Project Finance 2023 Comparisons

The principal sources of financing for project companies are:

• investments by strategic investors, such as construction companies and operation companies; and
• loans from financial institutions, such as commercial banks, insurance companies, investment trusts or pension funds, or funds in which these companies are beneficiaries.

Project bonds and asset-backed securities are rarely used as a funding source because interest rates used to stay sufficiently low that project companies need not rely on them. However, as interest rates are rising recently, developments should be observed. In the case of financing for real estate projects, many project companies procure funds by issuing short-term bonds.

The Act on Public-Private Partnerships in Infrastructure (the “PPP Act”) is the main PPP-enabling legislation in Korea. Applicable infrastructure facilities under the PPP Act include (without limitation, but mainly) roads, railways, urban railways, harbours, airports, multi-purpose dams, sewage treatment facilities and schools.

PPP projects can be undertaken (i) when profits and benefits outweigh costs, and (ii) when it is more advantageous from an economic/financial perspective compared with a project financed by the government. Selection of a concessionaire for a PPP project requires an open bidding procedure under the PPP Act. The central or local government needs to obtain the consent of the National Assembly or the council of the province or city, respectively, to incur long-term fiscal obligations that are not reflected in its budget.

When reviewing a project-financing structure, the main issue will be whether the deal structure satisfies the matters prescribed in the PPP Act and its sub-statutes and the framework plan for PPP projects published annually by the Ministry of Economy and Finance. Furthermore, the conditions required by the request for proposal (RFP) of the relevant project should be considered in reviewing the deal structure.

Generally, a project company would fund its project cost through raising capital contributions and debt. A project company engaging in PPP projects is required to raise at least 15% (during the construction period) – and 10% (during the operational period) – of the total project cost from private sectors including financing for the projects through capital contribution, pursuant to the framework plan for PPP projects published annually by the Ministry of Economy and Finance and the relevant concession agreement. As a result, a typical funding structure for a PPP project in Korea would initially consist of 15% equity financing and 85% debt financing (including senior debt and subordinated debt).

Based on the framework plan for PPP projects, there is an increasing focus on infrastructure projects such as highways, railways and public water treatment facilities, etc.

Statutory security interests include:

• mortgages established over registrable property (eg, immovable property, heavy equipment, specific licences permitted under the relevant statute, or factories (which consist of the real estate and the machinery and equipment installed thereon));
• security trusts in connection with real estate or securities;
• asset mortgages established over movable assets, claims and other movables (upon registration of security rights over movable assets, claims, etc); however, this option is not available if other types of registration are available; and
• pledges established over movable property, claims, shares, deposits, and intangible property rights.

In particular, the PPP Act enables the concessionaire to establish a mortgage over the concession rights concerning the infrastructure facility, which are registered with the competent authority.

The rights of the concessionaire may be assigned by way of security to the lenders under a yangdo dambo agreement. Yangdo dambo (title transfer by way of security, a non-statutory security interest) is a security interest recognised by Korean case law. Under a yangdo dambo:

• title to the collateral (regardless of whether the collateral constitutes immovable or movable property or claims) is transferred to the secured party;
• upon discharge of the secured obligation, title to the collateral is returned to the collateral-provider; and
• upon default, the secured party can exercise its preferential repayment rights over the collateral.

Establishment Method and Priority of Security Interest

Mortgage

In order to create a mortgage, the parties must first enter into a mortgage agreement and then file a joint application for record in the appropriate registry. Mortgages will have priority based on the order in which the registrations were made. That is, a first-priority secured party has priority over all subsequent creditors and claimants, priority being determined by the time of entry of the mortgage into the registry.

Security trust

In order to create a security trust, the trustor and the trustee must first enter into a security trust agreement. The trustor shall then transfer its ownership in the entrusted asset (real estate or securities) to the trustee, pursuant to the terms of the security trust agreement. If the entrusted assets constitute immovable assets, the trust arrangement must be recorded in the relevant registry.

Pledge

A pledge is created by a pledge agreement entered into by the parties. The creation of a pledge over movables requires the delivery of collateral to the pledgee, while a pledge over receivables requires the delivery of the instrument representing the receivables if that instrument exists. The pledgor may retain legal title to that collateral.

The pledge over the receivables may be perfected through the pledgor’s written notice to, or the written consent of, the third-party debtor. The written notice or consent must have a fixed-date stamp issued by a notary public. The share pledge also requires the delivery of the share certificates and the recording of the pledge in the shareholder registry and the share certificates.

Yangdo dambo

In order to create a yangdo dambo, the parties must first enter into a yangdo dambo agreement, pursuant to which the parties agree to transfer title of the collateral to the creditor and allow the debtor to maintain actual ownership and continued use of the collateral while holding it “in trust” for the creditor. In the case of registrable property, the parties must take the additional step of jointly registering the change of title in the title registry.

