Immoveable property
• Land, including any fixtures affixed to land.
• Buildings, which are regarded as independent from the land on which they are built and which are subject to a separate registration system.
The two most common forms of security created over immoveable property are a mortgage and a kun-mortgage: Tangible moveable property
Any tangible item that is not immoveable property will be classified as moveable property. Moveable properties are given different legal treatment depending on the type of moveable property.
In general, Civil Law provides that a mortgage cannot be created over most moveable property. Under certain statutes however, certain exceptions are given for construction machinery, automobiles, aircraft and registered ships. A pool of moveable properties is not recognised as a single moveable property. Therefore, a single security cannot be established over a pool of moveable properties unless it qualifies under the following exception. The Supreme Court has recognised that a pool of moveable properties can be subject to a single security interest if that pool can be identified as being separate from the other security grantor’s moveable properties by specifying the type, location and quantity of the moveable properties which are included in that pool. Also, a pool of moveable properties can be registered as a single security interest under the Security Act.
Norton Rose Fulbright 79
Pledges
A pledge over moveable property is created and granted by:
• an agreement between the pledgee and the pledgor
• delivery of the subject matter to the pledgee.
Delivery includes: actual delivery, summary delivery (that is, if the pledgee is already in possession of the moveable property under an existing lease agreement, delivery will be assumed to have taken place) and transfer of possession by instruction.
However, it excludes deemed delivery. Deemed delivery occurs when the pledgor enters into a lease agreement, simultaneously with entering into a pledge agreement, and is allowed to be in continuous possession of the moveable property under that lease agreement. In that case, the pledgee would only acquire “notional” possession of the moveable property.
A pledge over moveable property is perfected by continuous possession of the subject matter of the pledge.
Claims and receivables
A pledge over claims and receivables is created by a contract. However, creating a pledge over a claim represented by a claim instrument requires:
• delivery of the relevant instrument
• execution of the contract.
For a pledge over nominative claims (that is, claims for which creditors are specified and no claim instrument is issued), perfection is achieved (against the obligor of the claims (that is, the person obligated to pay the claims)) by giving notice to, or obtaining an acknowledgement from, each relevant obligor.
Perfection against third parties, other than obligors of the claims, is achieved by giving notice to, or obtaining acknowledgement from, each relevant obligor using an instrument bearing a fixed date stamp. A pledge over debts payable to order is perfected by an endorsement to this effect.
Shares
For shares in an unlisted company, a registered pledge is created and is effective on:
• the execution of the pledge agreement In addition, other limitations may be included in the articles
of incorporation. However, under certain circumstances, the company may be held liable for an unauthorised act of the representative director against a bona fide third party that did not have knowledge of such restrictions, except for matters requiring shareholders’ approval pursuant to the Commercial Code.
The Commercial Code requires that certain matters such as (i) transfer of the whole or an important part of the business, (ii) conclusion, alteration or rescission of a contract that (a) leases the whole business or (b) provides a mandate to manage the business by a third party or (c) provides for the sharing with a third party the entire profits and losses from the business or (d) has a similar effect with (a), (b) or (c) above and (iii) taking over of the whole or parts of a business of another company which may significantly affect the company’s business, should be resolved at a shareholders’ meeting by a supermajority vote, which means an affirmative vote of the shares representing at least two thirds of the shares present at the shareholders’ meeting and at least one third of the company’s total issued and outstanding voting shares.
Regulation of commercial secured lending
Unless it is a financial institution that engages in the credit business with the requisite authorisation or permission under any other act or a subordinate statute, any person who intends to engage in the credit business or the loan brokerage business needs to be registered for each business office pursuant to the Act on Registration of Credit Business and Protection of Finance Users.
