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International Project Finance and PPPs
A Legal Guide to Key Growth Markets

Edited by

Jeffrey Delmon
Victoria Rigby Delmon

Law & Business
AUSTIN

BOSTON

CHICAGO

NEW YORK

THE NETHERLANDS

Published by:
Kluwer Law International
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2400 AH Alphen aan den Rijn
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Website: www.kluwerlaw.com

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ISBN 978-90-411-2719-8

# 2010 Kluwer Law International BV, The Netherlands

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
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Printed in Great Britain.

Summary of Contents

Preface

xliii

Acknowledgements

xlv

General Reports
Chapter 1
Introduction to Public-Private
Partnerships
Chapter 2
Introduction to Project Finance

Introduction to PPPs – 1
Introduction to Project Finance – 1

Chapter 3
Local Legal Issues

Local Legal Issues – 1

Country Reports
Chapter 4
Brazil
Thomas Benes Felsberg, Maria da Grac¸a de
Brito Vianna Pedretti, Andre´a Machado Martins
Costa & Fabrizio de Oliveira Sasdelli
Felsberg, Pedretti, Manrich e Aidar
Advogados e Consultores Legais

ix

Brazil – 1

SUMMARY OF CONTENTS

Chapter 5
Chile
F. Patricia Nu´n˜ez, F. Sebastia´n Quijada &
Carolina Benito Kelley

Chile – 1

Nun˜ez, Mun˜oz & Cı´a. Ltda. Abogados
Chapter 6
China
Matthew McKee & Aldo Settimio Boni de Nobili

China – 1

Hwuason & Lehman, Lee & Xu
Chapter 7
Egypt
Ahmed El Sharkawy & Salma Shams El-Din

Egypt – 1

Sharkawy & Sarhan Law Firm
Chapter 8
India
Cyril Shroff & Alice George

India – 1

Amarchand & Mangaldas & Suresh A. Shroff & Co.
Chapter 9
Nigeria
Adedolapo Akinrele, Zelda Odidison & Jumoke Onigbogi

Nigeria – 1

F.O. Akinrele & Co.
Chapter 10
Romania
Lumini¸ta Popa, Iuliana Craiciu & Marius Baˆrla˘deanu

Romania – 1

Musat & Asociatii Attorneys at Law
Chapter 11
Russia
Andrei Baev, Alexander Dolgov, Veronika Kondruseva &
Elena Shishmariova
Allen & Overy LLP

x

Russia – 1

SUMMARY OF CONTENTS

Chapter 12
South Korea
Young Kyun Cho & Seong Soo Kim

South Korea – 1

Kim & Chang
Chapter 13
Tanzania
Wilbert Basilius Kapinga, Joy Hadji Alliy &
Nasra Hassan

Tanzania – 1

Mkono & Co.
Chapter 14
Turkey
H. Tolga Dani¸sman, Itir Sevim-C¸iftc¸i, Hakki Gedik,
_ smen
M. Kemal Mamak & Senem I¸
¨ zeke Attorney Partnership
Hergu¨ner Bilgen O
Chapter 15
Uganda
Joseph B. Luswata, Nicholas Ecimu, Julius Ojok,
Munanura Andrew Kamuteera &
Brenda Judith Kyokwijuka

Turkey – 1

Uganda – 1

Sebalu & Lule Advocates and Legal Consultant
Chapter 16
United Arab Emirates
David Wadham & Mhairi Main Garcia

United Arab Emirates – 1

Ashurst Middle East
Chapter 17
United States
Allan T. Marks & Eric F. Silverman
with contributions from
Alexander K. Borisoff, Caroline Conway,
Henry T. Scott & Amy E. Turner

United States – 1

Milbank, Tweed, Hadley & McCloy LLP
List of Country Codes

Country Codes – 1

Index

Index – 1
xi

Chapter 12

South Korea
Young Kyun Cho
Mr. Young Kyun Cho received his LL.B from Seoul National University in
1985 and his LL.M in 1987. He also received an LL.M. from the University of
Pennsylvania Law School in 1994. He is admitted to the bar of Korea. Mr. Cho
is a partner in the Project Finance Group, Aircraft Finance Group, and
Banking Group of Kim & Chang. Since joining the firm in 1988, he has
advised numerous clients including major domestic and foreign banks and
non-bank financial investors as well as major domestic companies in the area
of project financing, aircraft financing, commercial banking, corporate financing and structured financing. He has a vast amount of experience in project
financing in Korea and has advised banks, asset management companies, and
insurance companies as well as construction and engineering companies in
most major domestic infrastructure projects such as toll roads, railways, ports,
and power plants. In addition, since the early 1990s he has advised offshore
lenders and lessors including U.S. Eximbank and ECA in almost all of the
aircraft financing transactions in Korea.

Seong Soo Kim
Mr. Seong Soo Kim received his LL.B from Boston College in 1987 and his JD
in 1990. He went on to receive his LL.M from Boston College in 1992. He is
admitted to the New York Bar. Mr. Kim is a senior foreign attorney in Kim &
Chang’s Finance Department. Having joined the firm in 1996, he has developed extensive experience in international corporate and financing transactions, including project finance, ship finance, private and public equity
offerings, and overseas infrastructure/power projects. Previously he worked
for a major US law firm. In 2007, the Asia Pacific Legal 500 recognized
Mr. Kim as a leading projects lawyer in Korea.

South Korea – 1

SOUTH KOREA

Kim & Chang

Kim & Chang is widely recognized as Korea’s premier law firm.
Established in 1973, the firm has set the standard for excellence for
legal services in every major area of practice. The principles we were
founded on and which we still adhere to today allow us to provide the
highest-quality legal advice to our clients – specialization in core practice
areas, dedication to meeting the unique needs of each client, and internationalization of staff. Having advised in the majority of major transactions,
projects, and cases in Korea, we have earned an unrivalled track record for
developing innovative solutions to the increasingly complex legal challenges that our clients face, both in Korea and increasingly overseas.
Our success derives from the outstanding quality of our professionals and
staff. They include attorneys, patent attorneys, tax attorneys, economists, and
sector specialists, who number more than 700 today. They are exceptionally
talented individuals who have graduated from most prestigious universities
in Korea and around the world. They have honed their skills on challenging
assignments. They are international in practice and outlook; many Korean
attorneys are also licensed to practice in the US, and our foreign attorneys
have had work experience in the US, Japan, China, and the EU countries
and speak French, German, Chinese, Japanese, Swedish and Spanish in
addition to Korean and English. But perhaps most importantly, our professionals can be distinguished by their singular commitment to providing the
highest quality services to the firm’s clients as efficiently as possible.
Our clients comprise an extraordinary roster of multinational corporations,
domestic companies, international and domestic financial institutions, and
private equity funds. They include most of the companies in the Fortune
500. But whether they are established industry leaders or start-ups, our
clients can be assured of receiving the highest-quality advice that is
uniquely tailored to their needs.
Kim & Chang
Seyang Building, 223 Naeja-dong, Jongno-Gu
110-720 Seoul
South Korea
Tel.: þ82 2 3703 1114
Fax: þ82 2 737 9091/3
E-mail: [email protected]
Web: www.kimchang.com

South Korea – 2

Chapter 12

South Korea
Young Kyun Cho & Seong Soo Kim
Kim & Chang

1.