Since title to non-registrable property such as movables may not be registered, yangdo dambo on any such non-registrable property is likewise not publicly recordable. Hence, if the debtor sells collateral to a bona fide purchaser for value, courts will determine that the purchaser acquires title free and clear of the security interest. Secured parties can prevent this by implementing other forms of notice, such as affixing a plate to the collateral, where practicable, indicating the grant of a yangdo dambo over the collateral, or notifying the security interest directly to the prospective purchaser for value.

Yangdo dambo over receivables may be perfected through the transferor’s written notice to, or the written consent of, the third-party debtor. The written notice or consent must have a fixed-date stamp issued by a notary public.

Korean law requires that the collateral assets be specifically identifiable. Therefore, in principle, a valid security interest cannot be granted over a fluctuating pool of assets under Korean law. However, certain exceptions are recognised by courts. For example, a valid security interest can be granted in fungible property such as grain, oil and fish that is held in a segregated storage facility. Unless the collateral falls under such exceptions, a security interest cannot be validly created over a fluctuating pool or category of assets.

The execution of the security documents is not subject to a stamp tax or other charge. The registration of a mortgage agreement, however, requires the payment of registration tax (including local education tax) thereon equivalent to 0.24% (provided that registration tax applicable to registration under the Act on Security Over Movable Property and Claims is 0.12%) of the maximum secured amount and a filing fee in the amount equivalent to approximately USD15 (USD13 in case of registration via the internet, which is the more common practice) per application or parcel of land. Furthermore, in the case of a mortgage over real property, the mortgagor should purchase a national housing bond in the amount of 1% of the maximum secured amount (provided that such a national housing bond can thereafter be resold at discount).

As an alternative to a real estate mortgage, the parties often use a real estate security trust by transferring the property to a licensed trustee and providing the beneficial interest to the creditors as collateral, since the amount of registration tax for transfer of title to a trustee is lower than that required for registration of a mortgage.

Korean law requires that collateral assets such as stocks, mortgage and bonds be specifically identifiable. Therefore, in principle, a valid security interest cannot be granted with a general description of the types of collateral.

A kun-mortgage or kun-pledge can secure a specific obligation, or certain types of obligation (Hanjung- Kun) or all types of obligation (Pogwal Kun). Financial institutions providing loans are not permitted to obtain a Pogwal Kun from a third-party guarantor/collateral-provider (subject to certain exceptions) under the Act on the Protection of Financial Consumers. In addition, under the Monopoly Regulation and Fair Trade Act, affiliates within certain “Cross Shareholding Restricted Enterprise Groups” are in principle prohibited from providing a guarantee to their affiliates.

In the case of a mortgage, there is a searchable public registry providing comfort to the lenders with regard to the absence of any prior-ranking liens on their collateral. In the case of a pledge over movables and shares, the creditor may assure itself of its priority, since the pledge requires the delivery of collateral to the pledgee. In the case of a pledge or yangdo dambo over receivables, however, there is no way to confirm the absence of senior liens with a higher priority to the creditor’s lien other than relying upon the representations of the security-provider as to the absence of a senior lien. Also, as in other jurisdictions, the security interest may be subordinated to certain statutorily preferred claims (eg, tax liens or certain employee wage and severance claims).

Under the Civil Code of Korea, security interests will in principle be released when the secured claims are discharged following repayment. Thus, separate documents evidencing the release of security interests are not required. With regard to security interests registered in registries, while they are also released when the secured claims are discharged, that release needs to be registered through the submission of a document evidencing the release of the relevant security interest.

If Korean law were to apply (as determined by the Korean conflict of laws rules, including the Private International Laws of Korea) to the security interest, upon the debtor’s default, a secured party would have the option of:

• judicial foreclosure;
• private sale (ie, a sale other than by a judicial auction) with respect to the disposition of the collateral if the security agreement provides for a private sale and if the secured transaction is considered “a commercial transaction”; or
• acquisition of the securities in its own name in lieu of judicial foreclosure, if the secured transaction is considered “a commercial transaction” and the parties have agreed on such a remedy.

The Commercial Code lists the types of activities that are considered commercial transactions and in addition states that all activities of a merchant qualify as commercial transactions. It is considered that a credit facility extended by a financial institution would qualify as “a commercial transaction”. A merchant is a person that conducts commercial transactions in its own name. Therefore, if the collateral-provider or the secured party is a merchant, the secured party’s rights of enforcement against collateral would not be limited to judicial foreclosure proceedings.

Judicial Foreclosure

The Civil Execution Act and regulations thereunder contain detailed procedures for judicial foreclosure. Upon the mortgagee filing a petition, the court will typically issue an order to commence auction proceedings within two to three days after receipt of the petition. This order will then be registered with the court registry of the subject property. If there is no successful bidder who bids at least the minimum amount set by the court on the first auction date, another date will be set for the next round, approximately one month later. Each time a new auction date is set, the minimum auction price will be lowered by approximately 20–30%.

Private Sale

The secured party may also dispose of the pledged collateral through a private sale if permitted under the relevant security document. In the case of collateral such as aircraft, ships or real property where the title as well as mortgage interest therein is registered, it is generally difficult for the secured party to dispose of the collateral in a private sale because the title transfer would require the co-operation of the collateral-provider (ie, the mortgagor).

