REPUBLIC OF KOREA Special Rehabilitation Proceedings for MSMEs

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1 REPUBLIC OF KOREA Special for MSMEs Ministry of Justice, Republic of Korea I. Court-Supervised Insolvency in Korea 1. Types of the Insolvency The principal insolvency legislation in the Republic of Korea ( Korea ) is the Debtor Rehabilitation and Bankruptcy Act ( DRBA ) which became effective as of April 1, 2006 as a new consolidated insolvency law. The DRBA provides for the following court-supervised insolvency proceedings: (a) (b) (c) rehabilitation proceedings for all types of debtors (mainly for corporate debtors) ( ); summary rehabilitation proceedings for rehabilitation of small business debtors (including corporations and individuals) ( Summary ); individual rehabilitation proceedings for individuals owing small amount of debt and having the possibility of earning business income or salary income (Individual 1

2 (d) (e) ); bankruptcy proceedings for liquidation of the assets of all types of insolvent debtors ( Bankruptcy ); and proceedings for cross-border insolvency (legislating the UNCITRAL Model Law on Cross-Border Insolvency) The Individual (for individuals earning business income) and the Summary may be categorized as proceedings specifically designed to support rehabilitation of micro, small and medium-sized enterprises ( MSMEs ). 1 While the Individual have been available since 2004, 2 the Summary were newly introduced by the recent amendment of the DRBA (effective from July 1, 2015) in order to expand the support for rehabilitation of MSMEs. 2. Comparison of the Basic Structures The basic structure of each insolvency proceeding is as follows: Eligible Debtors Types Maximum Debt Subject Claims / Interests Payment Period under the Plan Voting on the Plan Discharge (General) Rehabilitation all types of debtors (mainly for corporations) N/A secured claims/ unsecured claims / (if applicable) equity interests up to 10 years (in principle) Yes effective upon court s approval of the plan Summary Rehabilitation small business debtors (including corporations/ individuals) KRW 3 billion (US$ 3 M) Same as above 1 Under the DRBA, in the case of bankruptcy proceedings, simplified procedures may be applied in the case where the bankruptcy estate is insufficient to cover the bankruptcy costs or where the amount of the assets belonging to the bankruptcy estate is less than 500 million Korean Won (approximately, US$500,000). 2 The former Individual Debtors Rehabilitation Act, which governed the Individual, was repealed and consolidated into the DRBA as of April 1,

3 Individual Rehabilitation individuals earning business income/ salary income secured debt: KRW 1 billion (US$ 1 M) unsecured debt: KRW 500 million (US$ 0.5 M) unsecured claims up to 5 years No effective upon court s discharge order, in principle, after completion of payment under the plan Bankruptcy (insolvent liquidation) all types of debtors N/A unsecured claims N/A N/A (for individuals) effective upon court s discharge order II. Individual 1. Eligible Debtors The Individual are available for the rehabilitation of individuals who are insolvent or near insolvency. Only debtors who owe a small amount of debt, i.e., secured debts not exceeding 1 billion Korean Won (approximately, US$ 1 million) and unsecured debts not exceeding 500 million Korean Won (approximately, US$ 500,000), and who are expected to earn salary income or business income continuously or repeatedly in the future, are eligible for a petition for Individual. 2. Simplified The Individual are simplified proceedings similar to Chapter 13 proceedings of the U.S. Bankruptcy Code. Only the debtor is entitled to petition for commencement of the proceedings. The proceedings are commenced by the court s commencement order. Preservation and stay orders are available during the gap period between the petition and commencement. Unlike the Summary Rehabilitation (and the U.S. Chapter 13 proceedings), only unsecured pre-commencement claims are subject to the proceedings and repaid pursuant to the court-approved plan. In principle, secured claims are not subject to the proceedings. 3 The debtor remains in control of the insolvency estate. 3 While foreclosure of security may be temporarily stayed during the gap period between the petition and commencement and shall be automatically stayed during the period from the commencement of the proceedings 3

