[Jeon Daegyu's 7 Trials and 8 Failures] Debt Reduction of Joint Guarantee by CEO of Company Under Rehabilitation Proceedings

Small and medium-sized enterprise A entered into a credit guarantee agreement with the Korea Credit Guarantee Fund under the joint guarantee of its CEO. According to the agreement, the company submitted the credit guarantee certificate issued by the Korea Credit Guarantee Fund to a bank and borrowed 1 billion KRW. Additionally, when the business faced difficulties, the CEO borrowed 500 million KRW from his friend B and provided a joint guarantee for the loan debt. A was unable to repay the bank loan at maturity, and the Korea Credit Guarantee Fund repaid the 1 billion KRW on its behalf. However, A judged that normal debt repayment was difficult and applied for the commencement of rehabilitation proceedings at the Seoul Rehabilitation Court. In A’s rehabilitation proceedings, the Korea Credit Guarantee Fund and B each filed claims of 1 billion KRW and 500 million KRW as rehabilitation claims. A’s rehabilitation plan anticipates repayment of about 30% on the rehabilitation claims. If the principal debtor A’s debt is discharged (reduced) according to the rehabilitation plan, does the principle of subsidiarity under civil law (where the guarantee debt is reduced in the same proportion as the principal debt) mean that the CEO’s joint guarantee debt is also discharged?

In reality, the CEO of a company has no choice but to provide a joint guarantee when the company obtains a credit guarantee certificate from the Korea Credit Guarantee Fund or borrows money from others. Without the CEO’s joint guarantee, it is impossible to obtain a credit guarantee certificate or borrow money. According to the principle of subsidiarity under civil law, if the principal debtor’s obligation to the creditor is discharged or modified, the joint guarantor’s obligation is also discharged or modified to the same extent. If this principle is observed, when the principal debt is discharged by the approval of the rehabilitation plan in the company’s rehabilitation proceedings, the joint guarantee debt is also discharged, allowing the CEO to be released from the joint guarantee debt. However, in rehabilitation proceedings, even if the principal debtor’s obligation to the creditor is discharged or modified by the approval of the rehabilitation plan, the principle of subsidiarity is excluded for the joint guarantor, and there is no discharge or modification of that debt. This stems from a legislative decision to protect creditors in rehabilitation proceedings.

As such, the principle of subsidiarity under civil law does not apply in the company’s rehabilitation proceedings, so despite debt restructuring for the principal debtor (company), the effect does not extend to the CEO who provided the joint guarantee, becoming an obstacle for entrepreneurs starting new businesses. Accordingly, the Act on the Promotion of Small and Medium Enterprises (Article 74-2), the Korea Credit Guarantee Fund Act (Article 30-3), and the Korea Technology Finance Corporation Act (Article 37-3) provide special provisions to protect CEOs who have provided joint guarantees. When the creditor is the Small and Medium Business Corporation, the Korea Credit Guarantee Fund, or the Korea Technology Finance Corporation, if the principal debt is reduced or discharged at the time of approval of the small business’s rehabilitation plan, the joint guarantee debt is also reduced or discharged in the same proportion. When the principal debt owed to the Korea Credit Guarantee Fund, etc., by a small business using rehabilitation proceedings is reduced according to the rehabilitation plan, the effect is extended to the CEO who jointly guaranteed the principal debt, thereby promoting effective rehabilitation of small businesses in financial difficulty and supporting the CEO’s recovery.

In the above case, if the repayment rate for rehabilitation claims in A’s rehabilitation plan is set at 30% and the rehabilitation plan is approved, the CEO only needs to bear joint guarantee debt to the Korea Credit Guarantee Fund within the 30% range (300 million KRW). This is because 70% of the principal debt was discharged, and accordingly, the joint guarantee debt of the CEO as the joint guarantor was discharged in the same proportion. On the other hand, the joint guarantee debt to B remains at 500 million KRW. This is because the reduction of joint guarantee debt due to the reduction of the principal debt is limited to cases where the creditor is the Small and Medium Business Corporation, the Korea Credit Guarantee Fund, or the Korea Technology Finance Corporation. Also, since this regulation is intended to assist CEOs of small and medium-sized enterprises, it does not apply to CEOs of companies that are not small businesses (large corporations).

Jeon Dae-gyu, Chief Judge, Seoul Rehabilitation Court

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