Acquisition of Collateral

The secured party may also acquire title to the collateral in lieu of foreclosure, but the secured party will be required to return to the collateral-provider any excess of the market value of the collateral over the amount of the secured obligation. In the case of collateral such as aircraft, ships or real property where the title as well as mortgage interest therein is registered, it is generally difficult for the secured party to acquire title to the collateral because the title transfer would require the co-operation of the collateral-provider (ie, the mortgagor).

The choice of foreign law as the governing law of the contract, and submission to a foreign jurisdiction, will be recognised by the courts of Korea in so far as the choice-of-law provisions thereof are valid under the law so chosen and the application of relevant provisions of the laws so chosen is not manifestly contrary to the public policy of Korea.

In determining whether to recognise and enforce a foreign judgment, the Korean courts will consider whether the foreign judgment has satisfied the requirements under Korean law, particularly the Code of Civil Procedure (CCP). Article 217 of the CCP sets forth the following requirements that a party seeking to enforce the foreign judgment must establish:

• the foreign judgment (including order, decision, etc) is final and conclusive (referred to as the final judgment requirement);
• the court that rendered the judgment should have jurisdiction under the principles of international jurisdiction under Korean law or applicable treaties;
• the defendant (ie, a Korean party) was duly served with a service of process (otherwise than by publication or similar means) in sufficient time to enable the defendant to prepare its defence in conformity with applicable laws, or responded to the action without being served with process (referred to as the proper service requirement);
• in view of the substance of the judgment and the relevant litigation procedure, recognition of the judgment is not contrary to the public policy of Korea (referred to as the public policy requirement); and
• judgments of the courts of Korea are accorded reciprocal treatment in the jurisdiction of the court which has issued the judgment, or the requirements for the recognition of a foreign judgment in the jurisdiction of the court which has issued the judgment are neither manifestly inequitable nor substantially different in material respects from the requirements for recognition of a foreign judgment in Korea (referred to as the reciprocity requirement).

Arbitration

Regarding arbitral awards, Korea is a member of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the “New York Convention”), so, as long as the relevant foreign jurisdiction is part of a contracting state of the New York Convention, an arbitration award will be enforceable in Korea without further review of the merits, but subject to the procedural formality of obtaining an enforcement judgment, provided that none of the grounds for denial of enforcement of foreign arbitral awards provided for in the New York Convention exist.

In principle, there is no restriction on a foreign lender’s ability to enforce its rights over security created under Korean law. However, depending on the terms of the loan or types of security, there may be foreign exchange reports that need to be filed in advance, and failure to do so may restrict the enforceability of security.

As a general principle, a foreign financial institution may not engage in any licensed financial or business activities in Korea without proper licensing. In practice, originating, arranging or funding loans from overseas to a foreign exchange bank in Korea, which is licensed for such business, is unlikely to raise any major issues. However, originating, arranging or funding loans from overseas to a Korean company, other than foreign exchange banks, will require certain reporting/approval requirements to Korean foreign exchange authorities to be met.

Under the Foreign Exchange Transaction Law (FETL) and regulations thereunder, the Bank of Korea’s acceptance of a foreign exchange report may in some cases be required for the collateral-provider to grant a security interest in the collateral (including any posted collateral additionally provided or substituted). Korean courts have held that a violation of the FETL does not affect the enforceability of the relevant contract. Therefore, the lack of foreign exchange authorisation would not invalidate a security interest in the collateral and the secured party (that is, a non-resident) would be able to obtain a judgment against the collateral-provider in a Korean court with regard to the relevant security.

However, the enforcement of that judgment and the remittance of any proceeds overseas would require the Bank of Korea’s authorisation, so without a foreign exchange report that has been duly filed with the Bank of Korea, a non-resident secured party may not be able to receive the proceeds resulting from the disposal of collateral.

Restrictions on Foreign Investment

The principal laws governing foreign direct investment (FDI) in Korea are the Foreign Investment Promotion Act (FIPA) and the FETL. Both the FIPA and the FETL have mechanisms that may be triggered to regulate foreign investment based on national interest. Specifically, the FIPA provides that foreign investments may be restricted at the request of the relevant ministries regulating the industries into which such foreign investments are made if the Ministry of Trade, Industry and Energy (MOTIE) determines, through the deliberation of the Foreign Investment Commission, that any such foreign investment threatens national security.

Furthermore, the FETL, which regulates foreign exchange operations and foreign currency-denominated transactions, states that if the Korean government deems that certain emergency circumstances are likely to occur – including sudden fluctuations in interest rates or exchange rates, extreme difficulty in stabilising the balance of payments or a substantial disturbance in the Korean financial and capital markets – it may impose certain restrictions, such as requiring foreign investors to obtain prior approval from the Ministry of Economy and Finance for the acquisition of Korean securities or for the repatriation of funds arising from the sale of Korean securities. In addition, according to the Act on Prevention of Divulgence and Protection of Industrial Technology (the “Industrial Technology Protection Act”), foreign investments in entities that hold key national technologies and that receive government funding, and the transfer of national technologies, must be reported to the MOTIE. In the event that the foreign transaction at issue is determined to pose a serious risk to national security, the Minister of the MOTIE may order various measures to address this risk, such as an order to suspend, prohibit or even unwind the transaction.