Registration and perfection of security
Mortgages
The creation of a mortgage is effective on:
• an agreement between the mortgagee and the mortgagor
• registration at the relevant property registry maintained by the district court (which also perfects the mortgage). Kun-Mortgages
A kun-mortgage is created and perfected in the same manner as a mortgage. However, the agreement creating a kun- mortgage must specify:
• the scope, or type, of claims to be secured
• the maximum amount to which the kun-mortgagee has preferential rights.
Significantly, the guarantee cannot be enforced until a creditor first exhausts its remedies against the principal obligor.
• A joint and several guarantee: in contrast to a simple guarantee, both the guarantor and the principal obligor assume joint and several liability over the debt. This means that a creditor can enforce the guarantee as soon as the principal obligor is in default and will not be required to exhaust its remedies against the principal obligor.
Prohibitions on providing financial assistance
Unlawful financial assistance
There are no financial assistance rules in South Korea. However, if a director grants security to a creditor without any benefit to the company in return, that director may be in breach of its fiduciary duty and shall be liable to the company for any damages that the company may sustain. The director can also be prosecuted for misappropriation. In principle, a company is prohibited from acquiring its own shares or the shares of its parent company (although there are certain limited exceptions to this).
Corporate benefit rules
It is not illegal for a subsidiary to grant in favour of its parent a security in connection with a loan extended (whether or not by a third party). In addition, there are no provisions in the Commercial Code relating to corporate benefit rules. However, if a subsidiary’s director provides security to a creditor of its parent, with no benefit to that subsidiary in return, that director may be in breach of its fiduciary duty and liable for damages to the subsidiary.
Where a director of a company seeks to trade or enter into a transaction with the company in a personal capacity and there is a conflict of interest between the director and the company, prior approval of the proposed trade or transaction is required from the company’s board of directors. This applies not only to situations where there is a direct conflict of interest between a director and the company of which he is a director, but also where the company represented by that director provides joint and several guarantees:
• over the personal liabilities of that director to a third party creditor or
• over the liabilities of another company in which that director is also a director.
• delivery of the share certificate to the pledge
• registration of the pledgee’s name and address in the company’s shareholder registry.
A registered pledge is perfected through the continuous possession of the share certificate along with continued registration on the company’s shareholder registry.
For shares in a listed company, a registered pledge of shares in a listed company is created and perfected through the same procedure as shares in an unlisted company. However, if the share certificates of the listed company are deposited with the Korea Securities Depository (KSD), a registered pledge over those shares is created and effective on:
• the execution of the pledge agreement
• the recording of the pledge in the accounts of the KSD. Intellectual property
A pledge over rights to patents, trade marks, copyrights and designs is created and perfected by:
• the execution of a contract
• registration of the pledge in the Korea Intellectual Property Office or with the Korea Copyright Commission. Security by transfer
A security by transfer is created and granted through a contract and delivery. In contrast to a pledge, delivery of the subject matter can take the form of a deemed delivery. A security assignment over moveable property is also perfected by continuous possession of the subject property.
Security registration under the Security Act
Security registration under the Security Act is created and perfected by:
• the execution of the security agreement
• registration of the security on the relevant registry.
Granting guarantees
There are two types of guarantees but in practice, a joint and several guarantee will always be used.
• A simple guarantee: the guarantor assumes the guarantee liability when the principal obligor fails to pay the debt.
Norton Rose Fulbright 81
However, these actions cannot be invalidated after the earlier of:
• two years from the start of a rehabilitation or bankruptcy proceeding or
• ten years from the date of the action.
Enforcement of security rights
A secured creditor can enforce security in circumstances specifically agreed between the parties. Depending on the terms of the specific agreement being made, it may be necessary for the creditor to make a request to the debtor to perform its obligations before the creditor is able to enforce the security.
If the debtor has:
• damaged, diminished or extinguished the secured asset or
• failed to perform its obligation to create security in favour of the creditor or
• been declared insolvent.
