## EXECUTIVE SUMMARY

## Source details

**Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2020/english/1korea2020003.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2020/english/1korea2020003.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2020/english/1korea2020003.pdf.json)

---

### Key findings and overall assessment
- The Korean insolvency and creditor rights framework is complex and has undergone several reforms in recent years.
- The regime for creditor rights and insolvency is largely in line with international best practice, with specific exceptions:
  - Certain unregistered security interests created under the customary retention of title arrangements known as Yangdo-Dambo are not in line with the standard.
- The legal framework provides debtors and creditors with a wide-ranging menu of in-court and out-of-court restructuring options that are generally regarded as efficient and cost effective.
- Identified disincentives and weaknesses:
  - Director’s duties in the period approaching insolvency are not specified.
  - The law is silent on ipso facto clauses (automatic termination upon insolvency filing) in executory contracts.
  - Post-commencement financing is not given the same high priority in liquidation as it is in reorganization (legislative amendments in February 2020 appear to address this concern but were not factored into this analysis).
  - In-court reorganization procedures rely on significant court supervision and there is no insolvency administrators’ profession in Korea.
  - Judges rotate frequently: every 2-3 years in the Seoul Bankruptcy Court, and every 1-2 years in the district courts, leading to uneven experience and expertise at regional courts.
- Korea has a modern insolvency and debt restructuring regime for individuals, usable for business and consumer debts (or a mix). Court supervised repayment plans or liquidations are followed by a discharge. No prescriptive recommendations are formulated for personal insolvency due to lack of international best practice in this area.
- Policy consideration: social protection programs addressing mortgage exposure could be designed to promote continued debt-servicing based on debtor’s ability to pay and be linked to good-faith behavior (e.g., information disclosures, reporting changes in circumstances) to limit moral hazard and strategic defaults.

### Main recommendations (summary)
- Undertake a study of Yangdo-Dambo (retention of title) with a view to adopting any reforms necessary
  - Timeline: Medium Term
  - Action Required: Administrative
  - Responsible Institution(s): MOJ
- Clarify Director’s duties in the period approaching insolvency
  - Timeline: Medium Term
  - Action Required: Amendment to the DRBA
  - Responsible Institution(s): MOJ (primary), and FSC
- Limit the enforceability of automatic termination clauses in insolvency
  - Timeline: Medium Term
  - Action Required: Amendment to the DRBA
  - Responsible Institution(s): MOJ (primary), and FSC
- Ensure same priority to post-commencement financing in liquidation as it has in reorganization
  - Timeline: Medium Term
  - Action Required: Amendment to the DRBA
  - Responsible Institution(s): MOJ (primary), and FSC
- Establish an insolvency practitioners’ profession
  - Timeline: Medium Term
  - Action Required: New legislation/regulation
  - Responsible Institution(s): MOJ (primary), and FSC
- Limit judicial rotations to allow expertise to develop
  - Timeline: Immediate
  - Action Required: Administrative
  - Responsible Institution(s): MOJ, courts

### Introduction (scope and context)
- Assessment benchmarked against:
  - World Bank Principles for Effective Insolvency and Creditor/Debtor Regimes (the “World Bank Principles”)
  - UNCITRAL Legislative Guide on Insolvency Law (“UNCITRAL Legislative Guide”)
- Four selected issues analyzed:
  - Secured credit;
  - Reorganization procedures, with special emphasis on micro and small business rehabilitation;
  - Insolvency of enterprise groups;
  - Institutional framework.
- Recent insolvency legal reforms:
  - Establishing the Summary Rehabilitation Proceeding for Small and Medium Enterprises (SMEs) in 2015;
  - Strengthening expedited restructuring provisions in 2016;
  - Establishment of the Seoul Bankruptcy Court in 2017;
  - Setting up the Credit Counseling and Recovery Service in 2017;
  - Establishment of the New Start Counseling center and institution of the S-Track program to facilitate SME restructuring in 2018;
  - Reducing the discharge period for entrepreneurs from 5 years to 3 years in 2018.
- Multiple government agencies responsible: Financial Services Commission (FSC), Ministry of Justice (MOJ), and insolvency courts. The Bank of Korea and Financial Supervisory Service (FSS) play limited roles.
- Market developments affecting insolvency landscape:
  - Growth of internet-only banks providing largely unsecured loans;
  - Asset management companies and private equity debt investors creating demand for distressed debt assets;
  - Increased access to capital markets by corporates.

### Secured credit — legal framework and issues
- Legal basis:
  - Civil Execution Act and the Act on Security over Movable Property and Claims establish rules for granting security interests.
  - Registration of Real Estate Act (for immovable property) and Act on Security over Movable Property and Claims (for movable property) allow creditors to register establishment, transfer, alteration or cancellation of security interests.
  - Clear rules of priority between creditors exist.
  - Civil Execution Act deals with procedural rules for enforcement.
- Enforcement timelines and court capacity:
  - Court data on real estate foreclosures indicates average enforcement takes a little over 1 year. There are no significant delays or backlogs of cases in court.
- Data on Enforcement of Collateral Over Immovable Assets (selected figures)
  - Real estate forced sale — 2017:
    - Number of applications 31,473; Number of cases handled 31,137; Cases with recovery proceeds 10,421; Withdrawal 16,328; Others (Incl. Dismissals and Transfers) 4,388; Average duration from application to the final judgement by the court (days) Total 370.6; Paying out Dividends 151.6
  - Real estate forced sale — 2018:
    - Number of applications 30,602; Number of cases handled 30,767; Cases with recovery proceeds 10,024; Withdrawal 15,992; Others (Incl. Dismissals and Transfers) 4,751; Average duration from application to the final judgement by the court (days) Total 384.1; Paying out Dividends 156.0
  - Voluntary sale — 2017:
    - Number of applications 35,094; Number of cases handled 34,359; Cases with recovery proceeds 21,525; Withdrawal 11,035; Others (Incl. Dismissals and Transfers) 1,799; Average duration from application to the final judgement by the court (days) Total 370.0; Paying out Dividends 153.3
  - Voluntary sale — 2018:
    - Number of applications 38,199; Number of cases handled 34,369; Cases with recovery proceeds 21,463; Withdrawal 11,042; Others (Incl. Dismissals and Transfers) 1,864; Average duration from application to the final judgement by the court (days) Total 377.8; Paying out Dividends 156.7
  - Source: Judicial Yearbook, May 17, 2019
- Customary security arrangements requiring further study:
  - Yangdo-Dambo (retention of title):
    - Widely used, typically over movables, and is unregistered.
    - Because unregistered, manner of notification and perfection is not in line with the standard.
    - Main providers of finance report Yangdo-Dambo is not generally regarded as a significant obstacle, but consideration could be given to a study to assess whether lack of registration leads to delays in enforcement, impairment of creditor rights, or inefficiencies.
  - Jeonse (lease key money) rights:
    - Lessee provides a substantial deposit (lease key money) to the lessor in lieu of monthly rent; deposit can be up to 80% of the market value of the leased property.
    - To secure the deposit, the lessee acquires a security interest in the real property (Jeonse right).
    - Registration of the Jeonse right in the real estate registry can be expensive; typically recorded through notification to the Community Service Center instead.
    - General rules of priority apply to Jeonse rights.
- Note: There are no summary enforcement or out-of-court enforcement procedures.