OVERVIEW OF PUBLIC-PRIVATE PARTNERSHIPS
IN KOREA

1.1.

MARKET CONTEXT

1.1.1.

Recent Trends and Issues

After several years of robust growth, Korea has become one of the most active
markets for infrastructure project finance transactions globally; however,
many industry participants are now concerned that the private sector’s interest
in PPI projects is waning in Korea. Obviously, the ongoing financial crisis has
adversely affected the PPI sector, but some allege that the financial crisis is
not the sole reason. PPI projects may now be perceived as less economically
viable and riskier than before due to their declining investment returns caused
by, among others, increasing competition among private participants, elimination or reduction of governmental support, as well as, to a degree, inconsistent policies. Consequently, the number of PPI projects, especially BTO
projects, has reduced significantly in recent years. The private sector’s declining interest in PPI projects in Korea may be specifically attributed to the
following:
(a) For some time, critics of the PPI scheme in Korea have been trying to
convince the general public of the intrinsic inefficiency and unfairness of the PPI scheme, alleging that the government’s excessive
payments of the minimum revenue guarantee mean that the
PPI scheme only benefits big businesses and foreign investors.
South Korea – 3

SOUTH KOREA

1. Overview of Public-Private Partnerships in Korea

Irrespective of whether or not such allegations are justified, it seems
that the public has sometimes taken this negative view of the
PPI scheme, thereby making it more difficult for the government
or potential investors to implement politically unpopular infrastructure projects.
(b) Some industry participants believe that PPI projects have become
unpredictable and therefore riskier due to the government’s recent
policy changes, such as reduction of construction subsidy and
termination payments, as well as retroactive application of newly
adopted policies. Generally, pursuant to the PPI Act, participants in
PPI projects invest in the concession companies through equity,
equity-linked debt, corporate bonds or advance loans. The concession companies operate infrastructure assets, such as toll roads,
bridges, ports, tunnels, and rail, under concessions from Korean
central and municipal governments. Until recently, a substantial
number of the concession companies under the PPI Act benefited
from some form of revenue guarantee from the competent authority
under their respective concession agreements. These revenue guarantees have effectively ensured that the concession companies
receive a minimum level of revenue for an agreed period of time.
However, the government has been gradually decreasing the level
of the revenue guarantees provided, thereby no longer ensuring the
investors’ return on their investment.
(c) Long-term injection of capital by financial investors is imperative for
most large PPI projects; however, it seems that there are not many
incentives in Korea for financial investors to provide funding to such
PPI projects. The current BIS (Bank for International Settlements)
ratio requirements have caused many financial institutions to be less
willing to extend loans to any PPI projects the loans for which would
be categorized as risky assets. Without a minimum revenue guarantee,
even large PPI projects might be perceived as risky. For this reason,
many commercial banks and insurance companies have become very
selective in their lending to PPI projects.
1.1.2.

New Governmental Measures

On 26 February 2009, the Ministry of Strategy and Finance of Korea
announced its ‘‘Plan to Revitalize PPI Projects’’ (the ‘‘Plan’’), in line with
the current administration’s overall economic policy to stimulate the economy
by implementing numerous public infrastructure projects in Korea. To attract
the private investment needed to revitalize the PPI sector, the Plan seeks to
give more governmental support to concession companies. In short, the Plan
South Korea – 4

1. Overview of Public-Private Partnerships in Korea

SOUTH KOREA

is divided into the following major categories: (i) support for funding;
(ii) sharing of increased interest costs; (iii) recution of overall duration for
projects; (iv) deregulations; (v) expansion of eligible projects and search for
new projects; and (vi) closer monitoring of disbursement of government funds.
More details are specified in the Basic Plan for PPI announced by the Ministry
of Strategy and Finance on 26 February 2009, which sets out the Korean
government’s policies for participation by investors in infrastructure projects,
and provides guidelines for the implementation of designated projects.
1.1.2.1.

Support for Funding

For a limited period of time, a special bridge loan programme of KRW 1 trillion
will be offered by The Korea Development Bank to companies with concessions for infrastructure projects, especially to those concession companies
implementing projects that will enter into the construction phase in 2009.
KRW 1 trillion is roughly equivalent to one-year construction costs required
for those PPI projects that will enter into the construction phase in 2009.
The maximum lending period for loans extended under the special programme
will be one year. Also, the loans will be guaranteed by the Infrastructure Credit
Guarantee Fund (the ‘‘Fund’’).
The Fund, which is managed by the Korea Credit Guarantee Fund, guarantees financial liabilities borne by the concession company incurred as a
result of borrowings for the project costs from financial institutions and/or
infrastructure bonds. Pursuant to the Plan, the Fund will increase its guarantees for PPI projects in terms of both amount and scope. The Fund’s
maximum guarantee amount per infrastructure project will be increased
from the current KRW 200 billion to KRW 300 billion. The Fund will
also provide guarantees for subordinated debt financing, so that subordinated debt lenders can recover their investment in case the infrastructure
project is prematurely terminated.
1.1.2.2.

Sharing of Increased Interest Expenses

Competent authorities and concession companies for infrastructure projects
that enter into the relevant loan agreements or construction phase in 2009 may
agree to adopt the measures described below.
Under the Basic Plan for PPI, for BTL projects, the competent authority may
share a portion of the difference between the interest rate of government bonds
(the ‘‘government bond rate’’) and the interest rate of corporate bonds issued by
banks (the ‘‘bank bond rate’’) having a five-year maturity and the credit rating
of AAA. If the Bank bond rate increases so that the difference between the
Government bond rate and the Bank bond rate becomes greater than 0.5%,
then 60% to 80% of such rate increase in excess of 0.5% will be shared by
South Korea – 5

SOUTH KOREA

1. Overview of Public-Private Partnerships in Korea

the competent authority. Conversely, if the Bank bond rate decreases, then the
competent authority will become entitled to take 60% to 80% of the savings
resulting from such rate decrease in excess of 0.5%. The actual allocation of the
interest rate fluctuation risk will be set every two years during the operation
phase, applying the mean value of the Government bond rate and the Bank
bond rate for such two-year period.
For BTO projects, if the base rate (such as the interest rate of bank bonds
having five-year maturity and the credit rating of AAA, the ‘‘Base Rate’’)
increases after the concession agreement is executed, then the competent
authority will share 60% to 70% of the rate increase in excess of 0.5%.
Conversely, if the Base Rate decreases, then the government will become
entitled to take 60% to 70% of the savings resulting from such rate decrease
in excess of 0.5%. The actual allocation of the interest rate fluctuation risk will
be set: (i) at the time when the initial user fee of the project facility is determined
and (ii) thereafter, every two years applying the mean value of the Base Rate for
such two-year period.
1.1.2.3.

