not supervised by any court and is, instead, managed by a council consisting of the financial institution creditors of the debtor company in question.

History of the CRPL
In response to the Asian currency crisis of 1997, Korean financial institutions entered into a private, multilateral umbrella agreement in 1998 under the initiative of the government aimed at speeding up the process of debt restructuring for failing companies. This agreement, which was based on financial institutions’ voluntary participation, outlined procedures for workout arrangements with respect to failing companies. However, implementation of the workouts under this agreement raised the problems of free-riding by institutions that did not participate in this agreement and delays in the amicable resolution of conflicting interests and disagreements amongst creditors. To address these problems, the government took steps in 2001 to codify the main contents of the 1998 agreement into law. As a result, the predecessor statute of the CRPL was promulgated in July 2001 with an expiration date of 31 December 2005. After this previous CRPL expired at the end of 2005, the current CRPL was enacted in November 2007 with an expiration date of 31 December 2010. The rationale behind assigning the CRPL a limited validity period stems from the fact that the statute was initially drafted to relieve the financial distress of Korean companies in times of financial crisis. Given the present economic and financial climate in Korea, the validity period of the CRPL is expected to be extended.