Title | Research on the Special Corporation Bankruptcy Procedure | ||
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Date | 2024.07.17 | ||
Files | Research on the Special Corporation Bankruptcy Procedure.pdf | ||
Research on the Special Corporation Bankruptcy Procedure
- Focusing on Non-profit Corporations and Virtual Asset Exchanges - The application of the law on the Debtor Rehabilitation and Bankruptcy Act in South Korea has primarily focused on for-profit corporations, although it also includes natural persons and juristic persons. It was natural for most cases to revolve around rehabilitation and bankruptcy of for-profit corporations, as they constituted a significant portion of the incidents. However, this premise is gradually changing. Bankruptcy cases involving non-profit corporations such as private school foundations, medical corporations, and religious corporations are increasing due to changes in social structure and the expansion of the legal market. With South Korea's birth rate being at the lowest level in the world, resulting in a decrease in the school-age population, restructuring of school foundations becomes inevitable. Medical corporations, responsible for the public domain of people's lives and health, cannot be viewed solely from a market-oriented perspective and are subject to separate regulations, such as medical laws. Religious corporations, as communities of believers united by common faith, face challenges in how to handle cases where they enter the legal framework of the debtor rehabilitation law due to a decrease and division of believers leading to operational failures. On the other hand, the rapid proliferation of virtual assets, a new concept of goods, raises questions about how to characterize them in terms of legal nature and how to understand and interpret the specific legal procedures when virtual asset exchanges, operating as businesses, go bankrupt. Since the Debtor Rehabilitation and Bankruptcy Act in South Korea did not anticipate virtual assets, interpreting them in a legally consistent manner poses a challenging issue. However, there is a high necessity to appropriately address these issues given the practical problems that are arising nowadays. First, we examine the issues at each stage of the rehabilitation procedure for non-profit corporations. From the stage of applying for rehabilitation, non-profit corporations should actively utilize the Autonomous Restructuring Support Program to hold off on the decision to commence rehabilitation and adjust the interests between debtors and creditors, focusing on early settlement of cases and thorough protection of stakeholders. It is encouraging that the Seoul Bankruptcy Court is exerting efforts to explore practical improvements to activate the Autonomous Restructuring Support Program. Moreover, although non-profit corporations are naturally recognized the right to apply for rehabilitation under legal interpretation, it is difficult to acknowledge, through interpretative theories, the right of supervisory bodies of private school foundations and medical corporations to file for rehabilitation on behalf of the debtor private school foundations and medical corporations despite the necessity. In many articles of association of non-profit corporations, a resolution of the board of directors is required for significant changes in the basic property, as the rehabilitation proposal involves changes in the debtor's basic property and rights, and the lack of such resolution at the time of application renders it illegal. In the special case of private school foundations, it is not possible to request the suspension of the university closure and the dissolution order procedure previously granted by the Ministry of Education while applying for the commencement of rehabilitation procedures. When deciding to commence rehabilitation, it is necessary for the court to interpret the preconditions, such as the inability to pay debts due or the likely risk of bankruptcy, more leniently in cases where the disposal of property requires the permission of the supervisory agencies, especially for private schools. Considering the exchange value of properties of private schools, which are almost impossible to dispose of due to the slim chance of obtaining permission from the supervisory agencies, and reviewing the possibility of repayment or excess debt, is needed much precautions as focusing solely on formal logic may ignore the practical demand for a new start for the debtor through the adjustment of stakeholders' rights. In cases of non-profit corporations, including schools and hospitals, if the chief director, representative of a religious organization, or similar figures are responsible for the deterioration of the debtor's assets due to criminal or unethical actions, it is necessary to appoint a third-party custodian who is separate from their influence, or a co-custodian along with the existing custodian if there is any doubt or unclear influence, in order to ensure fair and transparent appointment of custodians. Furthermore, during the crucial stage of preparing a rehabilitation proposal, for medical corporations, it is reasonable to interpret that the effect of the assignment of claims for nursing care benefit expenses as security is severed by the decision of commencement of rehabilitation proceedings, and therefore, these claims should be treated as rehabilitation claims, not secured rehabilitation claims. In cases like private school foundations and medical corporations, which are under the supervision of regulatory agencies, it is essential to consult these agencies during the preparation stage of the rehabilitation proposal and to obtain their permission in advance to assess the feasibility of the rehabilitation proposal; otherwise, without special circumstances, the feasibility may not be recognized because the ongoing administrative supervision over the debtor does not concentrate on the rehabilitation court. Additionally, for private school foundations, the distinctiveness of accounting practices, such as separating corporate accounting from school fund accounting and strictly prohibiting the transfer of school funds to corporate accounts, should be considered in preparing the rehabilitation proposal. Specifically, it may be appropriate to perpare separate rehabilitation proposals for school fund and corporate accounting, ensuring the principle of liquidation value guarantee for each and seeking the consent of creditors for each plan separately. An example of this procedure is the recently approved and concluded rehabilitation proposal for Myongji Educational Foundation. For private school foundations, incorporating school consolidation or merger in the rehabilitation proposal may be considered, which requires ensuring the continuity of education opportunities and employment for the students and staff of the schools being absorbed or discontinued. For religious corporations, which often own properties limited to religious buildings and lands, preparing a rehabilitation proposal that involves selling these properties could fundamentally harm their religious activities; as an alternative, considering a sales and lease back approach to continue using the assets after selling them could be actively explored, to avoid leaving religious corporations with virtually no viable method to prepare a rehabilitation proposal. Finally, non-profit corporations can also utilize M&A procedures in the rehabilitation procedure. Especially for private school foundations and medical corporations, since the concept of stocks does not exist due to the nature of nonprofit corporations, reviewing merger methods based on the acquisition and exchange of stocks, such as third-party stock purchases, is not feasible. Instead, the possibility of recognizing M&A based on the transfer of management rights is practically discussed. While there are opposing views on this matter, it is both legally and appropriately justified to recognize M&A involving the transfer of management rights for both private school foundations and medical corporations. Furthermore, when selecting preferred bidders in M&A, the leveraged buyout method should be strictly interpreted to ensure financial soundness. On the other hand, in the bankruptcy cases of cryptocurrency exchanges, two critical aspects need to be considered: the protection of the rights of the users of the cryptocurrency exchange and the realization and distribution of the dividends of the cryptocurrency exchange. Recognizing users of the cryptocurrency exchange as bankruptcy creditors offers the advantage of granting them the right to file for bankruptcy. However, as mere bankruptcy creditors without any priority over other creditors, their satisfaction level regarding claims is likely to be very low due to their rights being limited to pro-rata distribution according to their claim amount, indicating inadequate protection of their rights. Legislative supplementary policies are necessary to address this issue. Additionally, various methods and incentives for asset inquiries for asset realization, legislative supplements for claim filing and bankruptcy participation, including the submission of creditor lists by bankruptcy participation agencies and the resulting claim filing effects, should be considered until then. Using the internet for filing through the trustee in bankruptcy could be a temporary solution. Moreover, the realization of virtual assets can be conducted through sales via exchanges for listed virtual assets, while unlisted assets might go through public auction procedures, or realization might be forsaken if not feasible. As societal structures change and public’s perceptions evolve, laws and their interpretations can also change. Nonprofit corporations, which used to be not initially the focus of much attention in debtor rehabilitation and bankruptcy laws, have recently seen an increase in cases and various legal issues that have yet to be discussed. The same applies to special for-profit corporations like cryptocurrency exchanges. It is time to lead a successful insolvency system by thoroughly considering the uniqueness of each entity and harmonizing interpretations with debtor rehabilitation and bankruptcy laws. |
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