Reduction of Overall Duration of Projects

Under the Basic Plan for PPI, the concession company will be able to operate
the project up to a half of the time saved as a result of early completion of the
project facility. This is an incentive for concession companies because during
such early operation period concession companies are entitled to collect fees
from users of the project facilities for their own account. The above-described
incentive will be available to those infrastructure projects that will enter into
the construction phase in 2009.
Pursuant to the Plan, the government will implement several measures to
reduce the pre-construction phase of development. Specifically, the preconstruction phase for BTL projects, such as schools and military housing
projects, will be reduced to twelve months from the current thirty months,
and that for roads and other large infrastructure facilities will be reduced
to sixteen months from the current thirty-two months. To achieve this end,
simplified feasibility tests for projects will be implemented, and negotiation
of the concession agreement and preparation of detailed engineering will
take place simultaneously, if feasible. In addition, to expedite the negotiation
of the concession agreement, competent authorities are now required to
consult with other relevant authorities and municipalities on their demands
in connection with the project facility, complaints from residents, etc., before
commencing the negotiation of the concession agreement. Also, a draft of
the concession agreement prepared by the competent authority, as well as
detailed requirements of the competent authority, will be provided to
potential bidders at the time the competent authority announces its request
for proposals.
South Korea – 6

1. Overview of Public-Private Partnerships in Korea

1.1.2.4.

SOUTH KOREA

Deregulations

The minimum ratio of the equity capital of shareholders to the total private
project cost is lowered by 5% (from 15% to 10%). For BTO projects, the
minimum equity capital ratio is lowered to 20% from the current 25% (or
15%, if 50% or more of the concession company’s shareholders are financial
investors). For BTL projects, the minimum equity capital ratio is lowered to
5% from the current 5% to 15% if the total project cost is less than KRW 100
billion.
In general, any additional benefit gained by the concession company as a
result of refinancing of the project or change in its shareholder (e.g., increase in
net income due to lower interest rate after refinancing, etc.) must be shared with
the relevant competent authority. However, under the Plan, if there is no
minimum revenue guarantee provided by the competent authority, then the
concession company is not required to share with the competent authority
any benefit resulting from a change in its shareholder.
The competent authority may increase the project cost by 5% without
implementing a formal review by the Committee, if such increase is unavoidable due to a reason for which the concessionaire is not responsible.
1.1.2.5.

Expansion of Eligible Projects and Search for New Projects

The type of eligible infrastructure projects under the PPI Act will be expanded
to include facilities for the disabled, sewage water recycle facilities, and
professional sports facilities, such as soccer fields for professional players.
Previously, only public school projects could be implemented by the BTL
method under the PPI Act. Starting from 2010, construction or remodeling of
private schools may be implemented by the BTL method under the PPI Act.
In principle, economically viable unsolicited projects (i.e., projects
initiated by private investors, rather than the government) will be implemented as PPI projects. Even for government construction projects, the feasibility
of pursuing such projects under the PPI Act will be examined from the outset.
1.1.2.6.

Closer Monitoring of Disbursement of Government Funds

Disbursement of funds for PPI projects will be monitored by the government’s
special monitoring team for fund disbursement, as is the case with government
construction projects. Disbursement of funds will be continuously monitored
and problems relating to PPI projects will be resolved promptly by way of onsite review.
Each relevant department within the government will establish a
PPI review team, so that any problem or suggestion can be addressed
promptly.
South Korea – 7

SOUTH KOREA

1.2.
1.2.1.

1. Overview of Public-Private Partnerships in Korea

LEGAL CONTEXT
Procedures for Private Participation in Infrastructure

Korea first adopted its legal framework for implementing Private Participation
in Infrastructure (PPI) and project financing in 1994. The predecessor of the Act
on Private Participation in Infrastructure (the PPI Act) was unsuccessful in
generating any large volume of private investments in infrastructure projects,
and it failed to attract foreign investment. Nevertheless, by drawing on various
foreign models in designing its PPI program, Korea was able to establish a
relatively well-defined regulatory framework in a short period of time.
Under the PPI Act, there are two procedures for implementing infrastructure projects: solicited (i.e., government initiated) projects and unsolicited
(i.e., sponsor initiated) projects. Infrastructure projects may be implemented
in the form of BTO (Build-Transfer-Operate), BTL (Build-Transfer-Lease),
BOT (Build-Operate-Transfer), or BOO (Build-Own-Operate) projects. BTL
method is permitted for solicited projects only. Additionally, the PPI Act
permits the government and sponsors to adopt certain other project structures.
Among the foregoing, BTO and BTL are the two most common forms of
PPI projects used in Korea.
For solicited projects, the following procedures apply: (i) the competent
authority determines private infrastructure projects to be implemented; (ii) the
competent authority prepares the basic plan for each project and makes a public
announcement for each project; (iii) any interested bidder submits its project
proposal to the competent authority; and (iv) the competent authority evaluates
each project proposal and designates the concessionaire by entering into a
concession agreement. In case of a solicited project with the total project cost
above a specified amount, designation of the concessionaire requires a review by
the Private Investment Project Deliberation Committee (the Committee).
For unsolicited projects, the following procedures apply: (i) a sponsor
submits its proposal for an infrastructure project to the competent authority;
(ii) the competent authority consults the Public and Private Infrastructure
Investment Management Center (the PIMAC) and requests its review of the
project proposal; (iii) once the PIMAC approves the project proposal, the
competent authority makes a public announcement of the project and invites
third parties to participate in the bidding process; and (iv) the competent
authority selects the concessionaire through the bidding process. The sponsor
that submitted the original project proposal may receive additional points of up
to 5% of the evaluation points, and the bidder with the most points is granted
the concession. If no other party participates, then the original sponsor will be
designated as the concessionaire. Subsequently, the competent authority will
enter into a concession agreement with the concessionaire, pursuant to which
the project will be constructed and operated.
South Korea – 8

1. Overview of Public-Private Partnerships in Korea

1.2.2.

SOUTH KOREA

Concession Agreement

As mentioned above, the concession agreement, which has become somewhat
standardized through time, is the instrument by which the concessionaire will be
formally designated by the competent authority. It is also the most important
document in a project in that it regulates most major terms and procedures of
the project, including: (i) designation of the concessionaire and basic matters
relating to the parties’ rights, obligations, and relationships with each other;
(ii) commercial matters, such as the total project cost, user fee, the internal
rate of return, and operational revenue and expenses; (iii) approval of the implementation plan, performance guarantee, etc.; (iv) matters relating to construction
and operation; (v) minimum revenue guarantee and other governmental support
(both financial and non-financial); (vi) allocation of risk (such as force majeure
events); (vii) events of termination and dispute resolution; and (viii) matters
relating to termination, buy-out right, and payment of the termination sum.
1.2.3.

