[Jeondaegyu's 7 Jeon 8 Gi] Abuse of Debtor's Rehabilitation Procedure

In mid-last month, at Courtroom No. 1 of the Seoul Rehabilitation Court, a creditors' meeting for a bankruptcy case was being held. Generally, creditors rarely attend creditors' meetings in bankruptcy cases, but on this day, a large number of people filled the courtroom. They were creditors dissatisfied with the progress of the proceedings. This case involved a debtor who had applied for the commencement of rehabilitation proceedings two years ago, but the application was dismissed. Subsequently, the creditors filed for bankruptcy to expedite debt recovery. Then, the debtor applied again for the commencement of rehabilitation proceedings, and the court decided to commence the rehabilitation proceedings. As a result, the bankruptcy proceedings requested by the creditors were suspended. Later, the rehabilitation proceedings were dismissed, and the suspended bankruptcy proceedings resumed, leading to a bankruptcy declaration. During this time, three years had passed.

Due to the delay in the proceedings, the creditors naturally had many complaints. From questioning whether it made sense to file claims again in the bankruptcy proceedings after having already filed claims in the rehabilitation proceedings, to concerns that a significant portion of internal operating funds was used during the rehabilitation period. Many complaints were related to the delay in the bankruptcy process. Listening to the creditors' opinions made me reconsider the rehabilitation system.

Recently, cases of debtors abusing rehabilitation proceedings have occasionally been observed. First, there is the debtor's application for commencement of rehabilitation proceedings to counter the creditor's bankruptcy petition. Creditors file for bankruptcy to deprive the debtor of control over responsible assets and transfer them to a bankruptcy trustee for prompt and proper liquidation, especially when the debtor fails to repay or is suspected of hiding assets. Sometimes, bankruptcy is also filed as a means to pressure the debtor. According to the principle that rehabilitation proceedings take precedence over bankruptcy proceedings, an application for commencement of rehabilitation proceedings or a decision to commence rehabilitation proceedings can be grounds to obstruct a bankruptcy declaration. It is possible to apply for commencement of rehabilitation proceedings either during the hearing for bankruptcy declaration or after the bankruptcy declaration. Until a decision is made on the application for commencement of rehabilitation proceedings, the court may, ex officio, order the suspension of bankruptcy proceedings against the debtor. Once a decision to commence rehabilitation proceedings is made, the bankruptcy proceedings are suspended. Debtors sometimes use this to counter creditors' bankruptcy petitions by applying for commencement of rehabilitation proceedings.

While applying for commencement of rehabilitation proceedings to counter bankruptcy petitions has positive aspects, there are also negative aspects of abuse. In practice, when an application for commencement of rehabilitation proceedings is filed after a bankruptcy petition, an investigator is appointed to examine whether the principle of guaranteeing liquidation value is maintained, whether a rehabilitation plan can be prepared, and to hear the opinions of major creditors to determine if there are grounds to dismiss the application for commencement of rehabilitation proceedings (this is called a 'pre-commencement investigation'). Although the principle is that rehabilitation proceedings take precedence when bankruptcy and rehabilitation proceedings compete, if the bankruptcy proceedings are still ongoing and continuing with them aligns with the general interests of creditors, the court should dismiss the application for commencement of rehabilitation proceedings. The case mentioned earlier could be seen as an abuse of rehabilitation proceedings depending on the circumstances, based on the premise that funds that should have been distributed to creditors were used during the rehabilitation proceedings in a case with no possibility of rehabilitation.

Next is the application for commencement of rehabilitation proceedings to avoid charges under the Act on the Aggravated Punishment of Specific Economic Crimes related to dishonored checks. Once rehabilitation proceedings commence, the debtor no longer has payment authority, so even if a check bounces, they are not subject to punishment under the Act on the Aggravated Punishment of Specific Economic Crimes. Lastly, there is the application for commencement of rehabilitation proceedings to avoid charges under the Labor Standards Act. A representative is punished under the Labor Standards Act if wages are not paid within 14 days after a worker's resignation, but if rehabilitation proceedings commence before the 14 days, criminal punishment is avoided because payment authority is transferred to the administrator.

Although rehabilitation proceedings exist to enable efficient rehabilitation of debtors, they are sometimes abused to avoid bankruptcy proceedings or criminal punishment. The recent increase in applications for commencement of rehabilitation proceedings to avoid bankruptcy proceedings is concerning as it may foster negative perceptions of rehabilitation proceedings.

Jeon Dae-gyu, Chief Judge, Seoul Rehabilitation Court

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