Treatment of Secured Claims In Korean Rehabilitation Proceeding
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After the Debtor Rehabilitation and Bankruptcy Law (“DRBL”) took effect in 2006, the pro-debtor insolvency system including DIP-type trustee has been enforced. However, the DRBL has not modified much with respect to the rights and obligations of the creditors, especially secured creditors. This article conducts an overall review on the treatment of secured creditors in the rehabilitation proceeding under the DRBL. Secured creditors have a priority to get paid when their secured property is sold or foreclosed. The insolvent debtor has to bargain with secured creditors if it needs to continue to use the secured property. Theoretically, the debtor shall be able to utilize the secured property by making a payment to relevant secured creditor and whether or not to make such payment shall be determined in consideration of the going-concern value and the liquidation value of the secured property. However, the parties fail to reach, in many occasions, a conclusion due to the information asymmetry, hold-out of any party, etc. In such cases, the creditors' right to the secured property shall be restricted for the debtor's revival for the benefit of all interested parties. The restriction on the secured creditor's rights in the rehabilitation proceeding shall not harm the efficiency of secured claims that play positive functions in our society such as decrease of agency costs between the debtor and secured creditors. On the other hand, the adverse effects of secured claims shall not be disregarded because from time to time the secured creditors do not behave reasonably due to incomplete privatization, reliance on the value of secured property only without analyzing the debtor's credit, etc. If the rehabilitation procedures under the DRBL restrict the rights of secured creditors in a reasonable way, the efficiency of secured claims can be improved. For such purposes, this chapter offers the following suggestions. First, secured claim shall be evaluated on the basis of the market value of the secured property to reflect current practice. Second, the post-commencement interest shall be paid to the extent of the equity cushion of the secured property. Third, the security amount in the case of keun-mortgage shall not be crystallized at the time of commencement of the rehabilitation proceeding so that the debtor may use the keun-mortgage for DIP financing. Fourth, the cram-down based on the relative priority rule needs to be modified toward the absolute priority rule, provided that the procedures to stimulate the negotiation between the debtor and secured creditors shall be introduced at the same time. Fifth, the debtor who needs to transfer his business prior to the court’s confirmation of the rehabilitation plan shall have the right to extinguish the security interest on the secured property by paying the disposal value of the secured property.
Abstract
After the Debtor Rehabilitation and Bankruptcy Law (“DRBL”) took effect in 2006, the pro-debtor insolvency system including DIP-type trustee has been enforced. However, the DRBL has not modified much with respect to the rights and obligations of the creditors, especially secured creditors. This article conducts an overall review on the treatment of secured creditors in the rehabilitation proceeding under the DRBL. Secured creditors have a priority to get paid when their secured property is sold or foreclosed. The insolvent debtor has to bargain with secured creditors if it needs to continue to use the secured property. Theoretically, the debtor shall be able to utilize the secured property by making a payment to relevant secured creditor and whether or not to make such payment shall be determined in consideration of the going-concern value and the liquidation value of the secured property. However, the parties fail to reach, in many occasions, a conclusion due to the information asymmetry, hold-out of any party, etc. In such cases, the creditors' right to the secured property shall be restricted for the debtor's revival for the benefit of all interested parties. The restriction on the secured creditor's rights in the rehabilitation proceeding shall not harm the efficiency of secured claims that play positive functions in our society such as decrease of agency costs between the debtor and secured creditors. On the other hand, the adverse effects of secured claims shall not be disregarded because from time to time the secured creditors do not behave reasonably due to incomplete privatization, reliance on the value of secured property only without analyzing the debtor's credit, etc. If the rehabilitation procedures under the DRBL restrict the rights of secured creditors in a reasonable way, the efficiency of secured claims can be improved. For such purposes, this chapter offers the following suggestions. First, secured claim shall be evaluated on the basis of the market value of the secured property to reflect current practice. Second, the post-commencement interest shall be paid to the extent of the equity cushion of the secured property. Third, the security amount in the case of keun-mortgage shall not be crystallized at the time of commencement of the rehabilitation proceeding so that the debtor may use the keun-mortgage for DIP financing. Fourth, the cram-down based on the relative priority rule needs to be modified toward the absolute priority rule, provided that the procedures to stimulate the negotiation between the debtor and secured creditors shall be introduced at the same time. Fifth, the debtor who needs to transfer his business prior to the court’s confirmation of the rehabilitation plan shall have the right to extinguish the security interest on the secured property by paying the disposal value of the secured property.
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