Governmental Support

To the extent its budget permits, the competent authority may, with the
Committee’s approval, provide financial assistance to the concessionaire in
the following cases: (i) the financial support is necessary to prevent the dissolution of the concessionaire; (ii) the financial support is necessary to maintain
the fee charged to the public or users of the facilities at an appropriate level;
(iii) compensation to expropriated landowners is excessive and materially prejudices the concessionaire’s profitability of the project; (iv) the operation of the
project facilities becomes commercially unfeasible due to substantially low revenue to be collected from the users of the facilities (i.e., the minimum revenue
guarantee); and (v) due to fluctuations in the exchange rates, the concessionaire
has incurred a significant foreign exchange loss (but only with respect to
foreign currency borrowings and not for any foreign exchange loss for equity
investment). The specific terms of and procedural requirements for governmental support are stipulated under the relevant concession agreement.
The government may guarantee a certain percentage (usually between 60%
and 90%) of the estimated revenue (with reciprocal reversion to the government of any revenue earned in excess of a certain percentage (usually between
110% and 140%) of the estimated revenue). In case of force majeure or
default by the competent authority specified in the PPI Act, the concessionaire
may exercise its buy-out right and demand the competent authority to
purchase the project. Also, if the concession agreement is terminated prior
to the expiration of the concession period, then the concessionaire will become
entitled to receive a termination sum, which is calculated based on, depending
on the cause of such termination, the foregone future revenues, the private
investment amount (equity and debt), etc. The minimum revenue guarantee
South Korea – 9

SOUTH KOREA

2. Local Legal Issues

and the termination sum provisions are very important to financiers, as they
directly impact the amount actually recoverable by the financiers should the
concessionaire default on the loan. Not surprisingly, however, the government
has been gradually reducing the scope of the minimum revenue guarantee and
the termination sum for economic as well as political reasons.
1.2.4.

Tax Benefits and Others

The Korean government provides various tax benefits to the concessionaire.
For BOT projects, acquisition of real estate is exempt from acquisition tax
and registration tax. For BTO and BOT projects, the zero-rate VAT will
apply to transfer of the project facilities to the competent authority. Also,
under the PPI Act, many government clearance and approval procedures are
either simplified or exempted and the concessionaire is permitted to use certain
public lands for construction of the project facilities. The concessionaire has the
right to expropriate land under the PPI Act; alternatively, the concessionaire
may request the government to expropriate land on behalf of the concessionaire.
1.2.5.

The PPI Act

The PPI Act and the Enforcement Decree of the PPI Act (the ‘‘Enforcement
Decree’’) are the principal components of the legal framework for PPI. Under
the PPI Act, the Ministry of Strategy and Finance establishes and constantly
revises the Basic Plan for PPI, which stipulates policies related to PPI and
provides detailed guidelines for implementing PPI projects.
Certain amendments to the PPI Act became effective as from 1 January
2009. These amendments include:
– Additional types of infrastructure may be designated as eligible by the
Enforcement Decree to respond more timely to market demand.
– Competent authorities in charge of infrastructure projects must report the
status of operation and its outcome to the Ministry of Strategy and Finance.
– A feasibility study will be included in the request for proposals for each
solicited PPI project.
– The government may exclude certain private companies from participating in PPI projects for their misconduct in any previous PPI project.
2.
2.1.

LOCAL LEGAL ISSUES
PROCUREMENT RESTRICTIONS

Discussion to be provided in future updates.
South Korea – 10

2. Local Legal Issues

2.2.

SOUTH KOREA

THIRD PARTY RIGHTS

TO

CHALLENGE

A

PROJECT

Discussion to be provided in future updates.

2.3.

ULTRA VIRES

Discussion to be provided in future updates.

2.4.

CORPORATE LAW

2.4.1.

Form of Company

Generally, a Korean subsidiary of a foreign investor is established in the form
of a joint-stock company (JSC or Chusik Hoesa) or a limited liability company
(LLC or Yuhan Hoesa). Some major differences between a JSC and an LLC
are as follows:
– greater variety in the manner in which investments may be made in a JSC
(i.e., a JSC can issue common and preferred stock, bonds and debentures);
– restriction on the maximum number of members of an LLC (up to fifty)
versus no restriction on the number of shareholders of a JSC;
– restriction on the transfer of equity shares in an LLC – the consent of all
members is required through a special resolution of the members while
shares of a JSC are in principle freely transferable unless restricted in
the Articles of Incorporation to require board approval; and
– possibility of passing resolutions of general meetings of the members
of an LLC in writing without convening an actual meeting, if all
members consent to the procedure.
Generally, the JSC form is preferred for PPI projects due to the above characteristics. However, because of some of the advantages of the LLC (e.g., ability to
control the change of equity holders, flexibility in respect of corporate governance such as no mandatory board or auditor, fewer requirements for disclosure
of financial/accounting information, pass-through tax treatment for US tax purposes, etc.), some foreign investors do choose to use the LLC form.
2.4.2.

Board of Directors

In case of the board of directors, a JSC will require the appointment of,
in principle, at least three directors on the board as well as one statutory
(internal) auditor. In contrast, an LLC can have as few as one (sole) director.

South Korea – 11

SOUTH KOREA

2. Local Legal Issues

There are no residency or citizenship requirements related to either a director or a statutory auditor. However, to the extent that any of the non-Korean
directors are in Korea, the visa status of such director needs to be in order and
the appointment of such director to the Board of the company needs to be duly
reported to the relevant immigration authorities.
One of the directors should be designated as the representative director,
who will act as the chief executive officer of the company and will have
authority to enter into binding agreements on behalf of the company. Also,
a statutory auditor, who will be in charge of auditing the books of the
company, must be designated for a JSC. A statutory auditor is not required
in an LLC unless its articles if incorporation stipulates otherwise.
2.4.3.

Restrictions on Foreign Ownership

There are generally no restrictions on foreign ownership of a Korean
company, except in the case of certain ‘‘strategic’’ industries, such as broadcasting, telecommunications, and defense. Although there are no restrictions
on foreign ownership, a foreign investor investing in a Korean company will
need to comply with certain reporting requirements on an ongoing basis as
provided under the Foreign Investment Promotion Law (FIPL). For instance,
at the time of incorporation, the foreign investor will be required to invest a
minimum of KRW 50 million as initial capital, and will need to submit a
report regarding such investment to any one of the foreign exchange banks or
other entities designated by the Ministry of Knowledge and Economy.
2.4.4.
2.4.4.1

Shareholder Issues
Basic Shareholder Rights

A shareholder of a Korean corporation (JSC or LLC) has the following rights:
– basic shareholder rights, such as the right to vote at a shareholders’
meeting, the right to dividend distributions, preemption rights with
respect to newly issued shares, etc.;
– the right to bring a court action for revocation or nullification of a
resolution passed at a general shareholders’ meeting (the actual revocation or nullification of a resolution will require a court judgment
based on grounds specified under the law);
– the right to inspect the financial statements, business report and audit
report and to receive a copy or abstract of such documents;
– the right to bring a court action to nullify the issuance of new shares
(the actual nullification of the issuance of new shares will require a
court judgment based on grounds specified under the law);

South Korea – 12

2. Local Legal Issues

SOUTH KOREA

– the right to demand that the company suspend the issuance of new
shares;
– the right to bring a court action to nullify the incorporation of the
company (the actual nullification of the incorporation of the company
will require a court judgment based on grounds specified under the
law);
– the right to bring a court action to nullify a merger or consolidation (the
actual nullification of a merger or consolidation will require a court
judgment based on grounds specified under the law);
– the right to bring a court action to nullify a spin-off or spin-off merger
(the actual nullification of a corporate split or merger will require a
court judgment based on grounds specified under the law);
– the right to bring a court action to nullify any reduction in paid-up
capital (the actual nullification of any reduction in paid-up capital will
require a court judgment based on grounds specified under the law);
– the right to demand that the company suspend any unfair issuance of
convertible bonds or bonds with warrants;
– the right to inspect the articles of incorporation, minutes of the shareholders meeting, the shareholders’ ledger, and the debenture ledger;
– the right to bring a court action to nullify a comprehensive share swap or
transfer in the context of a merger or acquisition transaction (the actual
nullification of an all-inclusive share swap or transfer will require a
court judgment based on grounds specified under the law); and
– the right to request the company to purchase the shares owned by the
shareholder if dissenting against the subject matter of a resolution
(appraisal rights of a dissenting shareholder) in case of (i) transfer
of the whole or an important part of the business of the company,
(ii) making, altering, or rescinding a contract for leasing the whole
business, for giving authority to manage such business, or for sharing
with another person all profits and losses, or other similar contracts,
(iii) assuming the entire business of another company, (iv) assuming a
portion of the business of another company which significantly affects
the company’s business, (v) comprehensive share swap or transfer, (vi)
merger, or (vii) spin-off / spin-off merger.
2.4.4.2.