4 Reporting of claims by creditors is not required; instead, the debtor is required to submit a list of claims to the court. If a pre-commencement claim is not stated in such list of claims, such claim will not be subject to the proceedings. 4 Creditors voting on the plan is not required and the plan becomes effective when the court approval is obtained. The repayment period under the plan shall not exceed 5 years from the commencement of the payment of debt under the plan. The plan must meet requirements under the DRBA, including the payment to the creditors of at least the liquidation value of their respective claims and the use of the debtor s entire disposable income for the payment due under the plan. 3. Rehabilitation Commissioner As soon as possible after the petition has been filed, the court appoints the rehabilitation commissioner. The rehabilitation commissioner performs, under the supervision of the court, the duties specified in the DRBA, which include, among others, investigation of the debtor s property and income, administration of the creditors meeting, participation in the avoidance actions, recommendation to the debtor on the preparation of the draft plan and monitoring of the debtor s implementation of the plan. For the debtors earning salary income, usually a qualified court official is appointed as the rehabilitation commissioner to whom no fee is paid in principle. On the other hand, for the debtors earning business income, (i) during the period until the court s approval of the plan, usually an outside professional (e.g., individual CPA) is appointed as the rehabilitation commissioner to whom a very small fee (usually less than US$ 200) is paid by the debtor and (ii) during the period after the court s approval of the plan, a qualified court official is appointed as the rehabilitation commissioner to whom no fee is paid in principle. 4. Discharge The debtor s liabilities for unsecured pre-commencement claims (other than certain specified categories of debts) may be discharged by obtaining a separate discharge order from the court, in principle, after completion of payment due under the plan. 5. Procedures and Statutory Timeline In general, the Individual proceed as follows: until the court s approval of the plan, there is no restriction on foreclosure of security after the court s approval of the plan. 4 If the debtor deliberately does not state a pre-commencement claim(s) in such list of claims, the court may refuse to discharge the debtor s liabilities for the entire pre-commencement claims. 4

5 Procedures Debtor s petition for commencement (including submission of the list of claims, among others) Appointment of the rehabilitation commissioner Court s preservation/stay orders Debtor s filing of draft plan Court s commencement order Objection to the list of claims by the creditors Creditors meeting for briefing on, and objections to the plan (voting on the plan not required) Court s approval of the plan Payment under the plan (monitored by the rehabilitation commissioner) Discharge of pre-commencement debts (except for certain specified categories of debts) [Note: * may be extended by the court with cause] Statutory Timeline within 14 days from petition* within 1 month from petition between 2 weeks 2 months from commencement* between 2 weeks 1 month thereafter (no later than 3 months from commencement)* No longer than 5 years from the first payment under the plan In principle, after completion of payment under the plan III. Summary 1. Amendment of the DRBA in 2014 (Effective from July 1, 2015) 1.1 Challenges for MSMEs pursuing rehabilitation (1) Limited availability of the Individual As the Individual are available only to individuals, a corporate MSME could not use such proceedings. Further, the threshold amount of debts required for access to such proceedings were too low to cover a sufficient number of MSMEs who are individuals. (2) Burdens in using the In general, the were considered burdensome to the MSMEs (whether they are corporate or individual debtors) in terms of procedures and costs because such proceedings were originally designed for rehabilitation of large-sized corporate debtors. 5

6 1.2 Legislative Purposes The Ministry of Justice of Korea took the initiative to amend the DRBA in order to newly introduce streamlined rehabilitation proceedings for the MSMEs, which include both corporate and unincorporated debtors. As a result, the new Summary were introduced by the amendment of the DRBA in December 2014, which became effective from July 1, The legislative purposes focused on (i) providing simplified and low-costs procedures for rehabilitation of MSMEs as compared to the general, and (ii) expanding the scope of the small business debtors who may use the simplified proceedings as compared with the Individual. 2. Overview of the Summary The Summary are a kind of which are governed by chapter 2 of the DRBA. The newly added sub-chapter 9 of chapter 2 provides for the special features of the Summary. Except as provided in sub-chapter 9, the Summary are subject to the provisions of the DRBA which apply to the. 2.1 Common Features with The goal of the (including the Summary ) is to rehabilitate debtors who are insolvent or near insolvency by restructuring their debt pursuant to the plan accepted by the interested parties and approved by the court. The are similar to Chapter 11 proceedings of the U.S. Bankruptcy Code. The proceedings are commenced by the court s commencement order. Preservation and stay orders are available during the gap period between the petition and commencement. Both unsecured and secured pre-commencement claims as well as equity interests are subject to the proceedings and repaid or restructured pursuant to the courtapproved plan. The plan may call for a rescheduling of the debtor s debts over a period not exceeding 10 years, in principle. 2.2 Discharge In the (including the Summary ), the debtor s liabilities for pre-commencement claims (other than certain specified categories of debt) which are not recognized in the court-approved plan shall be irrevocably discharged. Such discharge shall become effective upon approval of the plan by the court. Therefore, debtors using the Summary would be in a better position than debtors under the Individual. In the latter proceedings, 6

