58 IFLR/September 2009 www.iflr.com

Co-published section: South Korea

As the Korean economy hasdeveloped, Korean companieshave become moreinternational, expanding their

operations outside Korea to seekopportunities in today’s globalisedeconomy. When such companiesexperience financial difficulties and seekdebtor protection under the rehabilitationproceeding or bankruptcy proceeding, thetwo court-supervised insolvencyproceedings under Korean law (KoreanInsolvency Proceedings), they may alsoneed to seek protection of their assets andinterests outside of Korea.

The simplest and most cost-efficient wayof obtaining such protection is usuallythrough recognition of the KoreanInsolvency Proceedings in foreignjurisdictions. We discuss below thestatutory basis under which a Koreandebtor may seek recognition in foreignjurisdictions of its Korean InsolvencyProceeding and explore some of the issuesthat may arise in connection with thecourts in the relevant foreign jurisdictions.

It should be said that cases of Koreancompanies seeking such recognition haveso far been very rare. However, Kim &Chang represented Daewoo, which soughtrecognition of its Korean bankruptcyproceeding from the court in the US, and

Samsun Logix, the first Korean companythat sought recognition of a Koreanrehabilitation proceeding in multipleforeign jurisdictions, including the US,UK, Australia, Singapore, Belgium andothers. Our discussion below is based inpart on our practical experiencesrepresenting Korean companies inconnection with their efforts to obtainrecognition abroad of their KoreanInsolvency Proceedings.

Statutory basisUntil the Debtor Rehabilitation andBankruptcy Law (DRBL) became effectivein 2006, introducing various measuresrelating to international bankruptcy toKorea’s insolvency regime, Koreamaintained the principle of strictterritoriality. (Under Article 4 of the oldCorporate Reorganization Law and Article3 of the old Bankruptcy Law, theinsolvency proceedings presided over byKorean courts were only applicable toassets within the territory of Korea).

By promulgating the DRBL, Koreaadopted the modified principle ofuniversality based on the Uncitral ModelLaw on Cross-border Insolvency. Underthe DRBL, a Korean InsolvencyProceeding may affect the debtor’s assets ina foreign country, if and to the extent the

Korean Insolvency Proceeding isrecognised and enforced in that country. Insome jurisdictions, such recognition maybe nearly automatic, but more frequentlyan additional proceeding is required (forexample in the US, Chapter 15 of theBankruptcy Code permits a foreignrepresentative to seek recognition by a UScourt of a foreign insolvency proceeding).Article 640 of the DRBL provides a basisfor seeking such relief in the foreignjurisdiction by providing that a receiver,bankruptcy trustee or any other personapproved by the court is authorised to actin a foreign country for the benefit of aKorean Insolvency Proceeding aspermitted by the applicable foreign laws.

Under the authority of Article 640, arepresentative of the Korean proceeding,such as the receiver of the debtor companyin a rehabilitation, may petition a foreigncourt for recognition and enforcement ofthe Korean proceeding in the foreigncountry in which the debtor company’sassets or interests are located. If the foreigncourt recognises and enforces the Koreanproceeding, payment out of the debtor’sassets situated in the foreign countryshould be governed by and subject to theKorean Insolvency Proceeding to theextent recognised and enforced by suchforeign court. So the DRBL provides arelatively simple but powerful tool forseeking protection abroad.

Why seek recognition?Generally, a Korean debtor company maybe interested in seeking recognition of theKorean Insolvency Proceeding in a foreignjurisdiction because it has or will havevaluable assets there (for example amanufacturing company that has tradereceivables in foreign countries or ashipping company whose vessels are or willbe making port calls in foreign countries),or because legal actions are pending orthreatened in the foreign jurisdiction.Although the DRBL provides for a stay ofcreditors’ actions upon thecommencement of an insolvencyproceeding in Korea, in cases where thedebtor’s foreign assets are particularlyvaluable (for example, seafaring vesselswould be the principal assets in case of ashipping company), it may be practicallyimpossible to successfully proceed with theKorean Insolvency Proceeding without theprotections granted by recognition of it inthe relevant foreign jurisdictions sincedepletion of such core assets throughcreditors’ enforcement actions wouldhinder the company’s ability to restructureits business and prevent a fair distribution