### Insolvency system overview
- Unified law: Debtor Rehabilitation and Bankruptcy Act (DRBA) adopted in 2006, which includes:
  - Rehabilitation procedure for corporates and individuals;
  - Streamlined summary rehabilitation procedure (SRP) for SMEs;
  - Rehabilitation procedure for individuals with small debts;
  - Liquidation procedure for individuals and corporates including a summary liquidation procedure for SMEs;
  - Cross-border insolvency provisions broadly based on UNCITRAL Model Law with some modifications.
- Snapshot of Procedures under the DRBA (selected entries)
  - Rehabilitation:
    - Proceedings Eligible Debtors: Corporates and Individuals
    - Maximum Debt: N/A
    - Claims Resolved: All (secured, unsecured, equity)
    - Maximum Repayment Plan Period: 10 years
  - Summary Rehabilitation Proceedings:
    - Proceedings Eligible Debtors: SMEs
    - Maximum Debt: KRW 3 billion
    - Claims Resolved: All (secured, unsecured, equity)
    - Maximum Repayment Plan Period: 10 years
  - Individual Rehabilitation:
    - Proceedings Eligible Debtors: Individuals with personal and business debts
    - Maximum Debt: Secured: KRW 1 billion; Unsecured: KRW 500 million
    - Claims Resolved: Unsecured
    - Maximum Repayment Plan Period: 3 years (for unsecured)
  - Liquidation and Summary Liquidation:
    - Proceedings Eligible Debtors: Corporates and individuals
    - Maximum Debt: N/A
    - Claims Resolved: Unsecured
    - Maximum Repayment Plan Period: N/A
    - Corporates and individuals with no more than KRW 500 million in assets of the estate: Unsecured; Maximum Repayment Plan Period: N/A
  - Source: Adapted from materials provided by the MOJ
- Corporate Restructuring Promotion Act (CRPA):
  - Statutory framework for out-of-court debt restructuring between a debtor and its financial creditors.
  - First enacted in 2001 as a temporary law; extended for 5-year intervals with latest extension in October 2018 (CRPA scheduled to expire on October 15, 2023).
  - Scope expanded to cover all corporates, including SMEs, and all financial creditors.
  - CRPA transformed from a London-Approach-style arrangement for large corporates into a broader statute facilitating multi-creditor workouts.

### Reorganization and corporate workouts — system description and practice
- Available options for corporates:
  - Court-supervised formal rehabilitation under the DRBA involving all creditors.
  - Hybrid “prepack” process under the DRBA with select creditors (P-Plan / “prior rehabilitation proposals”).
  - Out-of-court debt restructuring under the CRPA with financial creditors only.
  - Voluntary agreement with select creditors (informal, confidential, binds only participating creditors).
- Reorganization under the DRBA (key features):
  - Initiation: Debtor corporation or its creditors may initiate if the debtor is unable to pay debts when due without serious hindrance to business continuation, or likely to become insolvent.
  - No automatic stay at time of application (although stay may be requested); stay applies automatically upon commencement.
  - Debtor typically remains in possession unless court decides otherwise.
  - Creditors classified into secured and unsecured; further subclassification possible.
  - Plan confirmation thresholds:
    - Approved by creditors holding at least 2/3 of the value of unsecured claims and creditors holding at least 3/4 of the value of secured claims.
    - Liquidating plans require a 4/5 majority of secured creditors.
    - Where debtor’s liabilities do not exceed assets, equity rights holders with at least 1/2 of the equity must approve the plan.
  - If required majorities not secured, the court may modify and approve the plan provided rights of affected dissenting creditors are protected and at least one class of creditors has consented.
- P-Plan (prior rehabilitation proposals):
  - Expedited hybrid procedure under DRBA.
  - Creditors holding at least 50 percent of claims or a debtor with consent of such creditors may develop a rehabilitation plan out-of-court and submit to the court for voting.
  - Designed to blend speed/flexibility of out-of-court processes with advantages of an in-court process (court-ordered stay on enforcement, bind minority creditors).
  - Conceived to facilitate agreement reached under CRPA to be confirmed by the court under the DRBA.
- CRPA process (key features):
  - Facilitates out-of-court debt restructuring between debtor and financial creditors.
  - Principal financial creditor may notify debtor of “signs of insolvency.”
  - Debtor may commence rehabilitation discussions with principal creditor only (administrative proceeding) or with all financial creditors (joint administratorship).
  - Debtor remains in possession; creditors may agree to standstill on enforcement.
  - Confirmation of the plan requires consent of participating financial creditors holding at least 3/4 of the claims by value.
    - Where a single creditor holds 3/4 of the claims, resolution requires consent of 2/5 of the number of creditors.
  - Dissenting creditors have right to be bought out by other creditors.
  - Disagreements mediated by the Creditors’ Coordination Committee.
  - Only participating creditors are impacted by restructuring.
  - The FSC may levy fines for failure to abide by the CRPA.
- Voluntary agreements:
  - Confidential, flexible out-of-court negotiations binding only participating creditors.
- Practice observations:
  - Significant corporate debt restructuring takes place through voluntary out-of-court agreements due to stigma, confidentiality preferences, and ipso facto clauses.
  - Ipso facto clauses are common and deter formal filings.
  - Involuntary petitions by creditor banks are rare due to cultural norms and bank-internal disincentives.
  - Court-supervised reorganization generally efficient; Seoul Bankruptcy Court and its “Fast Track Program” credited with speeding up the process.

### Use and performance metrics (corporate rehabilitation)
- Average Days from Petition to Commencement Order (Nationwide):
  - 2017: 35.2
  - 2018: 34.4
- Average Days from Petition to Commencement Order (SBC):
  - 2017: 18.7
  - 2018: 19.8
- Average Days from Commencement Order to Approval of Rehabilitation Plan (Nationwide):
  - 2017: 212.6
  - 2018: 212.1
- Average Days from Commencement Order to Approval of Rehabilitation Plan (SBC):
  - 2017: 175.7
  - 2018: 159.6
- Use of P-plans is limited (fewer than a dozen P-plans in the courts).
- Use of post-commencement financing is limited; a specialized fund at KAMCO and the K-Growth Fund are active in facilitating financing for viable businesses.
- SME caseloads and SRP performance:
  - SMEs account for about a third of all corporate reorganization petitions filed before the courts.
  - SRP is quicker than the regular procedure: average 181 days from application to approval of the plan (compared to 247 days on average for the regular procedure).
  - SRP proceedings are even quicker at the Seoul Bankruptcy Court and take an average of 119 days.
  - Filings under the SRP are limited to a few hundred applications per year.
  - Chief SME challenges: lack of early filings and difficulties securing post-commencement financing.
- CRPA usage:
  - Creditors indicate preference for workouts under the CRPA over reorganization, but few rehabilitation cases under CRPA recently.
  - CRPA used successfully for large companies by financial institutions; perception exists of government influence over private restructuring decisions under CRPA.
  - Financial Service Commission will report to the National Assembly in July 2020 on making CRPA permanent.