Then prior to enforcement the creditor should request the debtor to perform its obligations (or make good any damage). Where repayment dates have passed, enforcement of particular types of asset will take place in the following manner
• Registered security interests: a registered security interest (such as a mortgage over immoveable property and pledge of intellectual property) is enforced through a court-supervised auction process. To start the auction process, a creditor must submit documents evidencing the existence of the security interest to either the courts or an enforcement agency.
• Pledges of moveable properties: a pledge of moveable properties can be enforced through a court auction process. If there are justifiable reasons (for example, if the value of the moveable property concerned is insignificant and therefore inappropriate for an auction), it is also possible to apply to the courts for a direct sale and a discharge following a valuation by an appraiser.
• Pledges of shares: a pledge of shares can be enforced through:
— a court auction process or
Insolvency risk periods
The Debtor Rehabilitation and Bankruptcy Act (DRBA) is the main legislation relating to a company’s insolvency proceedings. Under the DRBA, a financially troubled company can choose to apply for a court decision in relation to either:
• rehabilitation proceedings, which prevent a secured creditor from enforcing its security unless authorised by the court or
• bankruptcy (liquidation) proceedings which will not affect a secured creditor’s right to enforce its security.
In principle, the trustee appointed in rehabilitation proceedings or bankruptcy proceedings can void the following transactions:
• any action that the debtor takes with the knowledge that it will cause harm to its creditors
• any action that the debtor takes following a triggering event (see below) that:
— creates a security interest in the debtor’s assets
— discharges any obligation of the debtor or
— is otherwise prejudicial to creditors. A triggering event can be:
• an application for the start of a rehabilitation or bankruptcy proceeding or
• a suspension of payment (where the debtor explicitly or implicitly indicates that it is not able to make payments for its debts generally and continuously when they become due) or
• any action taken by the debtor after or within 60 days prior to a triggering event (one year in the case of related party transactions) (transactions with certain parties that are related by blood or affinity and/or are affiliated by equity investment or other control (including legal ownership)), that creates a security interest in the debtor or discharges any obligation of the debtor, where the debtor is under no obligation to do so or
• any gratuitous act taken by the debtor after or within six months (one year in the case of related party transactions) prior to a triggering event.
• the proceeds from the sale of the property securing claims would be paid first to satisfy the claims secured by the property.
In rehabilitation proceedings, claims rank in the following order:
• statutory claims
• secured claims in the rehabilitation proceedings (generally arising before the start of proceedings)
• unsecured claims in the rehabilitation proceedings (generally arising before the start of proceedings); and
• claims arising after the start of the proceedings (except for statutory claims).
Statutory claims are paid without any restriction under rehabilitation proceedings. In principle, rehabilitation secured claims and rehabilitation (unsecured) claims are only paid through the rehabilitation plan. Other claims arising after the start of the proceedings cannot be paid until the expiry of the earlier of:
• the prescribed payment period or
• completion of all payments to creditors provided in the rehabilitation plan.
Bankruptcy proceedings
Generally, the same rules apply as for rehabilitation proceedings. However, secured creditors can enforce their security interests without being restricted by bankruptcy proceedings. In bankruptcy proceedings, the claims are paid in the order of:
• estate claims (similar to statutory claims under a rehabilitation proceeding)
• bankruptcy claims with priority
• ordinary bankruptcy claims
• subordinated bankruptcy claims.
Secured claims (which are not included among these claims) are not subject to the bankruptcy proceedings and can be enforced independently and separately. Estate claims, like statutory claims, are paid without any restriction under
— where the shares concerned have market value, through a sale applying the market value on the date of that sale;or
— the method agreed in the pledge agreement, where the pledge has been created to the parties under a commercial agreement and where either the creditor has appropriated the pledged asset; or, the parties have agreed on a realisation method.
Priority of secured creditors in the event of
insolvency
Rehabilitation proceedings
In principle, claims incurred before the start of the
rehabilitation proceedings, whether secured or not, must be repaid only through the rehabilitation plan.