“It should be said that cases of Koreancompanies seeking such recognition haveso far been very rare”

Recognition ofinsolvency abroadSecuring rehabilitation at home can just be the first step fora Korean company in trouble. By Jin Yeong Chung andMilosz Zurkowski, Kim & Chang

www.iflr.com IFLR/September 2009 59

of the assets to all its creditors.A possible alternative to a recognition

proceeding is for the receiver, bankruptcytrustee or any other person approved bythe court to commence a parallelinsolvency proceeding in the foreignjurisdiction, but this may not be soattractive when several factors areconsidered. First, a parallel proceedingtakes more time and is much more costlythan a recognition proceeding.Furthermore, a parallel foreign insolvencyproceeding may require appointment of athird party as the administrator rather thanthe incumbent management and cedingcontrol over the debtor company’s assets inthe foreign jurisdiction to thatadministrator. This may be contrary to theprovision of Article 74 of the DRBL whichin principle requires the court to appointthe existing management as receiver.Finally, there is a potential risk that aparallel foreign proceeding may causeconfusion or unwanted consequences iftreatment of creditors is different thanunder the Korean Insolvency Proceeding interms of admission of claims, voting rightsand approval requirements for therehabilitation plan or its equivalent.

Timing is of the essenceThe timing of filing a petition forrecognition is critical because the debtorcompany may be vulnerable in the foreignjurisdiction if the commencement of aKorean Insolvency Proceeding becomespublic prior to the recognition of theProceeding abroad. Before the relevantforeign courts grant the requested debtorprotection, creditors may try to takeunilateral actions to enforce their claimsafter seizing the Korean debtor’s valuableassets in the foreign jurisdiction. Suchattachments may later cause thorny issuesfor the debtor even if recognition issubsequently granted, and they couldseriously impair the orderly processing ofthe Korean Insolvency Proceeding.Accordingly, receiving recognition asquickly as possible in the jurisdictionwhere key assets are located may beessential to the company’s business.However, the need to promptly file apetition for recognition of the KoreanInsolvency Proceeding must be balancedagainst the potential risks of rejectionbecause it was filed too early withoutsufficient basis.

Article 49 of the DRBL provides that thecourt has up to one month to decidewhether or not to approve thecommencement of the rehabilitationproceeding and appoint a receiver after the

filing of the petition. During this interimperiod the incumbent managementremains responsible for management of thedebtor. The problem that frequently arisesis that courts in many jurisdictions,including the US, tend to regard only areceiver appointed by the Korean court (orbankruptcy trustee in the case of abankruptcy proceeding) as therepresentative of the company that canseek recognition from a foreign court, andmay be reluctant to grant recognitionapplied for by the incumbent managementbefore the appointment of a receiver. Thiscan delay the application for recognition ofthe Korean Insolvency Proceeding untilthe commencement order is issued by theKorean court, which can take an entiremonth. Moreover, if the regulationsgoverning the recognition process of aforeign insolvency proceeding are not wellorganised or developed, or if recognitionproceedings are rare in the foreignjurisdiction, the process can takeadditional weeks or months. (For example,

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.

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.

Author biographies

“The timing of filing is criticalbecause the debtorcompany may bevulnerable in theforeign jurisdictionif the Proceedingbecomes public”

Co-published section: South Korea

60 IFLR/September 2009 www.iflr.com

Samsun Logix’s recent recognition petitionin Belgium was apparently the first suchpetition presided over by the Belgianjudge, and he reviewed the novel issues forquite some time before finally recognisingthe Korean Insolvency Proceeding.)

As a potential means of accelerating theprocess, it can be worthwhile to explorethe possibility of seeking recognition onthe basis of certain interim orders that maybe issued by the Korean court after thepetition for a Korean InsolvencyProceeding is received but before thecommencement order is issued. Suchorders include the order to appoint aninterim receiver, stay orders, including acomprehensive stay order, and apreservation order that prohibitsrepayment of debt, making borrowings,and disposing of the assets of the debtor,without the approval of the court. If theforeign court is willing to issue recognitionbased on such interim orders, however, itmay also later require a further recognitionproceeding once the commencement orderis issued.

