Information on Secured Transactions

ASIAN DEVELOPMENT BANK

REGIONAL TECHNICAL ASSISTANCE

TA NO: 5795-REG

INSOLVENCY LAW REFORM

SECURED TRANSACTIONS

KOREA

Soo Chang Kim
Lee & Ko

PROBLEM OF CREATION AND REGISTRATION OF SECURED TRANSACTIONS

1. Creation and Registration of Secured Interests

The form referred to as "Secured Transaction" is a Korean legal concept and can be categorized as follows:

(1) Whereas all assets of a company is the subject secured There is no effective method to create and register a single secured interest over the entire assets of a particular company that will guarantee the priority rights thereon. Furthermore, with the exception of such intellectual properties as patents or trademarks, there is no method under Korean law to create a secured interest over such concepts as "know-how" or "business rights" and as such, the value of a secured interest would not be increased if such a secured interest secured all the assets of a particular company. Under such circumstances that there would not be any actual benefit in creating a secured interest over the entire assets of a company, there are no studies nor any legal reform measures relating thereto.

(2) Whereas particular asset(s) is(are) the subject secured

i. Land or building
Though it is possible to create and register secured interests over such subjects, the registration expenses are quite considerable. Registration tax amounting to 0.2% of the amount secured, National Housing Bond purchase fees amounting to 1% of the amount secured, education taxes amounting to 20% of the registration tax as well as other fees and expenses (of which foreigner invested companies may receive exemption) will be levied.
ii. Movables or bonds
The two representative methods of creating secured interests over movables or bonds (including securities and account receivables claims), which are unique to Korea, are jilkwon (pledge) and yangdotambo. Both methods, however, may not be registered.
Because the secured interests of above may not be registered, in the case of a secured interest over a movable, such secured interest may not be enforced against a good-faith purchaser of the particular movable. Generally, a secured interest may secure the entire movables or the entire inventory assets of a particular factory. Accordingly, such a broad scoped secured interest may be created as long as the method to determine the subject matter of the secured interest is clearly defined. However, in the case of creating a secured interest over inventory of products produced, the inflow and outflow of the products will be continuous and as such, administration expenses to manage such flows to prevent the value of the secured interest to decrease will be separately required.
In the case of secured interest over bonds, regardless of whether the form is jilkwon or yangdotambo, the creator of the secured interest must notify the obligor or must receive an approval from the third party debtor with respect to the creation of such secured interest. The notice and approval should affix a fixed date stamp (whakjung ilja) from a notary or relevant public office so that the notice and approval may be challenged against (i.e. have priority over) a third party. In practice, as there is a large amount and varieties of a company's bond and the identities and addresses of the obligor are not readily ascertainable, such notice and approval has the problem that it will require a long period of time to accomplish. Notification and approval by way of a public notice or advertisement is currently not recognized.

2. Certification Procedure under the Foreign Exchange Management Regulations ("FEMR")

In order to provide a secured interest to a non-resident, certification as required under FEMR must be received. Even though the requirements under FEMR has been relaxed considerably and there are numerous categories whereas making of a report shall be sufficient, there still remains many regulations in the case land or buildings are secured. Should such certification procedure not be complied with, the sales proceeds resulting from the execution of the secured interest will not be able to be remitted outside Korea.

3. Problems with the Execution of the Secured Interes

Such laborer claims as wage, severance pay and reimbursement for expenses shall have priority, within a specified scope, over secured interests.

4. Secured Creditor Interests under Insolvency Procedure

Insolvency procedures, as well as such procedures similar thereto, under Korean law are corporate reorganization, compulsory composition and bankruptcy.
Under the corporate reorganization procedure, a secured creditor may not exercise his security interest. The secured creditor must make a report of his claim and receive repayment thereto in accordance to the reorganization plan. Except for rare cases, a secured creditor will receive repayment conditions under the reorganization plan, which are more favorable than those of unsecured creditors. Typically, repayment will take a period of 5 to 10 years. The main problems with this procedure are that even if repayment does not occur as provided under the reorganization plan, creditors may not exercise its rights, such as secured interests, and may only exercise such rights subsequent to the requesting of and termination to the reorganization plan. However, as there are may interests at stake, the termination of a reorganization plan is quite a difficult process.
Under compulsory composition procedure, unless the secured creditor has separately agreed to abide by the composition plan by suspending his rights to exercise his secured interest, the secured creditor may exercise his rights irrespective of the composition procedure. Any claim amount not satisfied by the exercise of the security interest may be reported as a composition claim.
Under bankruptcy procedure, the secured creditor may exercise his rights under his secured interest irrespective of the bankruptcy procedure. Any claim amount not satisfied by the exercise of the security interest may be reported as a bankruptcy claim, same as under compulsory composition procedure.

5. Other Issues

(1) Existing loan agreements made by financial institutions or large corporations typically include negative pledge conditions. Therefore, the providing of security over major assets of a company will be deemed as an event of default under such loan agreements and as such, such providing of security is very limited.

(2) Even for a secured transaction, should the relevant company enter bankruptcy proceedings, the provision of a secured interest may be denied under the Bankruptcy Act should it be deemed that other creditors interests are being harmed.