7 the debtor may petition for the discharge of the pre-commencement debts, in principle, only after completion of payment under the plan. 2.3 Special Features The Summary have, among others, the following special features: Eligible debtors The Summary are available to small business debtors, including individual and corporate enterprises, if the total amount of the pre-petition debts owed by the debtor does not exceed 3 billion Korean Won (approximately US$ 3 million). Under the DRBA, this threshold amount of debts may be increased up to 5 billion Korean Won (approximately, US$ 5 million) by amending the Presidential Decree. 5 Petition for commencement of the proceedings Only the debtor is entitled to petition for commencement of the proceedings. The causes for commencement and those for rejection of the petition are the same as for general Rehabilitation, except that the petition will be rejected if an individual debtor has a record of having obtained a discharge within the past 5 years. No appointment of a Trustee In the case of a general Rehabilitation Proceeding for a corporate debtor, in principle, a chief executive officer (or a director) is appointed as a trustee. In a Summary Rehabilitation Proceeding, however, in principle, a trustee is not appointed and the debtor s representative (or the debtor itself if the debtor is an individual) shall be deemed as the trustee. No creditors committee Organization of a creditors committee may be omitted. Simplified examination procedures reduction of court costs In a Rehabilitation Proceeding, upon commencement of the proceeding, the court appoints an examiner who performs, among others, examination of the business and property of the debtor and submits an opinion on whether it is appropriate to continue the Rehabilitation Proceeding. As compared with a general Rehabilitation Proceeding, in a Summary Rehabilitation Proceeding, the examination by the court-appointed examiner of the debtor s business and property and the examiner s report thereon may 5 Under Article 293-2, Paragraph 2 of the DRBA, the aggregate amount of secured and unsecured pre-petition debts owed by the debtor shall not exceed the amount prescribed by the Presidential Decree within the limit of 5 billion Korean Won. Currently, Article 15-3 of the Presidential Decree of the DRBA prescribes 3 billion Korean Won as such amount. 7

8 be made in simplified form and substance. 6 In the case of a corporate MSME, as a result of introducing such simplified examination procedures, usually an individual accountant (CPA) is appointed and the amount of the fees payable to the examiner has been substantially reduced, on average, to an amount ranging from 3 million Korean Won (approximately, US$ 3,000) to 5 million Korean Won (approximately, US$5,000). In a general Rehabilitation Proceeding for a corporate debtor, the amount of the fees payable to the examiner ranges, depending upon the size of the debtor s assets, from 15 million Korean Won (approximately, US$ 15,000) to 120 million Korean Won (US$ 120,000). For an MSME who is an individual, usually a qualified court official is appointed as the examiner, to whom no fee is payable in principle. Relaxed requirement for creditors acceptance of the plan Among the requirements for acceptance of the plan by the interested parties, the requirement applicable to the class of unsecured creditor has been relaxed. 7 In addition, even if the plan is not accepted by all classes of creditors, the court may still implement a kind of cram-down to approve the plan subject to the satisfaction of certain conditions under the provisions of the DRBA generally applicable to a Rehabilitation Proceeding. Conversion to a general Rehabilitation Proceeding In order to avoid wasting time and to minimize costs, even if the commencement of a Summary Rehabilitation Proceeding is rejected (e.g., for the reason that the total amount of pre-petition debts exceeds the specified threshold amount), a general Rehabilitation Proceeding may be commenced if the debtor wishes so and the requirements for commencement of such proceeding are met. 3. Seoul Bankruptcy Court s Practice 3.1 Establishment of the Bankruptcy Court Korea recently changed its court system to newly introduce bankruptcy courts which exclusively handle the insolvency cases and related disputes. As of March 2, 2017, the Seoul Bankruptcy Court (in replacement of the former Seoul Central District Court) was newly established as the first bankruptcy court in Korea. The Seoul Bankruptcy Court (currently having 35 judges) has jurisdictions over the insolvency cases in Seoul, all cross-border insolvency cases and certain large-sized regional cases. It is expected that the specialized bankruptcy court system will make significant contributions to the further improvement of Korean insolvency law practices. In the regions other than Seoul, however, bankruptcy courts have not yet been established and the insolvency cases in such regions are handled 6 The Supreme Court s Regulations provide for the simplified manner for the performance of the examiner s duties in a Summary Rehabilitation Proceeding. 7 The plan is deemed to be accepted by the class of unsecured rehabilitation creditors if either (i) at least twothirds by amount of the unsecured creditors or (ii) more than one-half by amount and more than one-half by number of the unsecured creditors, have accepted the plan. 8