The FIPA applies to all foreign investments where (i) the principal investment amount is equal to or greater than KRW100 million and (ii) the foreign investor is acquiring 10% or more of the voting shares (either existing or new shares) of a Korean company. Any investments that do not qualify as FDI under the FIPA are treated as portfolio securities investments and are subject to the regulations under the FETL. Finally, the Industrial Technology Protection Act generally applies to the transfer or export of key national technologies to foreign companies, foreign acquisitions of effective control over domestic companies that hold key national technologies and foreign acquisitions of relevant businesses from those domestic companies.

Sector-Specific Restrictions

By virtue of the Korean government’s liberalisation policy over the past couple of decades, almost all areas of Korean business are now open to foreign investment. Korea uses a negative list system, which means that a business is open to foreign investment unless it is specially restricted under the applicable law. In this regard, specific sectors over which the authorities have power to regulate and prevent foreign investment, or sectors that are the subject of special scrutiny, include rice and barley farming, the manufacture and supply of materials used in nuclear power generation, electric power transmission and distribution, newspaper publishing, television broadcasting, telecommunication services, education and defence.

In principle, there are no restrictions upon domestic companies remitting their profits to foreign investors. However, a prior report to foreign-exchange regulators must be filed in order for those profits to be remitted overseas.

In principle, all payments in relation to foreign-exchange transactions must be made both through a foreign exchange bank and directly to the transaction counterparty. Any payment in violation of this general principle must be reported to the competent foreign exchange authorities.

In principle, investment returns, including dividends and interest, are subject to withholding taxes in Korea. Under the Korean Corporation Tax Code, the withholding tax rate is 22% (15.4% in the case of interest on bonds), but if there is any applicable tax treaty that provides a lower withholding tax rate, the lower rate may apply on the amount to be remitted.

Although a Korean project company may establish and maintain offshore foreign currency accounts, some regulatory requirements will need to be satisfied. For a Korean project company to open an offshore account, the Korean resident must file a foreign-exchange report to its designated foreign exchange bank.

When transferring funds from Korea to the offshore account, there will be no need for a foreign-exchange report to be filed for the relevant transfer if the transfer amount is not more than USD100,000, provided that the transfer is made through the Korean project company’s designated foreign-exchange bank. However, transferring more than USD100,000 in a single transaction would generally require filing a prior foreign-exchange report to the Bank of Korea.

When transferring funds from overseas into the offshore account, if the amount deposited into the offshore account is greater than USD10,000, the Korean project company must file a foreign-exchange report to its designated foreign-exchange bank within 30 days after the funds have been deposited. If the aggregate amount of funds that were transferred from overseas into the offshore account during a one-year period, or the total balance in that offshore account as of the end of the year, exceeds USD500,000, the Korean project company must file a balance statement report by the end of the following January to its designated foreign-exchange bank, which will then report to the Bank of Korea.

Tax Implications of Offshore Accounts

In addition to foreign-exchange regulations, offshore financial accounts (accounts opened at a foreign financial institution holding any type of financial instrument, as well as assets including cash, stocks, bonds, insurance products and collective investment securities) need to be reported to the National Tax Service of Korea (NTS). A Korean project company must report its offshore account to the NTS in June each year if the account balance as at the end of any month exceeds KRW500 million (approximately USD380,000). If the name of the account-holder and the beneficial owner of the account are different or the account is jointly held with other persons, all relevant parties are each obliged to report the full balance in the account to the NTS.

Financing or project documents do not need to be registered or filed with any government authority, or otherwise comply with any legal formalities, in order to be valid or enforceable. However, there might be foreign-exchange reporting requirements under the FETL and the regulations thereunder.

A foreign national or foreign entity is generally required to report its acquisition of land in Korea to the local government within 60 days of the execution of the purchase contract (in the case of acquisition by private sale) or within six months of the acquisition (in the case of judicial foreclosure), and this procedure should be prior to the registration of title with the court registry.

The current Constitution provides that “licences to exploit, develop or utilise minerals and all other important underground resources, marine resources, water-power and natural power available for economic use may be granted for a certain period of time.” In other words, under Korean law, there exists only a provision on the licence to extract natural resources, but not any provision as to who can own natural resources. Under the Mining Industry Act, the Korean government has the authority to grant rights to extract and acquire untapped minerals. The mining rights to petroleum shall be solely owned by the government. Pursuant to the Submarine Mineral Resources Development Act, submarine mining rights also shall be solely owned by the Korean government. Pursuant to the Mining Industry Act, a foreigner may have mining rights only if:

• the nation of the foreigner permits Korean nationals to have mining rights under the same conditions as its own nationals;
• the nation of the foreigner permits Korean nationals to have mining rights under the same conditions as its own nationals if Korea permits that foreigner to have mining rights; or
• a treaty or an equivalent arrangement permits the foreigner to have mining rights.

