Supreme Court: "Contract Termination During Corporate Rehabilitation Valid Even If Rehabilitation Fails"

1st and 2nd Trials: "Rehabilitation Procedure Termination Before Approval of Rehabilitation Plan Does Not Allow Contract Cancellation or Termination"
Supreme Court: "Even If Rehabilitation Procedure Termination Decision Is Final, It Does Not Affect the Validity of Cancellation or Termination"

[Asia Economy Reporter Heo Kyung-jun] The Supreme Court has ruled that if a manager of a company undergoing rehabilitation proceedings expresses the intention to terminate a contract with another company, the termination of the contract remains valid even if the decision to discontinue the rehabilitation proceedings is later finalized.

The Supreme Court's Second Division (Presiding Justice Cheon Dae-yeop) announced on the 15th that it overturned the lower court's ruling, which had dismissed the plaintiff's claim in a damages lawsuit filed by Company A against Company B, and remanded the case to the Seoul High Court.

In 2017, Company A and Company B entered into an exclusive distribution agreement granting Company A the exclusive distribution rights for a disaster alert server and application system developed by Company B in 10 European countries, in exchange for Company A paying Company B 20 billion KRW. However, when Company A failed to make the payment by the due date, Company B initiated compulsory execution against real estate owned by Company A.

Eventually, Company A entered rehabilitation proceedings in 2019 at the request of its shareholders, and Company A's manager expressed the intention to terminate the exclusive distribution contract with Company B. However, due to repeated decisions to discontinue the rehabilitation proceedings before the approval of the rehabilitation plan and the initiation of rehabilitation proceedings, the rehabilitation was never completed. Company A then filed a lawsuit demanding that Company B return the 200 million KRW contract deposit it had received and the claim rights for the deposit obtained through compulsory execution.

The first and second trials rejected Company A's claim based on Supreme Court precedents stating that when a manager exercises the right to terminate a contract under the Debtor Rehabilitation Act after the initiation of rehabilitation proceedings, the effect of exercising the right to terminate is maintained in cases where the rehabilitation plan was approved and then discontinued. They held that since the rehabilitation proceedings were discontinued before the rehabilitation plan was approved, Company A could not terminate the contract.

However, the Supreme Court's judgment differed. The Supreme Court ruled that even if the decision to discontinue the rehabilitation proceedings is finalized, it does not affect the validity of the termination.

The court stated, "The decision to discontinue rehabilitation proceedings does not have retroactive effect regardless of whether its finalization occurs before or after the approval of the rehabilitation plan. When a manager terminates a bilateral contract under the Debtor Rehabilitation Act, the contract ultimately loses its effect, so even if the decision to discontinue rehabilitation proceedings is finalized afterward, it does not affect the validity of the termination."

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