1. Insolvency Law and Practices in Korea Business Law Asia & In-House Summit June 2009 Sang-goo Han

2. 2 1. Insolvency Law in Korea Insolvency Law in Korea: Debtor Rehabilitation and Bankruptcy Act (the “DRBA”) Insolvency proceedings under the DRBA a.reorganization proceeding b.liquidation proceeding c.rehabilitation proceeding for individual debtor with regular income

3. 3 2. Reorganization Proceeding (1)Summary of the Process ① Filing an application for commencement of the reorganization proceeding ② Court order for provisional measures ③ Court order commencing the reorganization proceeding ④ Claim report and investigation ⑤ Submission of the reorganization plan and resolution to adopt the proposed plan at the meeting of interested parties ⑥ Court order for confirmation of the plan ⑦ Implementation of the confirmed plan and conclusion of the reorganization proceeding

4. 4 2. Reorganization Proceeding (2) Classification of claims under the reorganization proceeding a.Claims for common interest b.Secured reorganization claim c.Unsecured reorganization claim Claims for common interest –Specifically provided in the DRBA: claims originating from an act of the administrator of the debtor company after the commencement of the reorganization proceeding, the wage claims of employees, and so on –Not affected by the reorganization proceeding –Repaid by the debtor company from time to time –Priority in the repayment over secured or unsecured reorganization claims

5. 5 (2) Classification of claims under the reorganization proceeding Unsecured reorganization claim –Unsecured claims whose cause existed prior to the commencement of the reorganization proceeding –Loans provided by the financial institution without security, claims originating from commercial transactions, etc. –Repaid in accordance with the reorganization plan (total amount of repayment shall not be less than the amount that the creditor would receive if the debtor was liquidated under a liquidation proceeding) –Subordinate to secured reorganization claims Secured reorganization claim –A reorganization claim secured by a property of debtor company –Repaid in accordance with the reorganization plan (total amount of repayment shall not be less than the amount that the creditor could collect by exercising its security right) –Exercise of a security right is prohibited upon the commencement of the reorganization proceeding 2. Reorganization Proceeding

6. 6 (2) Classification of claims under the reorganization proceeding Report of claims –Claims for common interest: not required Secured reorganization claim: required Unsecured reorganization claim: required –The period for filing report of claims set by the court: usually 3~4 weeks –Effect of failure to file claim report: forfeiture of unreported rights 2. Reorganization Proceeding

7. 7 (3) Repayment in accordance with the reorganization plan –Reorganization plan provides the terms of, and the schedule for, the repayment of each claim –Typically includes discharge of debts, debt-to-equity swap, and cash repayment of debts in installments –(Example) the amount of an admitted claim: USD 100 Discharge: 20% (USD 20) of the total debt amount Debt-to-equity swap: 30% (USD 30) of the total debt amount Cash repayment in installments for five years: remaining 50% (USD 50) of the total debt amount –Claims originating from ordinary commercial transactions: usually provided with more favorable repayment conditions than other unsecured claims such as loans extended by financial institutions

8. 8 2. Reorganization Proceeding (4) Administrator –Represent the debtor company –Has the authority to execute legal instruments or act on behalf of the debtor company –Appointed by the court –Who shall be appointed as the administrator? ① The current representative director of a debtor company (in principle) ② A third party ③ Co-administrators (in case of a large company)

9. 9 2. Reorganization Proceeding (5) Court approval for important actions of a company under reorganization –sale or purchase of properties –borrowing of funds –execution of contracts –filing of lawsuits –execution of settlements, etc.

10. 10 3. Liquidation Proceeding under the DRBA (1) Petition for bankruptcy declaration –A petition for bankruptcy declaration is required to be submitted to a court –Either a debtor company or a creditor thereof may submit a petition for bankruptcy declaration. –No automatic stay by submission of such a petition. Automatic stay: automatic injunction which prohibits individual actions by creditors to collect debts. –The court order declaring bankruptcy of a debtor in response to a petition  Commencement of the liquidation proceeding under the DRBA  Effect of prohibition of individual actions by creditors

11. 11 3. Liquidation Proceeding under the DRBA (2) The court order declaring bankruptcy of a debtor –Requirement for bankruptcy declaration: ① the debtor is insolvent; or ② the debtor’s debts exceed its assets. –Usually rendered in one or two months from the date of filing a petition for bankruptcy declaration (3) Trustee –A lawyer is appointed by the court as the trustee –Has the authority to perform all actions for the bankruptcy estate including disposition of properties, collection of claims, filing of lawsuits, and so on