Unlike the above-mentioned real estate security trust, a debtor may not create a security interest in favour of a security trustee or security agent for the benefit of the lenders, since the principles of the Civil Code of Korea require that the security holder be identical to the creditor of the underlying claims.

Claims (Including Guarantees, Rental Income, Insurance Policies, Financial Receivables)

Priority is determined by the delivery date of a fixed-date stamped notice to, or consent from, the obligor. A secured party that sends a notice or obtains a consent with an earlier fixed-date stamp is given priority over those with a fixed-date stamp from any later dates. A document can be fixed-date stamped at a court or at the offices of a notary public. The fixed-date stamp requirement cannot be satisfied by a dated letter. The foregoing priority rule would apply to security interests governed by Korean law in accordance with the Private International Laws of Korea.

Bearer Debt Security

A bearer debt security can be validly pledged only through the delivery of the certificates to the secured party. Because the certificates are deemed to have been delivered to the secured party or its agent by giving notice of the pledge to or obtaining a consent to the pledge from any third party holding the certificates, the priority is determined by the fixed-date stamp on the notice or consent. The priority of interests between a secured party (secured party X) that is holding the bearer-form debt security certificates and a secured party (secured party Y) that has perfected its security through a fixed-date stamped notice to, or consent from, a third party that was holding the certificates at the time of pledge would be determined by whether secured party X is a holder in due course of the certificates, in which case the holder in due course will be given priority. A holder in due course will be the party that has acquired the certificates in good faith without actual notice or constructive notice. A holder will have constructive notice if the lack of notice is caused by that party’s gross negligence.

Registered Security

Registered security’s priority is determined by the date of registration of the pledge with the court registry.

Book-Entry Security

Book-entry debt security or book-entry bonds can be validly pledged only through the transfer of the bonds to a pledged account of the secured party maintained either through the Korea Securities Depository or a custodian of the security collateral-provider. Therefore, there cannot be competing security interests in book-entry bonds.

Mortgage

Priority in mortgages is determined by the order of registration. Parties to a financing agreement may agree to create a mortgage having different priorities, in which case the priority of the mortgage will be determined by the order of registration.

Meanwhile, if a debtor is declared bankrupt, security interests that are contractually subordinated will become invalid and the security interests may be enforced pursuant to the bankruptcy laws of Korea. However, any “turnover subordination” provision agreed amongst lenders – under which a subordinated lender agrees to turn over to the senior lender any amount the subordinated lender has received – will likely be upheld as a valid and enforceable provision.

Under the PPP Act, a foreign company may also become a project company. However, for certain projects, the competent governmental agency or local government may require that the project developer and the investor be an entity organised under Korean law, in which case it is possible for a foreign company to be disqualified from becoming a project developer.

Project companies are established in the form of a jusik hoesa (joint stock company) for which investors have limited liability. Broadly speaking, the investors in project companies consist of:

• construction investors with the aim of engaging in project construction;
• operation investors with the aim of engaging in project operation; and
• financial investors with the aim of engaging in the financial aspects of the project.

Under the Debtor Rehabilitation and Bankruptcy Law (DRBL) of Korea, there are two major insolvency proceedings: bankruptcy proceedings and rehabilitation proceedings.

Insolvency proceedings are commenced by the filing of a petition for bankruptcy or rehabilitation. The filing of the petition per se does not act as an automatic stay. However, upon the formal commencement of rehabilitation proceedings by a court order or declaration of bankruptcy by the court in bankruptcy proceedings, any actions to enforce claims against the insolvent party are stayed. Upon the filing of a petition, the competent court will decide whether to commence rehabilitation proceedings or whether to declare bankruptcy. In rehabilitation proceedings, but not in bankruptcy proceedings, the court is required to make its decision as to whether a rehabilitation proceeding should commence within one month after the filing of the petition, where a petition is filed by the debtor company. A secured party in a bankruptcy proceeding may enforce its security rights outside the proceedings, whereas in a rehabilitation proceeding a secured party’s security rights may be exercisable only in accordance with the court-confirmed rehabilitation plan.

In a bankruptcy proceeding, a creditor may also exercise rights of set-off at any point, whereas rights of set-off will be stayed in a rehabilitation proceeding from the expiry of the claim-filing period. The claim-filing period is determined by the court at the time when a rehabilitation proceeding is commenced, or bankruptcy is declared. A rehabilitation proceeding lasts from two weeks to two months, and a bankruptcy proceeding may continue for up to three months.

Rehabilitation Proceedings

A debtor company or a creditor or creditors holding claims amounting to 10% or more of the company’s paid-in capital, or shareholders holding 10% or more of the debtor company’s total issued and outstanding shares, may file for rehabilitation of the debtor company.