1% Shareholder Rights

Shareholders holding in aggregate 1% or more of the total number of issued
and outstanding shares have the following rights in accordance with the KCC:
– the right to demand, on behalf of the company, that a director not take
certain actions or to discontinue certain actions that are in violation of
the law or the articles of incorporation of the company; and
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2. Local Legal Issues

– the right to bring a court action and/or to demand the company to bring
a court action against promoters, directors, statutory auditors, shareholders who illegally receive profits from the company, those who
have colluded with the company to subscribe to shares at a considerably unfair price, or liquidators who liquidates the company.
2.4.4.3.

3% Shareholder Rights

Shareholders holding in aggregate 3% or more of the total number of issued
and outstanding shares have the following rights in accordance with the KCC:
– the right to demand that the company convene an extraordinary general
meeting of shareholders or, if the company refuses to do so, the right to
demand that a court issue an order to convene an extraordinary general
meeting of shareholders;
– the right to propose the agenda for a shareholders’ meeting (non-voting
shareholders excluded);
– the right to request the company to elect directors by means of cumulative vote (non-voting shareholders excluded);
– the right to inspect the accounting books and documents required for
an understanding of the accounting books;
– the right to apply to the court for the appointment of an inspector of
accounts or management (in case it is suspected that there are any
wrongful acts or non-compliance with the relevant regulations or
the articles of incorporation); and
– the right to apply to the court for removal of directors, statutory auditors or liquidators.
2.4.4.4.

10% Shareholder Rights

Shareholders holding in aggregate 10% or more of the total number of issued
and outstanding shares have the following rights:
– the right to apply to the court for dissolution if:
 the corporate affairs are in a continuing deadlock which prevents
the company from operating in a normal manner and significant
and irreparable injury to the company is being suffered or is
impending; or
 the management or disposition of the company’s property is grossly
improper and the existence of the company is thereby threatened.
– the right to apply to the court for rehabilitation of the company, if the
company is deemed to be unable to pay its debts without significant
difficulty pursuant to the Debtor Rehabilitation and Bankruptcy Act
(Debtor Rehabilitation and Bankruptcy Act, Article 34(2)).
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2. Local Legal Issues

2.4.4.5.

SOUTH KOREA

20% Shareholder Rights

Shareholders who hold in aggregate shares representing 20% or more of
the total number of issued and outstanding shares of the single parent
company in a small-scale share swap or of the remaining company in a
small-scale merger can block the transaction that has been approved by the
board of directors.
2.5.

LICENSES

AND

PERMITS

Discussion to be provided in future updates.
2.6.

ASSETS

Discussion to be provided in future updates.
2.7.

GOVERNMENT SUPPORT

Discussion to be provided in future updates.
2.8.

SOVEREIGN IMMUNITY

There is no express provision in the Korean Civil Procedure Code which gives
the Korean government immunity from suit.
2.9.

DISPUTE RESOLUTION

Discussion to be provided in future updates.
2.10.

REGULATORY

AND

STATUTORY DUTIES

Discussion to be provided in future updates.
2.11.

COLLECTING TARIFFS

FROM

CONSUMERS

Discussion to be provided in future updates.
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SOUTH KOREA

2.12.
2.12.1.

2. Local Legal Issues

PENALTIES, SANCTIONS

AND

BONUSES

Procedures for Revocation

In order for a competent authority to revoke the operation and maintenance
right under Article 47(1)(1) of the PPI Act (the ‘‘O&M Right’’)1, it must implement certain procedures required under Article 22 of the Administrative
Procedures Act. Hearings must be held to give the concessionaire an opportunity to present its case. Then, officials of the competent authority must submit
their written opinion to the head of the competent authority, who determines
whether or not to approve the revocation. The concessionaire must be compensated according to the law, even if the revocation was made for public interest
reasons.
The decision made by the head of the competent authority may be
appealed to (i) the relevant court having jurisdiction over the competent
authority or (ii) the Administrative Tribunal, which is a committee under
the Prime Minister.
2.12.2.

Administrative Proceeding for Revocation

Once the competent authority notifies the concessionaire of its decision to
revoke the O&M Right and/or terminate the relevant concession agreement
pursuant to Article 47 of the PPI Act, the Concessionaire has ninety days to
file with the relevant court its application to cancel such revocation. The firstlevel trial of the administrative proceeding for revocation may last six to
months.
2.12.3.

Administrative Proceeding for Stay

Under Korean law, once the competent authority issues its administrative
decision (e.g., revocation), the administrative decision becomes effective
immediately, and commencement of the administrative proceeding for revocation does not have any affect on the validity of such administrative decision.
In order to prevent the revocation from divesting the rights of the concessionaire immediately, the concessionaire must obtain a stay order from the court.
Thus, simultaneously with submission of the application for the administrative proceeding for revocation, the concessionaire should also commence the
Administrative Proceeding for Stay to prevent the competent authority from
terminating the concession agreement. The stay is issued or denied in two to
three weeks.
1.

Under Art. 47(1)(1) of the PPI Act, the competent authority may revoke the operation and
maintenance right where it is necessary for public interest, such as efficient operation of the
infrastructure facilities or a change of circumstances, etc.

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2. Local Legal Issues

2.13.

TRUSTS, AGENCY

SOUTH KOREA
AND

OTHER LEGAL RELATIONSHIPS

Discussion to be provided in future updates.
2.14.

TAKING SECURITY

AND

INSOLVENCY

The following is an overview of the types of security interests that may be
created under Korean law.
2.14.1.

Mortgage

Mortgages are a statutory form of security interest. Mortgages provide
secured creditors with priority over subsequent creditors and purchasers of
the property. Mortgages may only be created on property that can be
registered, such as land, building, construction machinery, automobiles, etc.
2.14.1.1.

Creation

To create a mortgage, the parties must first enter into a mortgage agreement
and then file a joint application to record the mortgage in the court registry.
A mortgage is automatically perfected upon creation (i.e., a mortgage agreement and a public recordation) and no further action is required for perfection.
The public recordation is deemed to give constructive notice of the mortgage
to all subsequent creditors and purchasers; accordingly, any future purchasers
take title to the collateral subject to the mortgage. A mortgage does not
involve a transfer of actual possession of or title to the collateral, but only
the establishment of a security interest.
2.14.1.2.