12. 12 3. Liquidation Proceeding under the DRBA (4) Types of claims Claims for estate –Identified and listed in the DRBA: tax claims, employees’ wages, and expenses necessary for bankruptcy proceedings, etc. –Not affected by commencement of liquidation proceeding and repaid from time to time –Repaid prior to bankruptcy claims Bankruptcy claims –Claims whose causes occurred prior to the bankruptcy declaration and not secured by any lien or collateral (unsecured claims) –Only partially repaid through the distribution in the liquidation proceeding Secured claims –The claims, whose causes occurred prior to the bankruptcy declaration, secured by the properties of the debtor –The security right may be freely exercised regardless of liquidation proceeding

13. 13 3. Liquidation Proceeding under the DRBA (5) Necessity of filing a report of claims –Required for receiving payments in the liquidation proceeding –The filing period of report of claims are set by the court –Creditors are permitted to file a report of claims up to the commencement of final distribution proceeding even after the expiration of the filing period –Effect of failure to file a claim report: excluded from receiving payments (6) Payments –Convert all assets into cash: by selling assets, and collecting account receivables, etc. –Distributed to each holder of bankruptcy claims in proportion to the amount of its claim (7) Dissolution of A Bankrupt Company –Completion of the final distribution proceeding  Conclusion of the liquidation proceeding  Dissolution of the debtor company

14. 14 (1) General provisions regarding status of foreigners –Article 2 of the DRBA: “In the application of the DRBA, foreigners and foreign corporations shall have the same status as that of Korean nationals or Korean corporations.” –With respect to the rights and obligations under the DRBA, the DRBA does not discriminate non-Korean residents and treats them in the same manner as Korean residents. 4. Legal Issues frequently raised in relation to a foreign company when its Korean counterparty enters into insolvency procedures

15. 15 (2) The scope of effect of insolvency proceedings Separate entity –If the reorganization proceeding or the liquidation proceeding under the DRBA (hereinafter collectively referred to as the “Insolvency Procedures”) commences against a debtor, such proceeding is effective only for the debtor. –No effect on a parent company or a subsidiary of the debtor Liens established on a third party’s asset –Not affected by the commencement of the Insolvency Procedures against a debtor –Creditors are permitted to freely exercise its security right on a third party’s asset regardless of the Insolvency Procedures against the debtor. Co-signer or Guarantor for a debtor –Not affected by the commencement of the Insolvency Procedures against the debtor –Creditors are permitted to freely request the co-signer or guarantor to perform its obligations regardless of the Insolvency Procedures against a debtor. 4. Legal Issues frequently raised in relation to a foreign company when its Korean counterparty enters into insolvency procedures

16. 16 (3) Bilateral Executory Contract What is the status of the Seller in the Purchaser’s reorganization proceeding where the Purchaser entered into the reorganization proceeding after the execution of a sale and purchase agreement (the “Contract”)? Bilateral executory contract: a contract under which neither of the parties thereto has completed performance of its obligations at the time of the commencement of the reorganization proceeding Administrator’s right to choose: the administrator may choose to either assume or terminate a bilateral executory contract. In case of termination of the Contract, the Seller may assert its claim for damages as a reorganization claim for damages caused by the termination of the Contract. In case of assuming the Contract, the Seller would be entitled to receive full payment of the purchase price without any impairment of claim by the reorganization plan. Peremptory Notice: the Seller is entitled to request the Purchaser’s administrator to confirm whether it will terminate or perform the Contract. 4. Legal Issues frequently raised in relation to a foreign company when its Korean counterparty enters into insolvency procedures

17. 17 (4) Repossession of goods in transportation in a sale and purchase transaction Can the seller recover the goods in transportation if a reorganization proceeding commences against the purchaser during the transportation? A seller may repossess the sold goods if (i) the purchase price has not been fully paid, and (ii) the purchaser did not receive the goods until the commencement of the reorganization proceeding. (“Repossession Right”) To receive the goods = Actual possession of the goods –Possession of a bill of consignment or bill of lading: not deemed as receipt of goods –Goods stored in a bonded-warehouse at the port of entry: not deemed as receipt of goods The administrator of the purchaser may request delivery of the goods with payment of the full purchase price. 4. Legal Issues frequently raised in relation to a foreign company when its Korean counterparty enters into insolvency procedures

18. 18 (5) Right to avoid Administrator’s right to avoid an unfair act committed by a debtor shortly before the commencement of the Insolvency Procedures Time requirements: –On or after the reference date –60 days prior to the reference date –6 months prior to the reference date The types of acts often subject to the right of avoidance are as follows: –An act of extinguishing debt including repayment of a debt, payment in substitutes, etc. –An act of providing security for an existing debt –An act of transferring properties at low prices –A gratuitous act including gift, etc. 4. Legal Issues frequently raised in relation to a foreign company when its Korean counterparty enters into insolvency procedures