The trustee, creditors or shareholders can submit the
rehabilitation plan. Typically, on the court’s order, the trustee prepares and presents the plan to the court within the period that the court prescribes.
The court then convenes meetings of “related parties”. At the related parties’ meetings, all classes of creditors and shareholders must approve the plan. In the secured creditors’ class, the consent of the secured creditors holding at least three quarters of the total amount of the secured claims is required for approval. In the unsecured creditors’ class, the threshold is two thirds. If the debtor’s total assets exceed its total liabilities when the rehabilitation procedure commences, shareholders are entitled to vote (although shareholders do not generally receive distributions, except under extraordinary circumstances) and the threshold is 50 per cent.
After the related parties meetings, the court approves the plan. Despite the above voting thresholds, even where all the classes do not consent to the rehabilitation plan, the court has discretion to approve the rehabilitation plan with certain modifications designed to give “fair and equitable protections” to the creditors, provided that at least one class approved the submitted rehabilitation plan.
The claims of the secured creditors can be paid concurrently with the claims of the unsecured creditors. However, typically:
• the repayment ratio applicable to the secured creditors would be higher compared to that of the unsecured creditors
Norton Rose Fulbright 83
If the amount of the proposed loan exceeds 30 million US dollars (including any amounts borrowed within one year prior to the date of that reporting), the resident must make a report to Ministry of Strategy and Finance of Korea (MOSF) through its designated foreign exchange bank (instead of making a report to its designated foreign exchange bank). MOSF orders
MOSF can, in the event of a natural disaster, war, material and sudden changes to the domestic or international economy or other events which have a similar effect, order a temporary suspension of payments or collections of the whole or part of a loan.
Withholding tax
If the lender is a foreign corporation without a permanent establishment in South Korea, the withholding tax rate on the interest of a loan (regardless of the currency) is 22 per cent (including a resident surtax of 10 per cent thereon), unless, there is a tax treaty between South Korea and the jurisdiction of such lender.
The withholding tax rates applicable to some of the main jurisdictions under the relevant tax treaty are as follows:
• withholding tax exemption is offered in the case of Ireland and Hungary
• 10 per cent in the case of England, Singapore, Belgium and Luxembourg
• 12 per cent in the case of the USA
• 15 per cent in the case of the Netherlands.
However, where the lender is a foreign bank without a permanent establishment in South Korea and the borrower is a Korean foreign exchange bank (most South Korean banks qualify as a foreign exchange bank), any corporate tax levied on the interest of a foreign currency-denominated loan is exempted, and consequently, the South Korean borrower will not be required to deduct or withhold from payment of interest.
the bankruptcy proceedings. In principle, all three types of bankruptcy claims listed above are claims arising before the commencement of bankruptcy proceedings.
Choice of governing law
The parties can choose a governing law at the time of entering into the loan agreement. However, the agreed governing law will not be upheld in relation to property and security rights such as:
• property rights relating to moveables and immoveables (or other rights which are subject to registration), which must be governed by their lex situs (that is, the law of the place where the property is situated)
• security interests in bonds, shares or other securities, which must be governed by the laws governing the underlying asset
• security interests in bearer securities, which must be governed by the lex situs of those bearer securities at the time of the creation of that interest.
In addition, foreign law agreed between the parties will not be applied if applying the provisions of that foreign law would clearly violate the customs or social order of South Korea.
Existence of a trust or equivalent concept
A security interest is not an asset which can be placed on trust. Korean law only recognises a creditor with a direct interest in the debt obligation of the borrower as being entitled to the relevant security rights over such debt obligation. Therefore, the concept of security trust (such as holding of security through a security trustee) does not exist in South Korea. This gives rise to difficulties for lenders in South Korea, because they must assign or transfer rights over the borrower’s debt obligations together with the relevant security rights.
Exchange control on remittances
Foreign currency loans: a resident must make a prior report to its designated foreign exchange bank if the resident seeks to borrow foreign currency from a non-resident, including