9 by the ordinary courts as before. 3.2 Concentration of the cases and parallel conduct of personal rehabilitation cases for enterprise owners For efficiency and harmonization of the court procedures of the Summary for corporate MSMEs (including corporations and other juridical entities), the Seoul Bankruptcy Court is now operating two panels of judges to whom all Summary for corporate MSMEs are assigned. 8 The judges belonging to these panels also handle general Rehabilitation for the owners/management of corporate MSMEs which are petitioned mainly due to the personal guarantee obligations owed by such owners/management. 3.3 Streamlined and fast procedures The Summary omit or simplify certain procedures applied to general. For instance, (i) a trustee is not appointed and the debtor s representative shall be deemed as the trustee; (ii) the examiner s duties and its examination process are simplified in Summary ; (iii) organization of a creditors committee is omitted; and (iv) the interested parties meeting for the briefing of the debtor s business and property is omitted and, in principle, is replaced with the notification of the material information to the interested parties. The progress of the Summary and the timelines that are applied pursuant to the provisions of the DRBA and the standard practice of the Seoul Bankruptcy Court, respectively, are as follows: Procedures Timeline Statutory Practice 9 Petition for commencement D Preservation/stay orders no later than 7 days from petition D D+3 Commencement order (including the appointment of the examiner) within 1 month from petition D+14 Filing of schedules (lists of claims and 2 weeks 2 months equity interests) by the debtor from commencement* D+28 Reporting of claims by creditors 1 week 1 month (if necessary) from the last day for filing of schedules* D+35 8 In Korea, all types of rehabilitation cases for corporations and other juridical entities are handled by a panel comprised of three judges. All types of rehabilitation cases for individuals are handled by a single judge. 9 This is a standard timeline applied by the Seoul Bankruptcy Court and the timelines of the actual cases may differ depending upon complexity of the cases and cooperation of the debtors. 9

10 Verification of Claims Submission of examination report to the court by the examiner Notification of material information to the interested parties Submission of draft plan Interested parties meetings (consolidated) for deliberations and voting on the Plan Court s approval of the plan (discharge being effective) Commencement of payment under the plan 1 week 1 month from the last day for reporting of claims* no later than 4 months (or 2 months if the debtor is an individual) commencing from the last day for verification of claims* the plan must be accepted within 1 year from commencement* (extendable by up to 6 months) appealable within 14 days D+42 D+56 D+63 D+70 D+ 98 D+98 Court s conclusion order (successful exit from the proceedings) [Note: * may be extended by the court with cause.] As seen in the above table, if standard timelines are successfully applied, the court s approval for the plan may be granted within approximately 100 days from the petition. The time period from the court s approval of the plan until the court s issuance of a conclusion order (for the successful exit) may differ depending upon the circumstances of each case; however, the court pays close attention to expediting the debtor s successful exit from the proceedings Under the DRBA, once payment under the plan has been commenced, the court may, upon petition by an interested person or at its discretion, issue a conclusion order, formally closing the proceeding, unless there is an impediment to the implementation of the plan. 10