### Autonomous Restructuring Support (ARS) — Seoul Bankruptcy Court innovation
- Purpose:
  - Promote restructuring by allowing out-of-court agreement while preserving creditor stay.
- Key features:
  - A debtor’s insolvency petition is accepted by the court but kept in abeyance for 3 months to allow the parties time to reach an agreement out of court.
  - If the parties reach agreement, the petition can be withdrawn.
  - ARS permits parties to benefit from a stay on creditor action while negotiations are ongoing.

### SME rehabilitation: toolkit and special procedures
- SMEs importance:
  - SMEs make up over 99 percent of the total number of enterprises (about 38 percent are unincorporated micro-enterprises and 25 percent are small enterprises), and account for 51 percent of added value.
  - Domestic banks have significant exposure to SMEs: 40 percent of their total loan portfolio.
- Main elements:
  - Summary Rehabilitation Proceedings (SRP) under the DRBA:
    - SMEs with debts of no more than KRW 3 billion may access the process.
    - Eliminates need for a custodian and an inspector in most cases; an inspection commissioner may be appointed with simplified duties.
    - Adoption thresholds under SRP: unsecured creditors with consent of either (i) creditors holding at least 2/3 of the value of unsecured claims; or (ii) creditors holding at least 1/2 of the value of unsecured claims and a majority of the persons with voting rights.
  - Individual rehabilitation for owners of unincorporated businesses:
    - Maximum repayment plan period is generally 3 years.
    - Secured debts may not exceed KRW 1 billion, and unsecured debt may not exceed KRW 500 million.
  - Government support programs (illustrative): SME Rehabilitation Consulting Program; SME Equity Retention Scheme; Preauthorization M&A scheme; SME Fast Financing Support Program; Negotiation support program; Programs under the comprehensive re-challenge center
  - S-Track (launched 2017-2018 by the Seoul Bankruptcy Court):
    - Available to enterprises with debt of less than KRW 15 billion.
    - Components include counseling, appointing a restructuring officer, and financial support toward costs of proceedings and implementing restructuring plans, including an “Equity Retention” plan.

### Analysis and recommendations (selected)
- Alignment with international best practice:
  - The reorganization procedure is generally well-aligned with international best practice; DRBA broadly consistent with key elements including commencement, management of reorganization, claims verification, treatment of executory contracts, class voting, and discharge for entrepreneurs.
- Areas for better alignment and suggested measures:
  - Directors’ Duties in the Period Approaching Insolvency:
    - DRBA does not address specific duties; World Bank Principle B2 and UNCITRAL Legislative Guide recommend personal liability for wrongful trading to encourage early filings.
  - Ipso Facto Clauses:
    - DRBA is silent on enforceability; World Bank Principle C.10.2 and UNCITRAL Legislative Guide recommend unenforceability of termination clauses upon commencement (with exceptions for financial contracts).
    - Korean courts have held ipso facto clauses unenforceable in some cases, but legislative clarity is recommended.
  - Post-commencement Financing:
    - UNCITRAL Legislative Guide recommends incentives including priority ahead of unsecured creditors and preserving priority if reorganization converts to liquidation.
    - DRBA permits post-petition financing to have highest priority in reorganization but did not preserve this priority in liquidation at time of this analysis; DRBA amended in February 2020 to address priority concerns (amendment not factored into analysis).
    - DRBA does not recognize priority to financing agreed out-of-court in a subsequent in-court proceeding; including such provision could promote out-of-court restructuring.
- Individual entrepreneurs’ rehabilitation:
  - DRBA’s procedure for individual entrepreneurs is simplified, quick, inexpensive, and tailored to small debtors; maximum repayment plan period generally 3 years (recently reduced from 5 years).
- Further considerations:
  - Assess whether the system effectively triages unviable SMEs for speedy liquidation as appropriate.
  - Consider strengthening early-warning functions to address bank passivity in monitoring.

### Enterprise-group insolvency — findings
- DRBA provides that when an insolvency petition of a company is underway in a particular court, other insolvent affiliates may also file petitions before the same court.
- Courts have significant discretion in case management and coordinate proceedings.
- Substantive consolidation of all assets and liabilities for enterprise groups is not recognized under the DRBA.
- Procedural coordination is possible:
  - Coordinated restructuring plans;
  - Appointment of same insolvency administrator across related cases (subject to conflict checks);
  - Synchronization of hearing dates and creditor meetings.
- Framework is judged generally consistent with the standard; coordinated reorganization (and liquidation) between entities of a corporate group appears possible.

### Institutional framework — description and recommendations
- Specialized courts:
  - Seoul Bankruptcy Court, established in March 2017, adjudicates corporate rehabilitation and liquidation as well as personal insolvency cases.
  - The Seoul Bankruptcy Court has 34 judges, and over 200 legal staff as of 2018.
  - Outside Seoul, a bankruptcy division in each local district court has jurisdiction.
  - In high value cases (more than 300 creditors and where debts exceed KRW 50 billion) Seoul Bankruptcy Court has concurrent jurisdiction even if debtor’s center of main interests is outside Seoul.
- Court-supervised procedures and advisory bodies:
  - Procedures under the DRBA rely on significant court supervision.
  - Custodial committee of independent experts advises the court.
  - Courts generally mandate appointment of Chief Restructuring Officers (CROs); courts develop candidate lists and interview candidates.
  - Courts rely on bankruptcy administrators who assist judges with routine tasks.
- Human resources and rotation:
  - Insolvency judges at the Seoul Bankruptcy Court mandatorily rotate after 2-3 years; rotation periods could be as short as every 1-2 years in district courts.
  - Frequent rotations may affect development of specialized knowledge, particularly outside Seoul.
- Professional accreditation and lists:
  - No insolvency administrators’ profession in Korea; lawyers act as insolvency administrators and accountants serve as examiners in court.
  - No special qualification or training systems for bankruptcy-related services.
  - Seoul Bankruptcy Court compiles and updates a list of qualified examiners (usually every two years).
- Use and innovations:
  - Seoul Bankruptcy Court developed Fast Track Proceedings and S-Track.
  - Nearly 40% of all reorganization and liquidation cases filed in Korea are before the Seoul Bankruptcy Court.
  - No serious backlogs nationwide and average resolution times have decreased.
  - High degree of digitization and standardization; courts collect and report insolvency data.
  - Several Seoul Bankruptcy Court initiatives arise from practice rather than codification.
- Institutional recommendations:
  - Deepen court expertise by extending rotations for insolvency judges to at least 5-7 years.
  - Increase judicial capacity building in district courts outside Seoul.
  - Develop an insolvency administrators’ profession with objective, publicly available criteria for insolvency representatives (consistent with World Bank Principle D8).