When the debtor company files for the commencement of a rehabilitation proceeding, the court first issues a preservation order within seven days of the filing and then determines whether to commence with the rehabilitation proceeding. In addition, the court can also issue a comprehensive stay order or specific stay order prior to the commencement of the proceeding, the effect of which would be that all or specific administrative or judicial proceedings relating to the company will be stayed. Once the commencement of a rehabilitation proceeding is declared (the commencement date), repayment and enforcement of most claims against the debtor company that arose prior to the commencement date are stayed, while claims arising after the commencement date are generally not subject to the rehabilitation proceeding.

In general, the court will appoint the existing management (eg, directors or manager) of the debtor company to act as the receiver in the rehabilitation proceeding unless the insolvency of the debtor company was mainly caused by the existing management. In such cases, the court will appoint an independent receiver to administer the proceeding. The receiver has the power to conduct all of the debtor company’s business and manage all of its property, subject to the court’s supervision.

As a general rule, any creditor whose claim against the debtor company arose prior to the commencement date, whether secured or unsecured, may not enforce such claims other than as provided for in the rehabilitation plan adopted at the meeting of interested parties and approved by the court. Any alteration or modification of the rights of creditors or shareholders will be provided for in the rehabilitation plan.

Upon commencement of the rehabilitation proceeding, the receiver will prepare lists of claims held by the creditors. If the claims are correctly specified in these lists, the filing of the proof of claims will not be required. However, if the claims are not specified or are specified incorrectly in these lists, a creditor must file the proof of claims within the designated period of time, and failure to do so will either nullify its claim or fix its claim as specified in the lists. Creditors are classified into three basic categories:

• creditors with unsecured rehabilitation claims;
• creditors with secured rehabilitation claims; and
• creditors with claims for the common benefit.

The first two categories of creditors are subject to the rehabilitation proceeding and generally may not receive payment or repayment of their respective claims (other than as provided for in the rehabilitation plan). However, creditors with claims for the common benefit are not subject to the rehabilitation plan, and include either creditors whose claims arose after the commencement date (with certain exceptions) or those creditors whose claims were approved by the court during the preservation period, or fall within certain categories, such as, among others, wages and taxes.

If the debtor company fails to perform its payment obligations in accordance with the rehabilitation plan, the affected creditors are not permitted to enforce their claims or security interest while the rehabilitation proceeding continues. Instead, they (or the receiver or the debtor company) may request that the court discontinue the rehabilitation proceeding or amend the rehabilitation plan. However, if the amendment could have an adverse effect on the creditors with rehabilitation claims or the shareholders of the debtor company, the court may amend the rehabilitation plan only by obtaining an affirmative vote at a meeting of interested parties. If it becomes apparent, either before or after the court approves the rehabilitation plan, that the debtor company cannot be rehabilitated, the court may, at its own discretion or upon request by the receiver or a creditor with a rehabilitation claim, issue an order to discontinue the rehabilitation proceeding.

Once the rehabilitation proceeding is discontinued due to the debtor company’s failure to comply with the rehabilitation plan, the court shall declare the debtor company bankrupt and liquidate the debtor company if the liabilities of the debtor company exceed the value of its assets. When the bankruptcy proceeding is initiated, unsecured rehabilitation claims are characterised, in general, as bankruptcy claims and creditors with unsecured rehabilitation claims will be paid pursuant to the bankruptcy proceeding. Creditors with secured rehabilitation claims, however, may immediately enforce their security interest once the rehabilitation proceeding is discontinued and their enforcement rights will not be affected by the bankruptcy proceeding, except for certain procedural limitations.

A bankruptcy trustee will be appointed to administer the bankruptcy proceeding. Since an attorney who is a third party to the debtor company is appointed as the bankruptcy trustee, the receiver in a rehabilitation proceeding will not serve as the bankruptcy trustee in the bankruptcy proceeding.

Bankruptcy Proceedings

Bankruptcy proceedings are court-administered proceedings designed to liquidate an insolvent debtor’s assets. A bankruptcy proceeding formally begins upon adjudication by the court that the debtor is “bankrupt” following the filing of a petition for the bankruptcy process by a debtor company itself or by a creditor or creditors or a director of such debtor company. The court will make its determination as to whether grounds for bankruptcy exist, based on the written pleadings and oral arguments of the petitioner. The adjudication of bankruptcy also has the effect of staying all unsecured creditors from executing on their claims against the bankruptcy estate.

The bankruptcy trustee appointed by the court will be vested with the exclusive right to manage and dispose of the bankruptcy estate, and to conduct an investigation and assessment of it, subject to the court’s supervision. After reviewing the reports prepared by the bankruptcy trustee, the creditors will have a meeting and vote on a resolution deciding whether to continue or discontinue the debtor company business and the manner of safeguarding the bankruptcy estate.

Subject to certain statutory limitations and approval by the inspection commissioners, the bankruptcy trustee has the power to liquidate the bankruptcy estate, and to determine the manner and timing of that liquidation. The bankruptcy trustee distributes the proceeds from the liquidation of the bankruptcy estate to the creditors in proportion to their claim amounts.