11 IV. Statistics of the Recent Rehabilitation Proceeding Cases Provided below are statistics of the nation-wide rehabilitation proceeding cases pending during the period from July 1, 2015 (the date when the Summary became available for the first time) until March 31, Number of Petitions 1.1 Entire rehabilitation cases (Nation-wide; July 1, 2015 March 31, 2017) Debtors Number of Petition (General) Corporations 11 1,153 Individuals 932 Corporations Summary (small business debtors) 472 Individuals (small business debtors) 431 Individual Individuals (business income) 14,973 Individuals (salary income) 144,366 Total 162, Rehabilitation cases for corporations (Nation-wide; July 1, 2015 March 31, 2017) Debtors Proportion (General) Corporations 71% (1,153) Summary Corporations (small business debtors) 29% (472) Total 100% (1,625) 11 The term corporations used in this Section IV includes corporations and other juridical entities. 11

12 1.3 Rehabilitation cases for individuals (Nation-wide; July 1, 2015 March 31, 2017) Debtors Proportion (General) Individuals 0.58% (932) Summary Individuals (small business debtors) 0.27% (431) Individual Rehabilitation Individuals (business income) 9.32% (14,973) Individuals (salary income) 89.83% (144,366) Total 100% (160,702) 2. Average period from petition until court s approval of the plan (Nation-wide; July 1, 2015 March 31, 2017) (General) Summary Rehabilitation proceedings Debtors Corporations Individuals Corporations Individuals Average period from petition to court s approval of the plan 274 days (Seoul: 222) 243 days (Seoul: 198) 172 days (Seoul: 119) 207 days (Seoul: 170) Individual Individuals 285 days (business income) [* Seoul : based on the cases handled by the former Seoul Central District Court (July 1, 2015 February 28, 2017) and the Seoul Bankruptcy Court (March 2, 2017 March 31, 2017)] 12

13 3. Success rates of commencement and plan approval/discharge (General) Summary Individual (Nation-wide; July 1, 2015 March 31, 2017) Debtors Approximate Approximate rates of rates of plan approval/discharge commencement (compared with the (compared with number of the number of commencements) 13 petitions) 12 Corporations 67.1% (90.0%) 52.0% Individuals 70.0% (93.5%) 47.9% Corporations 74.6% (91.9%) 50.4% Individuals 70.3% (94.2%) 46.9% Individuals 86.0% (plan approval) x (business 82.8% (86.8%) 42.7% (estimated income) discharge rate) = 36.7% 14 V. Concluding Remarks It appears that introduction of the Summary have been quite helpful for efficient rehabilitation of MSMEs in financial distress. The statistics indicate that these streamlined, fast and low-cost procedures (in particular, for corporate MSMEs) are functioning well and that they are being used extensively in practice. Further, we expect substantial further improvements in the efficiency of insolvency law practice in Korea as a result of the introduction of the new Bankruptcy Court system. 12 Success rate of commencement = number of commencements (number of commencements + number of rejections on the merits + number of voluntary withdrawals, etc.). If only the court s rejection on the merits is considered, the success rates of commencements increase as indicated in the parentheses. 13 Success rate of plan approval = number of approvals (number of approvals + number of disapprovals, etc.) 14 During the period from July 1, 2015 until March 31, 2017, the average plan approval rate in the Individual for business income earners (as compared with the commenced cases) was approximately 86%. Further, during the same period, the average discharge rate of the plan-approved cases for both business income earners and salary income earners was approximately 42.7%. 13

14 10 years have passed since the DRBA became effective as the consolidated insolvency law of Korea. Since then, a number of amendments have been made to the DRBA from time to time on a piecemeal basis, and it is now time to review the overall application and effectiveness of the DRBA to the insolvency law practice and identify the areas in the DRBA which require further legislative improvements. Such improvements have been under deliberations by a special committee which was organized by the Ministry of Justice last year. 14