### Personal insolvency and CCRS — findings and data
- DRBA individual rehabilitation:
  - Secured debts may not exceed KRW 1 billion, and unsecured debt may not exceed KRW 500 million.
  - Maximum repayment plan period generally 3 years (recently reduced from 5 years); in exceptional circumstances discharge period may be extended up to 5 years.
  - After the repayment period, remaining debts are discharged.
- Stigma and caseloads:
  - Bankruptcy carries stigma and other legislation retains penalties (e.g., disqualification from several professions), resulting in more rehabilitation than bankruptcy filings.
  - Individual insolvency caseload:
    - 2017: Rehabilitation 81,592; Bankruptcy 44,246
    - 2018: Rehabilitation 91,205; Bankruptcy 43,397
    - Source: Nationwide Court Data provided by the Ministry of Justice
- Credit Counseling and Recovery Service (CCRS):
  - Non-profit established under the Microfinance Support Act of 2017.
  - Eligibility:
    - Debt should not exceed KRW 1.5 billion and should be either (i) owed to multiple creditors and not more than 90 days overdue; or (ii) owed to a single creditor but more than 90 days overdue.
  - Small application fee: KRW 50,000 (can be waived for indigent debtors).
  - CCRS plans typically liquidate assets and require debtor’s income to satisfy debts; up to a maximum of 70% of individuals’ debt may be written off under the plan, which may be 8-10 years.
  - Agreement of a simple majority of creditors is required for plan approval; dissenting creditors are bound by a contractual inter-creditor agreement.
- CCRS performance data:
  - Applications:
    - 2014 85,168
    - 2015 91,520
    - 2016 96,319
    - 2017 103,277
    - 2018 106,808
  - Repayment Plans Approved:
    - 2014 73,925
    - 2015 77,757
    - 2016 81,401
    - 2017 89,087
    - 2018 93,136
  - Approval Rate:
    - 2014 86.8%
    - 2015 85%
    - 2016 84.5%
    - 2017 86.3%
    - 2018 87.2%
  - Source: Data provided by the CCRS
- CCRS outcomes and considerations:
  - CCRS has been highly successful; over 100,000 applications are received annually and in over 80% of cases where a plan is proposed it has been accepted by creditors.
  - CCRS offers a pre-insolvency program and incentives to stay current on plans (e.g., access to credit cards and emergency loans).
  - Secured creditors are typically not impacted by individual insolvency; they may enforce collateral and are not required to be bound by rehabilitation plans.
  - CCRS facilitates voluntary mortgage debt restructuring, typically through maturity extensions to allow debtors to maintain home-ownership.
  - Given mortgage debt is the most significant component of banks’ exposure to households, balancing social considerations of home ownership with banking system risk is critical.
  - Any social protection program should:
    - promote continued debt-servicing based on debtor’s ability to pay;
    - be linked to good-faith behavior (information disclosures, reporting changes in circumstances, etc.);
    - aim to limit potential for moral hazard and strategic defaults.

*Source: 1korea2020003 - EXECUTIVE SUMMARY, REPUBLIC OF KOREA, INTERNATIONAL MONETARY FUND*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Key findings and overall assessment
- The Korean insolvency and creditor rights framework is complex and has undergone several reforms in recent years.
- The regime for creditor rights and insolvency is largely in line with international best practice, with specific exceptions:
  - Certain unregistered security interests created under the customary retention of title arrangements known as Yangdo-Dambo are not in line with the standard.
- The legal framework provides debtors and creditors with a wide-ranging menu of in-court and out-of-court restructuring options that are generally regarded as efficient and cost effective.
- Identified disincentives and weaknesses:
  - Director’s duties in the period approaching insolvency are not specified.
  - The law is silent on ipso facto clauses (automatic termination upon insolvency filing) in executory contracts.
  - Post-commencement financing is not given the same high priority in liquidation as it is in reorganization (legislative amendments in February 2020 appear to address this concern but were not factored into this analysis).
  - In-court reorganization procedures rely on significant court supervision and there is no insolvency administrators’ profession in Korea.
  - Judges rotate frequently: every 2-3 years in the Seoul Bankruptcy Court, and every 1-2 years in the district courts, leading to uneven experience and expertise at regional courts.
- Korea has a modern insolvency and debt restructuring regime for individuals, usable for business and consumer debts (or a mix). Court supervised repayment plans or liquidations are followed by a discharge. No prescriptive recommendations are formulated for personal insolvency due to lack of international best practice in this area.
- Policy consideration: social protection programs addressing mortgage exposure could be designed to promote continued debt-servicing based on debtor’s ability to pay and be linked to good-faith behavior (e.g., information disclosures, reporting changes in circumstances) to limit moral hazard and strategic defaults.

*Author note: The author of this note is Anjum Rosha (IMF), member of the FSAP 2019 team led by Udaibir Das. The analysis has benefitted from discussions with the staff of the BOK, FSC, FSS, the Korea FSAP team, and reviewers at the IMF.*

### Table 1 — Main recommendations (summary)
- Undertake a study of Yangdo-Dambo (retention of title) with a view to adopting any reforms necessary
  - Timeline: Medium Term
  - Action Required: Administrative
  - Responsible Institution(s): MOJ
- Clarify Director’s duties in the period approaching insolvency
  - Timeline: Medium Term
  - Action Required: Amendment to the DRBA
  - Responsible Institution(s): MOJ (primary), and FSC
- Limit the enforceability of automatic termination clauses in insolvency
  - Timeline: Medium Term
  - Action Required: Amendment to the DRBA
  - Responsible Institution(s): MOJ (primary), and FSC
- Ensure same priority to post-commencement financing in liquidation as it has in reorganization
  - Timeline: Medium Term
  - Action Required: Amendment to the DRBA
  - Responsible Institution(s): MOJ (primary), and FSC
- Establish an insolvency practitioners’ profession
  - Timeline: Medium Term
  - Action Required: New legislation/regulation
  - Responsible Institution(s): MOJ (primary), and FSC
- Limit judicial rotations to allow expertise to develop
  - Timeline: Immediate
  - Action Required: Administrative
  - Responsible Institution(s): MOJ, courts

### INTRODUCTION (scope and context)
- This background note assesses select aspects of the Korean insolvency and creditor rights system against the international standard composed of:
  - World Bank Principles for Effective Insolvency and Creditor/Debtor Regimes (the “World Bank Principles”) and
  - UNCITRAL Legislative Guide on Insolvency Law (“UNCITRAL Legislative Guide”).
- Four selected issues analyzed in light of risks and priorities identified in the 2020 FSAP:
  - Secured credit;
  - Reorganization procedures, with special emphasis on micro and small business rehabilitation;
  - Insolvency of enterprise groups;
  - Institutional framework.
- Extensive insolvency legal reforms in recent years include:
  - Establishing the Summary Rehabilitation Proceeding for Small and Medium Enterprises (SMEs) in 2015;
  - Strengthening expedited restructuring provisions in 2016;
  - Establishment of the Seoul Bankruptcy Court in 2017;
  - Setting up the Credit Counseling and Recovery Service in 2017;
  - Establishment of the New Start Counseling center and institution of the S-Track program to facilitate SME restructuring in 2018;
  - Reducing the discharge period for entrepreneurs from 5 years to 3 years in 2018.
- Multiple government agencies responsible for insolvency policies and oversight: Financial Services Commission (FSC), Ministry of Justice (MOJ), and insolvency courts. The Bank of Korea and Financial Supervisory Service (FSS) play limited roles.
- Market developments affecting insolvency landscape:
  - Growth of internet-only banks providing largely unsecured loans;
  - Asset management companies and private equity debt investors creating demand for distressed debt assets;
  - Increased access to capital markets by corporates.