Claims entitled to distribution are differentiated according to the priority of the claims. For this purpose, the creditors are classified, in general, as follows, in accordance with their priorities:

• creditors with estate claims, which include costs of judicial proceeding, tax claims, wages and payment of severance, management expenses incurred in connection with management, liquidation and distribution of the bankruptcy estate, and other claims arising from administration of the bankruptcy estate;
• creditors with other statutorily preferred claims;
• unsecured bankruptcy claims; and
• subordinated claims.

Unlike the rehabilitation proceedings, the enforcement of a security interest in the debtor company’s assets is not subject to the bankruptcy proceeding, except for certain procedural limitations. Thus, the proceeds recovered from any such enforcement may be applied to the repayment of the secured claims, regardless of the bankruptcy proceeding. A deficient claim remaining after recovery from that enforcement may be repaid as an unsecured bankruptcy claim. However, in order to receive distributions for those deficient claims, enforcement of the security interest must be completed.

Enforcement of Rights Over Collateral During a Bankruptcy Proceeding and Rehabilitation Proceeding

In the case of a bankruptcy proceeding, the secured party may enforce its security interest in the collateral.

In the case of rehabilitation, however, the secured party may not enforce its security interest. Therefore, compulsory execution based on the secured rehabilitation claims cannot be enforced after a rehabilitation proceeding is commenced (or after the comprehensive stay order if issued). Also, an enforcement proceeding that has already been commenced will be suspended. The satisfaction of the secured claims and the enforcement of security interest may be made only to the extent permitted under the rehabilitation plan resolved by the creditors and approved by the court. Usually, the terms and conditions of the secured claims shall be adjusted in the rehabilitation plan. Upon completion or discontinuance of a rehabilitation proceeding, the secured party may individually seek enforcement or compulsory execution with respect to the secured claims that have become due and payable.

During a rehabilitation or bankruptcy proceeding, a foreign creditor is treated in the same manner as a local creditor.

Avoidance Power During a Bankruptcy Proceeding or Rehabilitation Proceeding

Under the DRBL, a court-appointed receiver or bankruptcy trustee may avoid the following transactions by the debtor undergoing rehabilitation proceedings or bankruptcy proceedings as avoidable transfers or preferences:

• any action performed by the debtor company that, in its knowledge, would cause harm to creditors, unless the beneficiary of that action was unaware at that time that any such action would cause harm to creditors;
• any action performed by the debtor company after the suspension of payments or the filing of an application for the commencement of bankruptcy proceedings or rehabilitation proceedings (an insolvency event), which causes harm to the creditors;
• the creation of a security interest or the satisfaction of the debtor company’s obligations, unless the beneficiary of any such action was unaware at that time that an insolvency event had occurred or that any such action would cause harm to creditors;
• any action performed by the debtor company after, or within 60 days of, the occurrence of an insolvency event and which involves providing a security interest or satisfying the debtor’s obligation where the debtor was otherwise not obliged to provide that security or to satisfy that obligation at that time or in that manner, unless the beneficiary of that action was unaware at that time that the debtor was causing harm to the pari passu standing of other creditors by that action and, if that action took place after the occurrence of an insolvency event, the beneficiary of that action was also unaware at that time that an insolvency event had occurred; and
• any action performed by the debtor company without any compensation after, or up to six months before, the occurrence of an insolvency event.

Rehabilitation Proceedings

In a rehabilitation proceeding, secured creditors cannot exercise their claims except pursuant to the rehabilitation plan approved by the interested parties and confirmed by the court. They generally receive payment through the rehabilitation plan in the amount of the value of their security. Secured creditors have voting rights and, in order for a rehabilitation plan to be approved, secured creditors representing three quarters or more of the debtor company’s secured debt also have to approve the rehabilitation plan.

Bankruptcy Proceedings

In a bankruptcy proceeding, secured creditors may enforce their security interests without any restriction under the bankruptcy proceeding. Secured creditors need to file proofs of claims and to identify the collateral with the bankruptcy court, but failing to file proofs of claims does not deprive them of their secured interests.

Upon the debtor’s default, the secured party would have the following options:

• judicial foreclosure;
• private sale (ie, sale by any means other than judicial auction) with respect to the disposition of the collateral; and
• acquisition of the collateral by the secured party.

Private sale of collateral or acquisition of the collateral by the secured party are available if the security agreement allows such a remedy. If the secured party disposes of the collateral by private sale or acquires the collateral, the secured party shall apply the proceeds to repayment of the secured claims and return the excess amount, if any, to the debtor.

The secured party cannot resort to self-help remedies to repossess collateral. Project lenders may participate as buyers in a sale. There is a statutory notice period for judicial sale, but not for private sale. Judicial sale can be made only in South Korean won, but this is not the case in a private sale.

As already mentioned, if the borrower, security-provider or guarantor is declared bankrupt, certain restrictions would apply with respect to exercising security interests or the amount a secured party may claim thereunder.