A further consideration that may affecthow quickly recognition is received is that,under Article 61 of the DRBL, the receiveror bankruptcy trustee needs to obtain priorcourt approval before making any paymentin excess of a certain amount as decided bythe court, and it can sometimes take aslong as a week or two. Accordingly, it isimportant to plan the recognition processcarefully so that there is sufficient time tocoordinate with the Korean court toreceive the relevant approvals if anypayment exceeding the court-determinedthreshold is required in relation to therecognition proceeding, includingpayment to foreign counsel for their adviceabout the recognition proceeding.

Effect of recognition Although the specific effects of recognitionmay vary from jurisdiction to jurisdiction,the most important issue from the debtor’sperspective will be whether the recognitionprovides immediate and sufficientprotection against creditors’ attempts toenforce their claims against the debtor’sassets. An immediate comprehensive stayorder, which prohibits creditors fromtaking legal actions against the debtor andits assets, is the typical relief sought by adebtor. If a stay is gained by virtue of therecognition, the next questions would bewhether it will remove the attachmentsthat had been already made prior to therecognition and whether foreign creditorswill be bound by the Korean InsolvencyProceeding. Such questions are particularly

relevant in the case of a debtor subject to arehabilitation proceeding that aims to savethe debtor company from going out ofbusiness through restructuring of its debts.Such debtor will want to know whether itwill eventually be freed from its old debtsnot only in Korea but also in the foreignjurisdictions where its assets are located.Uncertainty may hinder the debtor’s abilityto prepare and present a rehabilitation planthat treats all creditors equally.

Article 131 of the DRBL provides that,in a rehabilitation proceeding all securedand unsecured creditor claims (except forcertain preferred claims which are payablewhen due) can only be satisfied through therehabilitation plan approved by the court.Because claims not contained in therehabilitation plan are discharged, creditorsthat fail to file their claims pursuant to theDRBL are permanently prevented fromseeking to bring them after therehabilitation plan has been approved. Tostop creditors avoiding filing their claims inthe Korean rehabilitation proceeding andlater applying for a lifting of the stay topress their claims against the company’sassets in the foreign jurisdiction after thedebtor has emerged from the rehabilitationproceeding, the debtor will want to verifythe scope and effect of the recognition inthe foreign jurisdiction. Particularly, it willbe important to know whether the stay willbe permanent and whether creditors in theforeign jurisdiction will also be bound bythe Korean rehabilitation plan or, if not,what further measures may need to betaken to bind such foreign creditors. (In theU.K., a series of cases seem to conclude thata creditor’s rights under an English lawcontract will not be affected by foreigninsolvency law unless the creditor has insome way participated in and assented tothe foreign insolvency proceedings so as tobecome bound by the laws of the countrywhere those proceedings have beencommenced.)

The issue of whether or not the debtor isgranted a stay, the scope of the stay, andthe further effects of recognition willdepend on the laws of the particularjurisdiction. However, the nature of theprotections afforded to the Korean debtorunder the DRBL can be relevant todetermining such effects of the recognitionbecause the foreign court will often grantthe same or similar protections as areavailable under the Korean InsolvencyProceeding and may be reluctant inprinciple to grant more protection thancould be obtained in Korea. So the foreigncourt often requests from the debtorevidence or affidavits about various aspectsof the Korean Insolvency Proceeding.

The other issue for the debtor is theeffect of the recognition on new andexisting creditor attachments. Since underthe DRBL, a commencement order willprevent new attachments from being leviedbut will not automatically dissolve existingattachments, the Korean debtor canusually expect the same effect in theforeign jurisdiction with respect to creditorattachments. This will usually mean thatsome additional procedure to release seizedor frozen assets in the foreign jurisdictionmay be required after recognition isgranted. In connection therewith, Article44 of the DRBL provides that the receivermay petition the court for a cancellationorder with respect to a specific attachmentin order to have the attachment lifted. Asimilar motion or petition may need to befiled, if possible, in the foreign jurisdictionif any assets were attached or seized priorto the recognition.

While recognition of the KoreanInsolvency Proceeding is the necessary firstmeasure for achieving the debtor’s aim ofprotecting its assets in the foreignjurisdiction, it can sometimes set the stagefor further legal battles to free the debtor’sassets if they have been previously seized bycreditors in that jurisdiction.

Co-published section: South Korea

“Recognition of the Proceeding can sometimes set the stage for further legalbattles to free the debtor’s assets”