### SECURED CREDIT — legal framework and issues
- Legal basis:
  - Civil Execution Act and the Act on Security over Movable Property and Claims establish rules for granting security interests over immovable and movable property respectively.
  - Registration of Real Estate Act (for immovable property) and Act on Security over Movable Property and Claims (for movable property) allow creditors to register establishment, transfer, alteration or cancellation of security interests.
  - Clear rules of priority between creditors exist.
  - Civil Execution Act deals with procedural rules for enforcement.
- Enforcement timelines and court capacity:
  - Court data on real estate foreclosures indicates average enforcement takes a little over 1 year. There are no significant delays or backlogs of cases in court.
- Table 2 — Data on Enforcement of Collateral Over Immovable Assets
  - Real estate forced sale
    - 2017: Number of applications 31,473; Number of cases handled 31,137; Cases with recovery proceeds 10,421; Withdrawal 16,328; Others (Incl. Dismissals and Transfers) 4,388; Average duration from application to the final judgement by the court (days) Total 370.6; Paying out Dividends 151.6
    - 2018: Number of applications 30,602; Number of cases handled 30,767; Cases with recovery proceeds 10,024; Withdrawal 15,992; Others (Incl. Dismissals and Transfers) 4,751; Average duration from application to the final judgement by the court (days) Total 384.1; Paying out Dividends 156.0
  - Voluntary sale
    - 2017: Number of applications 35,094; Number of cases handled 34,359; Cases with recovery proceeds 21,525; Withdrawal 11,035; Others (Incl. Dismissals and Transfers) 1,799; Average duration from application to the final judgement by the court (days) Total 370.0; Paying out Dividends 153.3
    - 2018: Number of applications 38,199; Number of cases handled 34,369; Cases with recovery proceeds 21,463; Withdrawal 11,042; Others (Incl. Dismissals and Transfers) 1,864; Average duration from application to the final judgement by the court (days) Total 377.8; Paying out Dividends 156.7
  - Source: Judicial Yearbook, May 17, 2019
- Customary security arrangements requiring further study:
  - Yangdo-Dambo (retention of title):
    - Widely used, typically over movables, and is unregistered.
    - Because unregistered, manner of notification and perfection is not in line with the standard.
    - Main providers of finance report Yangdo-Dambo is not generally regarded as a significant obstacle, but consideration could be given to a study to assess whether lack of registration leads to delays in enforcement, impairment of creditor rights, or inefficiencies.
  - Jeonse (lease key money) rights:
    - Lessee provides a substantial deposit (lease key money) to the lessor in lieu of monthly rent; deposit can be up to 80% of the market value of the leased property.
    - To secure the deposit, the lessee acquires a security interest in the real property (Jeonse right).
    - Registration of the Jeonse right in the real estate registry can be expensive; typically recorded through notification to the Community Service Center instead.
    - General rules of priority apply to Jeonse rights.
- Note: There are no summary enforcement or out-of-court enforcement procedures.

### INSOLVENCY SYSTEM OVERVIEW
- Unified law: Debtor Rehabilitation and Bankruptcy Act (DRBA) adopted in 2006, which includes:
  - Rehabilitation procedure for corporates and individuals;
  - Streamlined summary rehabilitation procedure (SRP) for SMEs;
  - Rehabilitation procedure for individuals with small debts;
  - Liquidation procedure for individuals and corporates including a summary liquidation procedure for SMEs;
  - Cross-border insolvency provisions broadly based on UNCITRAL Model Law with some modifications.
- Table 3 — Snapshot of Procedures under the DRBA
  - Rehabilitation
    - Proceedings Eligible Debtors: Corporates and Individuals
    - Maximum Debt: N/A
    - Claims Resolved: All (secured, unsecured, equity)
    - Maximum Repayment Plan Period: 10 years
  - Summary Rehabilitation Proceedings
    - Proceedings Eligible Debtors: SMEs
    - Maximum Debt: KRW 3 billion
    - Claims Resolved: All (secured, unsecured, equity)
    - Maximum Repayment Plan Period: 10 years
  - Individual Rehabilitation
    - Proceedings Eligible Debtors: Individuals with personal and business debts
    - Maximum Debt: Secured: KRW 1 billion; Unsecured: KRW 500 million
    - Claims Resolved: Unsecured
    - Maximum Repayment Plan Period: 3 years (for unsecured)
  - Liquidation and Summary Liquidation
    - Proceedings Eligible Debtors: Corporates and individuals
    - Maximum Debt: N/A
    - Claims Resolved: Unsecured
    - Maximum Repayment Plan Period: N/A
    - Corporates and individuals with no more than KRW 500 million in assets of the estate: Unsecured; Maximum Repayment Plan Period: N/A
  - Source: Adapted from materials provided by the MOJ
- Corporate Restructuring Promotion Act (CRPA):
  - Provides statutory framework for out-of-court debt restructuring between a debtor and its financial creditors.
  - First enacted in 2001 as a temporary law; extended for 5-year intervals with latest extension in October 2018 (CRPA scheduled to expire on October 15, 2023).
  - Scope expanded to cover all corporates, including SMEs, and all financial creditors.
  - CRPA transformed from a London-Approach-style arrangement for large corporates into a broader statute facilitating multi-creditor workouts.