No entity is excluded from the bankruptcy proceedings under the applicable laws.

The insurance laws and regulations in Korea provide certain restrictions on cross-border insurance transactions between a foreign insurance company that does not have a Korean insurance business licence (a non-admitted insurer) and a Korean resident. Under Korean law, in principle, the types of insurance product that Korean residents are permitted to purchase from a non-admitted insurer are limited to the following:

• life insurance;
• export cargo insurance;
• import cargo insurance;
• aviation insurance;
• travel insurance;
• hull insurance;
• long-term casualty insurance; and
• reinsurance.

In addition, the sale of the following offshore insurance products to Korean residents is also permissible, regardless of the type of insurance:

• any insurance product that is not sold in Korea;
• any insurance product which three or more domestic insurance companies have refused to underwrite; and
• any insurance product that was purchased in another country but has not expired upon the policyholder’s return to Korea.

It should also be noted that, even for permissible cross-border insurance transactions, the non-admitted insurer must comply with certain restrictions on marketing methods. For example, non-admitted insurers should sell permitted products only by mail, telephone, fax or over the internet, from outside Korea.

Insurance policies may be payable to foreign secured creditors if those creditors are the insured parties or pledgees of the relevant insurance policies. If a foreign investor receives insurance proceeds under an insurance policy over assets in Korea, those proceeds are highly likely to be subject to a 22% withholding tax. Otherwise, if there is any applicable tax treaty, the foreign investor may be exempt from any such withholding tax.

No withholding tax would apply to payments of the principal. A 22% corporate income tax (including local income tax, and 15.4% in the case of interest on bonds) would apply to interest payments made by a Korean borrower to a foreign lender. There is a possibility for a lower withholding tax to apply if there is an applicable tax treaty. Other payments may also be treated similarly as interest payments and be made subject to withholding tax, but this will largely depend on the nature of those payments.

Under the Restriction on Special Taxation Act, withholding tax upon interest payments is exempt under certain conditions. For example, withholding tax would not apply to interest payments made by a Korean financial company to a foreign financial company under a foreign currency-denominated loan transaction or by a Korean company issuing foreign currency-denominated bonds from overseas.

In addition, under the Stamp Tax Act, stamp tax would be imposed upon any document or contract that creates a property right. Therefore, when a lender executes a loan agreement and agrees to provide a loan to the borrower, stamp tax will be imposed, pursuant to the Stamp Tax Act.

The Interest Limitation Act sets the maximum interest at 20% per annum. Any interest that exceeds this maximum will be invalid.

In general, project agreements and financing agreements executed in Korea are governed by the laws of Korea. The PPP Act is the main legislation of Korea.

However, the parties may agree to have the project agreements and financing agreements governed by other foreign laws, with the exception of the concession agreement, which should be governed by Korean law. The mandatory provisions of laws such as Korean public policy will apply to the agreement regardless of the choice of governing law. The laws or regulations that apply to typical project sectors include:

• the Water Environment Conservation Act;
• the Clean Air Conservation Act;
• the Soil Environment Conservation Act;
• the Wastes Control Act;
• the Occupational Safety and Health Act;
• the Serious Accident Punishment Act;
• the Framework Act of Fire Services;
• the High-Pressure Gas Safety Control Act;
• the Chemicals Control Act;
• the Framework Act on the Construction Industry;
• the Construction Technology Promotion Act; and
• the Act on Acquisition of and Compensation for Land for Public Works Projects.

The Ministry of Environment (MOE) is the competent authority for environmental matters, whereas the Ministry of Health and Welfare (MOHW) and the Ministry of Employment and Labour (MOEL) regulate health and safety matters. Also, the various regional offices of the MOE and MOEL co-ordinate and implement central government environmental, health and safety (EHS) policies and legislation at the provincial, special city and local governmental levels.

As described, the typical sources of financing are loans from financial institutions such as commercial banks, insurance companies, investment trusts or pension funds. The laws applicable to each entity would also apply to the financing agreements. For example, the Banking Act, the Insurance Business Act, the Trust Act and the Financial Investment Services and Capital Markets Act apply to commercial banks, insurance companies, investment trust and pension funds, respectively.

The PPP Act prescribes:

• the methods of implementing PPP projects;
• statutory procedures for PPP projects, such as establishing framework plans for PPP projects; and
• restriction, upon a company committing unfair practices, from participating in PPP projects.

In connection with the financing agreement:

• the Banking Act sets a limit on credit provision to a single borrower, restrictions on capital contribution to other companies, and restrictions on investment exceeding 100% of the bank’s equity capital;
• the Insurance Business Act prescribes asset-management principles and restrictions on capital contribution by insurance companies to other companies, and prohibitions on an act of financing support;
• the Trust Act sets forth cash management methods; and
• the Financial Investment Services and Capital Markets Act sets forth certain restrictions on the management of funds, such as conditions regarding custody and management of collective investment assets and operation supervision.