Priority

In principle, the secured creditor has priority over all subsequent creditors and
claimants, priority being determined by the time of entry of the mortgage into
the court registry. In practice, however, the secured creditor should also consider statutory preferred claims which are deemed to be preferential to the
registered mortgage. For instance, such statutory preferred claims include
certain tax liens, certain employee wage and severance claims, small-sized
residential lessee claims for security deposit refunds and certain other rights.
2.14.1.3.

Foreclosure

Upon default, the secured creditor has two different options to recover the
secured amount.
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2. Local Legal Issues

First, it may initiate a judicial foreclosure process, which typically consists
of a public auction. The amounts recovered in a public auction tend to be less
than the fair market value of the collateral. The judicial foreclosure proceeding will generally consist of (i) the creditor’s filing of the application for court
auction at the court having jurisdiction over the location of the collateral,
(ii) the creditor’s payment of deposit for court auction costs, (iii) the court’s
attachment of the collateral and notice to the debtor, (iv) the court-appointed
appraiser’s valuation of the collateral by an appraiser, (v) designation of court
auction date, (vi) holding of the court auction, and (vii) the distribution of
proceeds.
It is not necessary for the mortgagee to obtain a judgment on its claim
against the debtor. Upon receipt of the mortgagee’s petition, the court will
initiate an auction sale of the mortgaged property. The time involved in a
judicial foreclosure proceeding may vary according to several factors, e.g.,
whether a buyer is found who will meet the minimum bid price as determined
by the court (if not, a new auction is held with a lower minimum bid price as
determined by the court), whether the debtor asserts any procedural defense,
etc. In practice, the courts generally lower the minimum bid price by 20%
each time the property is not sold at a particular auction and the court holds
another auction. In the absence of complications, it generally takes approximately 6 to 8 months from the date the petition is filed until the distribution of
the auction proceeds to the registered mortgagees and/or security holders. If a
particular auction is unsuccessful on the initial auction date, the court will
hold the next auction in one month to one month and a half.
Once the property is sold, the court will deduct from the proceeds (i) the
costs of the auction sale and (ii) the amount of payment for statutory preferred
claims, if any, and then it will distribute the remaining auction proceeds to
mortgagees and other creditors in the order of priority, which is generally
determined based on the timing of registration. Distribution of proceeds only
occurs if the court auction is successful. If the sale proceeds of the court
auction fall short of the claim amount, only the portion of the claim amount
that corresponds to the amount of sale proceeds distributed to the creditor will
be deemed paid, and the creditor can continue to pursue the remaining and
unsatisfied portion of the claim amount against the debtor. However, the
creditor will need to take additional action (e.g., initiation of a lawsuit) to
recover the remaining amount.
Secondly, if the debtor agrees, the secured creditor can engage in a private
foreclosure, consisting of either a private auction or a privately-bargained
transfer of title to the secured party in satisfaction of the debt. For instance,
the private foreclosure may be accomplished as follows:
– the debtor (who is the owner of the property) sells the property to a
third party purchaser;

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2. Local Legal Issues

SOUTH KOREA

– the purchaser deducts and withholds the amount equivalent to the
secured claim from the purchase price and directly pays such withheld
amount to the secured creditor at the closing of such sale and purchase;
– at the closing, the secured creditor delivers to the purchaser all documents necessary to de-register the mortgage, in simultaneous exchange
with the repayment of the secured claim; and
– if there are also other claimants junior to the senior mortgage, the
parties (i.e., the debtor-owner, the senior creditor, the junior claimants
and the purchaser) typically reach a mutual agreement under which the
purchaser may either assume or repay such junior debts at the closing
of the sale and purchase transaction.
2.14.1.4.

Costs and Fees

The recordation of mortgage is subject to a certain registration tax and surtax,
and mandatory purchase of national housing bonds. In addition, there are also
a moderate amount of expenses such as a stamp tax and fee. In practice, the
financial institutions demand the borrower to bear such taxes, costs and fees.
2.14.1.5.

Bankruptcy Events

In the event that the debtor undergoes bankruptcy-liquidation proceedings, the
secured creditor will maintain priority with respect to its security interest.
However, in rehabilitation proceedings, the judicial foreclosure process could
potentially be stayed by a preservation order of the court, and the secured
creditor’s claims could be discharged subject to the rehabilitation plan.
2.14.1.6.

Kun-mortgage

A kun-mortgage is a special type of mortgage, and it can be used to secure
any type of debt. It is distinct because it secures the debt up to a certain
agreed maximum ceiling amount without regard to intermediate increases
or decreases in the debt within the range of the ceiling amount of such
debt. Kun-mortgages, of course, are preferable because they require that
only a maximum secured amount be stated in the recordation, thereby affording the parties the freedom to increase or decrease the secured amount as
desired. In practice, parties use kun-mortgages rather than ordinary mortgages
in almost all cases.
If the amount of principal outstanding plus interest at any given time falls
below the registered maximum secured amount, the full amount of the debt,
but no more, will be secured by the kun-mortgage. But if the amount of
principal outstanding plus interest at any given time exceeds the stated

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SOUTH KOREA

2. Local Legal Issues

maximum amount, then such excess will not be secured. Accordingly, it is
advisable to fix the maximum amount at a level that exceeds the principal
of the claim amount by an adequate margin. Customarily such maximum
secured amount generally ranges from 110% to 130% of the principal amount
(the financial institution lenders typically set the maximum secured amount at
130% of the principal amount). Since a kun-mortgage is indivisible, the
mortgagee may exercise its right over the whole property covered by the
kun-mortgage up until its claim has been completely satisfied. Procedurally,
to establish a kun-mortgage, the mortgagor and the mortgagee must execute a
kun-mortgage agreement. The kun-mortgage agreement should specify the
maximum amount to be secured. The kun-mortgage is then registered with
the registry of the real property provided as collateral.
2.14.2.

Yangdo Tambo

Unlike mortgages, yangdo tambo is not a statutory security interest, but is
rather a contractual security arrangement that has come to be recognized by
Korean courts over time. Yangdo tambo is the security interest of choice with
respect to personal property since most personal property can not be
registered, and a mortgage interest, which requires public registration, is
not available.
2.14.2.1.

Creation

In order to create a yangdo tambo, the parties must first enter into a yangdo
tambo agreement pursuant to which the parties agree (i) to transfer title to the
collateral to the creditor and (ii) to allow the debtor to maintain actual possession and continued use of the collateral while holding it ‘‘in trust’’ for the
creditor. In the case of registrable property, the parties must take the additional step of jointly registering the transfer of title in the title registry.
Moreover, the parties must agree that such title transfer is conditional insofar
as (i) the title reverts to the debtor upon repayment of the secured amount and
(ii) the secured party must dispose of the collateral upon default unless
otherwise agreed.
According to case law, during the term of the yangdo tambo, the secured
creditor can validly convey title to the collateral to a bona fide purchaser for
value, free of the yangdo tambo. In such cases, the only remedy the debtor
would have available to it would be a claim against the secured party for
breach of the yangdo tambo contract. The courts have further held that, since
title to the collateral has passed to the secured creditor under yangdo tambo,
other creditors of the debtor may not attach the collateral, despite the debtor’s
continued possession and use of the collateral.

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2. Local Legal Issues

2.14.2.2.

SOUTH KOREA

Priority

Because a creation of yangdo tambo requires the transfer of title (and the
public recordation in the relevant court registry in case of the real property), the secured creditor has priority over all subsequent creditors and
claimants.
2.14.2.3.