### REORGANIZATION AND CORPORATE WORKOUTS — System description
- Available options for corporates:
  - Court-supervised formal rehabilitation under the DRBA involving all creditors.
  - Hybrid “prepack” process under the DRBA with select creditors (P-Plan / “prior rehabilitation proposals”).
  - Out-of-court debt restructuring under the CRPA with financial creditors only.
  - Voluntary agreement with select creditors (informal, confidential, binds only participating creditors).
- Reorganization under the DRBA (key features):
  - Initiation: Debtor corporation or its creditors may initiate if the debtor is unable to pay debts when due without serious hindrance to business continuation, or likely to become insolvent.
  - No automatic stay at time of application (although stay may be requested); stay applies automatically upon commencement.
  - Debtor typically remains in possession unless court decides otherwise.
  - Creditors classified into secured and unsecured; further subclassification possible.
  - Plan confirmation thresholds:
    - Approved by creditors holding at least 2/3 of the value of unsecured claims and creditors holding at least 3/4 of the value of secured claims.
    - Liquidating plans require a 4/5 majority of secured creditors.
    - Where debtor’s liabilities do not exceed assets, equity rights holders with at least 1/2 of the equity must approve the plan.
  - If required majorities not secured, the court may modify and approve the plan provided rights of affected dissenting creditors are protected and at least one class of creditors has consented.
- P-Plan (prior rehabilitation proposals):
  - Expedited hybrid procedure under DRBA.
  - Creditors holding at least 50 percent of claims or a debtor with consent of such creditors may develop a rehabilitation plan out-of-court and submit to the court for voting.
  - Designed to blend speed/flexibility of out-of-court processes with advantages of an in-court process (court-ordered stay on enforcement, bind minority creditors).
  - Conceived to facilitate agreement reached under CRPA to be confirmed by the court under the DRBA.
- CRPA process (key features):
  - Facilitates out-of-court debt restructuring between debtor and financial creditors.
  - Principal financial creditor may notify debtor of “signs of insolvency.”
  - Debtor may commence rehabilitation discussions with principal creditor only (administrative proceeding) or with all financial creditors (joint administratorship).
  - Debtor remains in possession; creditors may agree to standstill on enforcement.
  - Confirmation of the plan requires consent of participating financial creditors holding at least 3/4 of the claims by value.
    - Where a single creditor holds 3/4 of the claims, resolution requires consent of 2/5 of the number of creditors.
  - Dissenting creditors have right to be bought out by other creditors.
  - Disagreements mediated by the Creditors’ Coordination Committee.
  - Only participating creditors are impacted by restructuring.
  - The FSC may levy fines for failure to abide by the CRPA.
- Voluntary agreements:
  - Confidential, flexible out-of-court negotiations binding only participating creditors.

*Italic line: Source: 1korea2020003 - EXECUTIVE SUMMARY, REPUBLIC OF KOREA, INTERNATIONAL MONETARY FUND*

### 10.      The Seoul Bankruptcy Court has devised a new process called Autonomous

### 10. The Seoul Bankruptcy Court has devised a new process called Autonomous Restructuring Support (ARS)

### ARS (Autonomous Restructuring Support)
- Purpose:
  - Promote restructuring by allowing out-of-court agreement while preserving creditor stay.
- Key features:
  - A debtor’s insolvency petition is accepted by the court but kept in abeyance for 3 months to allow the parties time to reach an agreement out of court.
  - If the parties reach agreement, the petition can be withdrawn.
  - ARS permits parties to benefit from a stay on creditor action while negotiations are ongoing.

### SME Rehabilitation: Toolkit and Special Procedures
- Importance of SMEs:
  - SMEs make up over 99 percent of the total number of enterprises (about 38 percent are unincorporated micro-enterprises and 25 percent are small enterprises), and account for 51 percent of added value.
  - Domestic banks have significant exposure to SMEs: 40 percent of their total loan portfolio.
- Main elements of the SME toolkit:
  - Summary Rehabilitation Proceedings (SRP) under the DRBA:
    - Streamlined procedure to reduce costs, increase efficiency, and boost chances of successful plan adoption.
    - SMEs with debts of no more than KRW 3 billion may access the process.
    - Eliminates need for a custodian and an inspector in most cases; an inspection commissioner (accountant or court official) may be appointed with simplified duties under Supreme Court Regulations.
    - A creditors’ council is not required in all cases; voting thresholds for plan adoption are relaxed.
    - Adoption thresholds under SRP: unsecured creditors with consent of either (i) creditors holding at least 2/3 of the value of unsecured claims; or (ii) creditors holding at least 1/2 of the value of unsecured claims and a majority of the persons with voting rights.
  - Individual rehabilitation for owners of unincorporated businesses:
    - Eligible if they meet debt thresholds for the procedure.
    - Enables restructuring of all debts (business and personal) in a single proceeding.
    - Maximum repayment plan period is generally 3 years.
    - Secured creditors are generally not part of the proceeding (applies only to unsecured debts).
    - Secured debts may not exceed KRW 1 billion, and unsecured debt may not exceed KRW 500 million.
    - Individuals may also benefit from the Credit Counselling and Recovery Service for business debts.
  - Government support programs (illustrative list includes):
    - SME Rehabilitation Consulting Program
    - SME Equity Retention Scheme
    - Preauthorization M&A scheme
    - SME Fast Financing Support Program
    - Negotiation support program
    - Programs under the comprehensive re-challenge center
  - S-Track (launched 2017-2018 by the Seoul Bankruptcy Court):
    - Designed to integrate and link various SME support programs across agencies.
    - Available to enterprises with debt of less than KRW 15 billion.
    - Components include:
      - Pre-petition and petition support through counseling on options and support schemes.
      - Appointing a restructuring officer to mediate and support negotiations and assist with exit options (including business sale).
      - Financial support toward costs of proceedings, cost of implementing restructuring plans, and establishing an “Equity Retention” plan enabling entrepreneurs to earn back equity after a debt-to-equity swap.

### Use and Practice of Restructuring Mechanisms
- Creditor landscape and market participants:
  - Creditor types: banks, asset management companies, distressed debt investors, other capital market players; tax creditors also participate (claims generally paid with priority under a rehabilitation plan as a matter of practice).
  - Robust NPL market led by United Asset Management Company (UAMCO); KAMCO purchases NPLs from banks on request and uses techniques such as sale-and-lease-back arrangements.
  - The K-Growth Fund is a fund of funds investing in rehabilitation of distressed corporates.
- Preference for out-of-court restructuring:
  - Significant corporate debt restructuring takes place through voluntary out-of-court agreements due to stigma associated with insolvency, cultural preference for confidentiality, and contractual ipso facto clauses.
  - Ipso facto clauses (which entitle a counterparty to terminate a contract on a counterparty’s insolvency) are common and deter formal filings.
  - Debtors prefer out-of-court workouts as they are less likely to impact shareholder control.
- Involuntary petitions and bank incentives:
  - Involuntary insolvency petitions by creditor banks are rare due to cultural norms and disincentives (formal filing affects loan risk classification and branch key performance indicators).
- Court-supervised reorganization under the DRBA:
  - Generally regarded as efficient; DRBA provides timelines that are largely observed.
  - Time taken for in-court reorganization is significantly lower in Seoul than other parts of the country; the Seoul Bankruptcy Court and its “Fast Track Program” credited with speeding up the process.
- Reorganization features and techniques:
  - Both financial and operational restructuring are common; debt-to-equity swaps frequently used to dilute existing shareholders and change management.
  - “Stalking horse bids” have gained popularity: a conditional agreement with a prospective buyer can be followed by an open bid auction; if no higher bidder emerges sale proceeds to stalking horse; break-up fees or top-up bids may apply.
  - Operational restructuring is common but less so among smaller enterprises.
- Duration metrics (corporate rehabilitation proceedings):
  - Average Days from Petition to Commencement Order (Nationwide):
    - 2017: 35.2
    - 2018: 34.4
  - Average Days from Petition to Commencement Order (SBC):
    - 2017: 18.7
    - 2018: 19.8
  - Average Days from Commencement Order to Approval of Rehabilitation Plan (Nationwide):
    - 2017: 212.6
    - 2018: 212.1
  - Average Days from Commencement Order to Approval of Rehabilitation Plan (SBC):
    - 2017: 175.7
    - 2018: 159.6
- Use of P-plans and fresh-money protection:
  - Use of P-plans is limited (fewer than a dozen P-plans in the courts).
  - Priority for fresh money provided in an out-of-court workout is not recognized in a subsequent in-court proceeding, offering little protection to new financiers if an insolvency petition is later filed.
- Post-commencement financing:
  - Limited availability of post-commencement financing is a challenge.
  - Authorities established a specialized fund at KAMCO to facilitate post-commencement financing on commercial terms to viable businesses.
  - The K-Growth Fund is actively investing in rehabilitation including pre-insolvent companies.
- SME caseloads and performance:
  - SMEs account for about a third of all corporate reorganization petitions filed before the courts.
  - Within the Seoul Bankruptcy Court, a special bench exclusively hears SME petitions filed under the SRP.
  - SRP is quicker than the regular procedure: average 181 days from application to approval of the plan (compared to 247 days on average for the regular procedure).
    - Note: SRP proceedings are even quicker at the Seoul Bankruptcy Court and take an average of 119 days.
  - Filings under the SRP are limited to a few hundred applications per year; many distressed SMEs may use individual insolvency, voluntary workouts, or exit without filing.
  - Chief SME challenges: lack of early filings and difficulties securing post-commencement financing.
- CRPA (Corporate Restructuring Promotion Act) usage:
  - Creditors indicate a preference for workouts under the CRPA over reorganization, but few rehabilitation cases under CRPA recently.
  - CRPA used successfully for large companies by financial institutions; perception exists of government influence over private restructuring decisions under CRPA.
  - CRPA regarded as more flexible than DRBA but creditor coordination remains a major obstacle because decisions require unanimity or buyouts of dissenting creditors.
  - Possible solutions: standing inter-creditor agreements between major financial institutions or holdout clauses in multi-creditor financing agreements.
  - Ongoing discussions on making CRPA permanent; the Financial Service Commission will report to the National Assembly in July 2020 on this issue.

