There are four distinct laws governing debtor rehabilitation and bankruptcy in Korea: the Corporate Reorganization Act; the Composition Act; the Bankruptcy Act and the Individual Debtor Rehabilitation Act. In an effort to overhaul the insolvency system, the Korean government has enacted the Debtor Rehabilitation and Bankruptcy Act (the DRBA), which will take effect in April 2006.
The DRBA will allow the creditors meeting to be convened even in bankruptcy proceedings and will enhance creditor protection by conferring a greater level of authority to the creditors meeting.
The existing regulations on composition proceedings will be repealed, and regulations on corporate reorganization, which now only apply to limited liability companies (chusik hoesa), will apply to all debtors.
The DRBA has also paved the way for early rehabilitation for insolvent companies by allowing the transfer of material business with the court's prior approval before the debtor company's rehabilitation plan is approved.
Unlike the current corporate reorganization scheme, whereby the existing chief executive is removed from management, the DRBA will permit the existing chief executive to be appointed as trustee by the court.
Under the DRBA, the scope of transactions subject to avoidance will be increased to include, among others, creation of security or discharge of debt obligations by a troubled company in favour of any of its affiliates or special related persons at any time: (i) after the company submits a petition for rehabilitation or bankruptcy; or (ii) 12 months before the company submits the petition.
Implementation of the DRBA is expected to enhance the efficiency of the rehabilitation and bankruptcy proceedings and provide effective and equitable remedies for creditors.