Foreclosure

In the event of default, the secured party, as the titleholder, is typically entitled
to dispose of collateral through a private sale, although yangdo tambo requires
that the secured creditor return any balance in excess of the secured amount to
the debtor. If agreed to by the debtor, the secured creditor may also keep title
by having the collateral appraised and paying the debtor any excess of the
appraised amount over the secured amount.
2.14.2.4.

Costs and Fees

If the debtor and the secured creditor agree to use yangdo tambo with respect
to appreciated real property, the transferor may incur large tax liabilities for
capital gains, since Korean tax law treats the yangdo tambo as an outright sale.
In addition, the registration of title transfer is also subject to substantial registration tax and surtaxes (at the aggregated rate of 4.6% of the purchase price
(in case of an office building and the underlying land). National housing bonds
must also be purchased (the amount of such required bond purchase varies
depending upon the location and the value of property).
In the case of real property, parties in Korea tend to favor kun-mortgages
over yangdo tambo since the public registration of a mortgage acts as constructive notice to subsequent creditors or purchasers of the real estate and
mortgages are relatively effective at protecting the priority of the claims of
secured creditors (subject to the caveats noted above). In addition, unlike
yangdo tambo, mortgages do not trigger tax liability for capital gains under
Korean tax law (pursuant to a deemed sale of the real property).
2.14.3.

Insolvency Issues

Below is a brief explanation of the domestic and cross-border insolvency
regimes offered in Korea for business entities. The five parts are as
follows: (i) general overview of Korean insolvency regimes, (ii) rehabilitation
proceedings, (iii) bankruptcy proceedings, (iv) cross-border insolvency
regime, and (v) out-of-court proceedings under the Corporate Restructuring
Promotion Law.

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SOUTH KOREA

2.14.3.1.

2. Local Legal Issues

General Overview

A new consolidated insolvency law called the ‘‘Debtor Rehabilitation and
Bankruptcy Law’’ (DRBL) became effective on 1 April 2006. The DRBL
repealed the four previous insolvency-related laws and consolidated the proceedings thereunder into the following three insolvency regimes: (i) rehabilitation proceedings under Chapter 2 of the DRBL primarily for the
rehabilitation of insolvent business entities; (ii) bankruptcy proceedings
under Chapter 3 of the DRBL for the liquidation of insolvent business entities
and individuals; and (iii) rehabilitation proceedings for individuals under
Chapter 4 of the DRBL. As such, under the DRBL, there are mainly two
proceedings for the insolvency of business entities: (i) Chapter 2, Rehabilitation
Proceedings; and (ii) Chapter 3 Bankruptcy Proceedings.
In line with the international efforts for harmonization of cross-border
insolvency regimes, the DRBL discarded the principle of territoriality that
was applicable under the previous insolvency laws and adopted the modified
principle of universality. In addition, the DRBL includes new provisions in
Chapter 5, which address, among other matters, the recognition and enforcement of foreign insolvency proceedings in Korea, the outbound effect of
Korean insolvency proceedings on assets located in a foreign country and
the rule of payment adjustment in concurrent insolvency proceedings.
Korea offers another insolvency-related law called the ‘‘Corporate Restructuring
Promotion Law’’ (CRPL). This law took effect on 4 November 2007 with
certain changes to its predecessor which expired on 31 December 2005.
Generally, the CRPL applies only to debt owed by an insolvent company to
certain Korean financial institutions (including Korean branches of certain
foreign financial institutions) which are rescheduled pursuant to out-of-court
workout arrangements governed by the CRPL.
2.14.3.2.

Rehabilitation Proceedings under Chapter 2 of the DRBL

(1) Petition for Rehabilitation and Commencement
The goal of rehabilitation proceedings governed by Chapter 2 of the DRBL is
to rehabilitate insolvent debtors by restructuring their debt pursuant to a rehabilitation plan approved by the creditors and the court. A debtor company,
creditors holding claims amounting to 10% or more of the debtor company’s
paid-up capital or shareholders holding 10% or more of the debtor company’s
total issued and outstanding shares may file for the commencement of the
rehabilitation proceeding against the debtor company. The rehabilitation proceedings are analogous to Chapter 11 proceedings of the U.S. Bankruptcy
Code. However, the filing for a rehabilitation proceeding does not itself trigger
the formal commencement of the rehabilitation proceeding. A rehabilitation
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2. Local Legal Issues

SOUTH KOREA

proceeding commences only when the court issues a separate commencement order
in response to the filing.
(2) Appointment of Receiver
Upon commencement of the rehabilitation proceeding, in principle, the court
will appoint a receiver. Usually, the court will appoint the existing management (e.g., representative director) of the debtor company to act as the
receiver in the rehabilitation proceeding unless the insolvency of the debtor
company was caused by the existing management, in which case the court will
appoint an independent receiver. The receiver has the power to conduct all of
the debtor’s business and manage all of its property, subject to the court’s
supervision.
(3) Preservation Order and Stay Order
When an application for the commencement of a rehabilitation proceeding
has been filed with the court, the court may issue, upon petition by an
interested party, or at the court’s discretion, a preservation order within
seven days from the filing. The court will then determine whether to commence the rehabilitation proceeding. During the gap period between the
filing and the commencement, the court may also issue, upon petition by
an interested party or at its discretion, a comprehensive stay order or specific
stay order that suspends all or specific administrative or judicial proceedings
against the debtor.
(4) Filing of Claims and Types of Claims
Upon commencement of the rehabilitation proceeding, the receiver will prepare lists of claims held by the creditors. If the claims are correctly specified in
these lists, the filing of the proof will not be required. However, if the claims
are not specified or are specified incorrectly in such lists, a creditor must file
the proof of claims within a designated period of time, and failure to do so will
either nullify its claim or fix its claim as specified in the lists.
In Chapter 2 rehabilitation proceedings, creditors are classified into three
basic categories: (i) creditors with unsecured rehabilitation claims; (ii) creditors with secured rehabilitation claims; and (iii) creditors with common
benefit claims. Creditors with either secured or unsecured rehabilitation
claims are subject to rehabilitation proceedings and generally may not receive
payment or repayment of their respective claims (with certain exceptions,
including set-off of claims that are exercised within certain periods permitted
under the DRBL) other than as provided for in the rehabilitation plan.
However, creditors with common benefit claims are not subject to the
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2. Local Legal Issues

rehabilitation plan, and include, inter alia, those creditors whose claims arose
after the commencement of the rehabilitation proceeding (with certain exceptions), and those creditors whose claims were approved by the court during the
preservation period.
(5) Rehabilitation Plan and Termination of Rehabilitation
A rehabilitation plan may call for rescheduling of the debtor’s debt over a
period not to exceed, in principle, ten years, except when corporate debentures
are issued pursuant to the rehabilitation plan. Any secured rehabilitation
claims and unsecured rehabilitation claims that are not recognized under
the court-approved rehabilitation plan are irrevocably extinguished, even if
the rehabilitation proceeding is subsequently terminated. If payment under the
court-approved rehabilitation plan has commenced, the court shall, upon
petition by an interested party or at its discretion, terminate the rehabilitation
proceeding early, unless there is an impediment to the implementation of the
rehabilitation plan.
(6) Discontinuation of Rehabilitation
If it becomes apparent, either before or after the court approves the rehabilitation plan, that the debtor cannot be rehabilitated, the court may, in its sole
discretion or upon request by the receiver or a creditor, issue an order to
discontinue the rehabilitation proceeding. Once the rehabilitation proceeding
is discontinued due to the debtor’s failure to comply with the rehabilitation
plan, the court may declare the debtor bankrupt and liquidate the debtor.
2.14.3.3.