### Analysis and Recommendations
- Alignment with international best practice:
  - The reorganization procedure is generally well-aligned with international best practice; DRBA broadly consistent with key elements including commencement, management of reorganization, claims verification, treatment of executory contracts, class voting, and discharge for entrepreneurs.
- Areas for better alignment and suggested measures:
  - Directors’ Duties in the Period Approaching Insolvency:
    - The DRBA does not address specific duties and obligations of directors approaching insolvency; corporate law sets general fiduciary duties and sanctions.
    - World Bank Principles (Principle B2) and UNCITRAL Legislative Guide (Part IV) recommend personal liability for directors for wrongful trading to create accountability and encourage early filings; express inclusion in the DRBA could be useful.
  - Ipso Facto Clauses:
    - The DRBA is silent on enforceability of automatic termination and acceleration clauses of executory contracts upon insolvency.
    - Such clauses deter early filings and harm business rescue prospects.
    - World Bank Principle C.10.2 and UNCITRAL Legislative Guide recommend that contract provisions terminating upon commencement should be unenforceable, except in special cases such as financial contracts (derivatives, repos).
    - Korean courts have held ipso facto clauses unenforceable in some cases, but legislative clarity would be useful.
  - Post-commencement Financing:
    - UNCITRAL Legislative Guide recommends incentives for post-commencement financing, including priority at least ahead of unsecured creditors and preserving that priority if reorganization converts to liquidation.
    - The DRBA permits post-petition financing to have highest priority in case of reorganization but does not preserve this priority if reorganization proceedings convert to liquidation.
    - The DRBA was amended in February 2020 to address priority concerns in liquidation; few details available and the amendment was not factored into the paper’s analysis.
    - The DRBA also does not recognize priority to financing agreed out-of-court in a subsequent court-supervised reorganization or liquidation; including such a provision could help promote out-of-court restructuring even though it is not required by the standard.
- Individual entrepreneurs’ rehabilitation:
  - The DRBA’s rehabilitation procedure for individual entrepreneurs is simplified, quick, inexpensive, and tailored to small debtors.
  - Procedure differs from insolvency standard (e.g., no creditor voting on repayment plan) and is closer to personal insolvency; it appears well-suited and generally effective for individuals with small debts.
- Further considerations:
  - Assess whether the system effectively triages unviable SMEs for speedy liquidation as appropriate.
  - Consider strengthening early-warning functions (e.g., expanding circumstances triggering discussions with debtors and encouraging periodic self-assessments by debtors) to address bank passivity in monitoring.

*Source: IMF staff summary of Korea insolvency and SME rehabilitation provisions and practice.*

### 24.      As in other jurisdictions, there are limited provisions for the insolvency of enterprise

### 1korea2020003 - 24.      As in other jurisdictions, there are limited provisions for the insolvency of enterprise

### Enterprise-group insolvency: findings
- The DRBA provides that in cases where an insolvency petition of a company is underway in a particular court, other insolvent entities that are its affiliates may also file their insolvency petition before the same court.
- Courts have significant discretion in case management and appear to be sensitive to the need to coordinate proceedings.
- Large corporate groups, known as chaebols, do not typically borrow from banks; the chief risk is spillover effects of insolvency of an enterprise group on other businesses, including the SMEs in its supply chain.
- Substantive consolidation of all assets and liabilities for enterprise groups is not recognized under the DRBA.
- If more than one company in a group becomes insolvent, courts have considerable discretion to facilitate procedural coordination:
  - Coordinated restructuring plans are possible.
  - Appointment of the same insolvency administrator across related cases is possible, subject to conflicts of interest checks.
  - Hearing dates and meetings of creditors may be synchronized by the court due to the judge-led system in Korea.
- The framework is judged to be generally consistent with the standard; coordinated reorganization (and liquidation) between entities forming part of a corporate group appears possible, in line with World Bank Principle C.16 and Part III of the UNCITRAL Legislative Guide.