Bankruptcy Proceedings under Chapter 3 of the DRBL

Bankruptcy proceedings governed by Chapter 3 of the DRBL are courtadministered proceedings designed to liquidate an insolvent debtor’s assets.
(1) Adjudication of Bankruptcy
The bankruptcy proceeding formally begins when the debtor company or its
creditor files a petition for the bankruptcy proceeding. The court then adjudicates that the debtor is ‘‘bankrupt.’’ The adjudication of bankruptcy stays all
creditors that have unsecured bankruptcy claims from exercising or otherwise
enforcing their claims against the bankruptcy estate (with certain exceptions,
including set-off claims that are permitted by the DRBL). Even before the
formal adjudication of bankruptcy, the court is empowered to issue preservation orders preventing creditors that have unsecured bankruptcy claims
from enforcing their claims.
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2. Local Legal Issues

SOUTH KOREA

(2) Bankruptcy Trustee
The bankruptcy trustee appointed by the court is vested with the exclusive
right to conduct an investigation and assessment of the bankruptcy estate, and
to manage and dispose of the bankruptcy estate.
Subject to certain statutory limitations and approval by the court, the bankruptcy trustee has the power to liquidate the bankruptcy estate, and to determine the manner and timing of such liquidation. The bankruptcy trustee
distributes the proceeds from the liquidation of the bankruptcy estate to the
creditors according to the priority of their claims and, with regard to the claims
of the same priority, in proportion to their claim amounts. When the bankruptcy estate has been fully liquidated, the bankruptcy trustee will make the
final distribution.
(3) Classification of Creditors and Enforcement of Security Interest
In bankruptcy proceedings, creditors are generally divided into two groups;
creditors with bankruptcy estate claims, and creditors with unsecured bankruptcy claims. Unsecured bankruptcy claims are subject to the bankruptcy
proceedings, and repaid from the distributions made by the bankruptcy
trustee. However, bankruptcy estate claims are repaid from time to time
from the bankruptcy estate. Unlike rehabilitation proceedings, enforcement
of security interests in the debtor’s assets is not subject to bankruptcy proceedings, except for certain procedural limitations. Thus, the proceeds recovered from such enforcement may be applied to the repayment of the secured
claims regardless of the bankruptcy proceeding.
2.14.3.4.

Proceedings under the Corporate Restructuring Promotion Law

The CRPL was enacted in November 2007, and it will remain in effect until
31 December 2010. The purpose of the proceedings under the CRPL is to
restructure the indebtedness of a debtor pursuant to an out-of-court workout
arrangement.
(1) Eligibility for CRPL Proceeding
The CRPL proceedings apply to a debtor company that has received ‘‘credit’’
from financial institutions licensed under relevant Korean laws and/or certain
other entities designated by the presidential decree of the CRPL (all such
creditors are hereinafter called ‘‘Financial Institution Creditors’’).
For CRPL proceeding to apply, the total amount of the outstanding credit
has to be at least 50 billion Won. CRPL proceedings are initiated when the
debtor company is determined by its prime bank or the creditors council,
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SOUTH KOREA

2. Local Legal Issues

which is comprised of the Financial Institution Creditors, to be unable to repay
its debt without financial assistance from outside or special borrowings
(excluding borrowings made in the ordinary course of its business).
(2) First Meeting of the Council and Suspension of Exercise of Creditors’
Rights
The prime bank of a debtor company may or (upon request by the Financial
Institution Creditors collectively holding more than one-fourth of the total
amount of the claims held by all Financial Institution Creditors) must call a
meeting of the creditors’ council by sending out a written notice regarding the
first meeting. At the first meeting of the creditors’ council, the Financial
Institution Creditors must determine whether to suspend the exercise of creditors’
rights (including enforcement of security interest) and the period for such suspension. The suspension period may be up to one month (or three months if an
investigation of the debtor company’s financial status is necessary). This suspension period may be extended by the creditors’ council for an additional one month.
(3) Approval of Workout Plan
The creditors’ council may approve a plan for rehabilitation of the debtor
company, and enter into an agreement with the debtor company for implementation of the rehabilitation plan. For such purpose, the creditors’ council
may adopt a debt restructuring plan and/or assistance with new credit with the
approval of (i) at least three-fourth of the total amount of claims held by all
Financial Institution Creditors and (ii) at least three-fourth of the total amount
of the secured claims held by all Financial Institution Creditors. A creditor
who did not participate in the creditors’ council meeting or exercised a dissenting vote in writing against the commencement of the CRPL proceedings
or the debt restructuring (including the new credit assistance) will have the
right to require the assenting Financial Institution Creditors to purchase its
claims pursuant to the provisions of the CRPL.
2.15.

CURRENCY

Discussion to be provided in future updates.
2.16.

EXPROPRIATION

Discussion to be provided in future updates.

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2. Local Legal Issues

2.17.

SOUTH KOREA

EMPLOYMENT

Discussion to be provided in future updates.
2.18.

CHOICE

OF

LAW

Korean law generally respects the parties’ agreement on a foreign law as the
governing law, except in certain limited circumstances. More specifically, the
choice of a foreign law to govern an agreement would be recognized by the
Korean courts insofar as the choice of law provisions thereof are valid under
such foreign law; provided that in the event of any legal proceeding brought in
a Korean court, the Korean court would apply: (i) the mandatory laws of
Korea which should be applied by their nature irrespective of the governing
law; (ii) the laws of the jurisdiction of a party’s incorporation bearing upon the
capacity of such party to enter into contracts; and (iii) if all elements of the
case relate to a jurisdiction (‘‘related jurisdiction’’) other than the relevant
jurisdiction, the mandatory laws of the related jurisdiction.
Further, although the formation and the substantial validity of such agreement are in principle to be governed by the foreign law, the Korean courts
would allow a party to establish that it did not consent to enter into the contract
(including the agreement on the choice of law) or to challenge the validity of
the agreement on the choice of law. The lack of consent or challenge to
validity would be decided in reliance of the laws of the jurisdiction of residency of such party if it is manifestly unfair under the relevant circumstances
to apply the foreign law to determine the effect of such party’s conduct.
Specifically, with respect to the law governing security interests, the
Korean Private International Law provides (i) that in rem or other registrable
rights (such as the title to or mortgage over real estate) should be governed by
the law of location of the relevant property and (ii) that security interest in
claims and receivables should be governed by the law governing the relevant
claims and receivables.
Also, according to the PPI Act, a concessionaire’ right to operate and
manage its project pursuant to the concession agreement is a registrable property right, which is registered with the registry maintained and administered
by the competent authority and over which a mortgage may be established.
Accordingly, collateral over a concessionaire’ right to operate and manage its
project is governed by Korean law.

South Korea – 27

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