### Institutional framework — description and practice
- Specialized courts:
  - The Seoul Bankruptcy Court, established in March 2017, adjudicates corporate rehabilitation and liquidation as well as personal insolvency cases.
  - The Seoul Bankruptcy Court has 34 judges, and over 200 legal staff as of 2018.
  - Outside Seoul, a bankruptcy division in each local district court has jurisdiction over insolvency cases.
  - In high value cases, the Seoul Bankruptcy court has concurrent jurisdiction even if the debtor’s center of main interests is outside Seoul.
    - Footnote definition: These are cases with more than 300 creditors and where debts exceed KRW 50 billion.
- Court-supervised procedures and advisory bodies:
  - Procedures under the DRBA rely on a significant degree of court supervision.
  - The court is advised by a custodial committee comprising independent experts who:
    - assist the court in the appointment of custodians and inspectors;
    - examine the draft rehabilitation plan;
    - facilitate the establishment of a creditors’ committee (creditors’ consultative council).
  - Courts generally mandate the appointment of Chief Restructuring Officers (CROs) by debtors; courts develop candidate lists, interview candidates and make recommendations to the debtor.
  - Courts rely on bankruptcy administrators who assist judges by performing routine tasks associated with insolvency matters.
- Human resources and rotation:
  - Insolvency judges at the Seoul Bankruptcy Court mandatorily rotate from their posts after 2-3 years to other commercial matters.
  - Rotation periods could be shorter in district courts, potentially as frequent as every 1-2 years.
  - Frequent rotations may affect the creation of deep and specialized knowledge on insolvency matters, particularly outside Seoul.
- Professional accreditation and lists:
  - There is no insolvency administrators’ profession in Korea; lawyers act as insolvency administrators and accountants serve as examiners in court.
  - No special qualification systems or training systems exist for lawyers or accountants who provide bankruptcy related services.
  - The Seoul Bankruptcy Court compiles a list of qualified examiners as candidates for appointment by court through a custodial committee and updates the list through periodic assessments (usually every two years); courts elsewhere follow the same protocol.
- Use and innovations:
  - The Seoul Bankruptcy Court developed programs (e.g., Fast Track Proceedings, the S-Track) to complement the DRBA.
  - Nearly 40% of all reorganization and liquidation cases filed in Korea are before the Seoul Bankruptcy Court.
  - There are no serious backlogs nationwide and average resolution times have decreased in recent years.
  - High degree of digitization and standardization: most applications are made online; schedules, forms and templates are available; courts collect and report data on insolvency cases.
  - Several Seoul Bankruptcy Court initiatives arise from practice rather than codification (e.g., S-Track, ARS), creating a significant body of discretionary practice.

### Institutional framework — recommendations (analysis)
- Deepen court expertise:
  - It is recommended that the period of rotations for insolvency judges be extended to at least 5-7 years.
  - Increased efforts toward judicial capacity building in district courts outside Seoul are recommended.
- Develop an insolvency administrators’ profession:
  - The absence of an insolvency administrators’ profession is a significant institutional gap.
  - The system does not regulate accreditation, supervision and monitoring of administrators as a profession.
  - The international standard recommends objective, clearly established, and publicly available criteria for insolvency representatives (Principle D8 of the World Bank Principles).
  - Consideration should be given to developing an insolvency administrators’ profession in line with the international standard.
  - Introduction of such a profession with requisite expertise and accountability is considered desirable; current experience with professionals is mixed.
  - Korean authorities reviewed the issue in early 2019 but reached no conclusions.

### Annex I — Select considerations on personal insolvency: findings
- Korea has a modern insolvency and debt restructuring regime for individuals under the DRBA.
- The DRBA includes a procedure for individual rehabilitation accessible to debtors with business or personal debts below the prescribed threshold.
  - Footnote: Secured debts may not exceed KRW 1 billion, and unsecured debt may not exceed KRW 500 million.
- Rehabilitation procedure summary:
  - Eligible debtors may file for commencement of rehabilitation or bankruptcy proceedings.
  - All creditor enforcement actions may be temporarily suspended by the court, but secured creditors are in principle not subject to the process (only unsecured debts are included).
  - Debtor prepares a plan subject to a vote; if creditors object the court may still approve the plan provided certain conditions are met (e.g., creditors receive no less than they would in liquidation; disposable income of the debtor is used to make payments; total payments meet a minimum threshold).
  - Maximum repayment plan period is generally 3 years (recently reduced from 5 years).
    - Footnote: In exceptional circumstances, the discharge period may be extended up to 5 years.
  - After the repayment period, remaining debts are discharged.
- Stigma and legal penalties:
  - Bankruptcy carries several disincentives and severe stigma.
  - Although the DRBA states debtors should not be subject to penalties for bankruptcy, other legislation retains penalties (e.g., bankrupt persons disqualified from several professions such as the law; not eligible to work in the public sector).
  - As a result, there are significantly more rehabilitation applications than bankruptcy applications.
- Individual insolvency caseload (Annex Table 1):
  - 2017: Rehabilitation 81592; Bankruptcy 44246
  - 2018: Rehabilitation 91205; Bankruptcy 43397
  - Source: Nationwide Court Data provided by the Ministry of Justice

### Credit Counseling and Recovery Service (CCRS): findings and data
- CCRS overview:
  - A non-profit established under the Microfinance Support Act of 2017.
  - Financial institutions that have entered into the Credit Recovery Support Agreement with the CCRS participate.
  - Individuals may reach out-of-court debt restructuring agreements via CCRS.
- Eligibility and process:
  - Individuals with business and personal debts may apply to CCRS.
  - Eligibility requirements:
    - Debt should not exceed KRW 1.5 billion and should be either:
      - (i) owed to multiple creditors and not more than 90 days overdue; or
      - (ii) owed to a single creditor but more than 90 days overdue.
  - Small application fee: KRW 50,000 (can be waived for indigent debtors).
  - CCRS develops a repayment plan based on debtor information and creditor confirmation.
  - Plans typically liquidate debtor’s assets and require debtor’s income to satisfy debts.
  - Up to a maximum of 70% of individuals’ debt may be written off under the plan, which may be 8-10 years.
  - The plan aims, where possible, to allow the debtor to retain the family home.
  - Agreement of a simple majority of creditors is required for plan approval; dissenting creditors are bound by a contractual inter-creditor agreement.
  - If creditors agree, the original contract is deemed modified.
  - If a debtor has no assets and no income, CCRS encourages approach to court for a speedy discharge.
- CCRS performance data (Annex Table 2):
  - Applications:
    - 2014 85168
    - 2015 91520
    - 2016 96319
    - 2017 103277
    - 2018 106808
  - Repayment Plans Approved:
    - 2014 73925
    - 2015 77757
    - 2016 81401
    - 2017 89087
    - 2018 93136
  - Approval Rate:
    - 2014 86.8%
    - 2015 85%
    - 2016 84.5%
    - 2017 86.3%
    - 2018 87.2%
  - Source: Data provided by the CCRS
- CCRS outcomes and considerations:
  - CCRS has been highly successful; over 100,000 applications are received annually and in over 80% of cases where a plan is proposed it has been accepted by creditors.
  - CCRS offers a pre-insolvency program and benefits that incentivize staying current on the plan (e.g., access to credit cards and emergency loans).
  - Presently, secured creditors are typically not impacted by individual insolvency; they may enforce collateral and are not required to be bound by rehabilitation plans.
  - CCRS facilitates voluntary mortgage debt restructuring, typically through maturity extensions to allow debtors to maintain home-ownership.
  - Given mortgage debt is the most significant component of banks’ exposure to households, balancing social considerations of home ownership with banking system risk is critical.
  - Authorities are considering providing more favorable treatment to debtors with mortgages, particularly for vulnerable groups.
  - Any social protection program should:
    - promote continued debt-servicing based on debtor’s ability to pay;
    - be linked to good-faith behavior (information disclosures, reporting changes in circumstances, etc.);
    - aim to limit potential for moral hazard and strategic defaults.

*Source: 1korea2020003 — REPUBLIC OF KOREA / INTERNATIONAL MONETARY FUND*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1korea2020003.pdf_