[edit] Supreme Court Decision 2001Da78898 delivered on August 23, 2002 [Lawsuit for Denial]
【Main Issues】
[1] Whether the acts of prejudicing a bankruptcy creditor, which may be denied when a bankruptcy debtor faces insolvency as set forth in Item 2 of Article 64 of the Bankruptcy Act, include not only a fraudulent act of absolutely reducing general assets of the bankrupt debtor, but also a biased act of obstructing equality between creditors (affirmative)
[2] Whether it is reasonable to exclude a certain act from acts which may be denied under the Bankruptcy Act just because the certain act falls under the category of any of the acts which are not restricted under Article 31 of the Composition Act, or are restricted pursuant to the above Article 31, but, nonetheless, may not be denied as set forth in the proviso of Article 33 of the Composition Act (negative)
[3] If a certain act may be denied in accordance with the Bankruptcy Act but may not be denied pursuant to the Composition Act, whether the provisions of the Composition Act may prevail (negative)
[4] Whether reasonableness of a certain act is a requirement for exercise of the right of denial under the Bankruptcy Act (affirmative)
[5] Criteria to determine whether a certain act is reasonable or not and who has the burden of alleging and establishing such reasonableness
【Summary of Decision】
[1] We conclude that the acts of prejudicing a bankruptcy creditor, which may be denied when a debtor faces insolvency as set forth in Item 2 of Article 64 of the Bankruptcy Act, include not only a fraudulent act of absolutely reducing general assets of the bankrupt debtor, but also a biased act of obstructing equality between creditors. Therefore, if the bankrupt debtor repays debts that become due and payable during the formal period of crisis, such act is considered as the repayment, which causes inequality between creditors, and thus may be denied in case of a debtor's crisis under the Bankruptcy Act.
[2] Even though there is an application for a composition proceeding by a debtor, he still holds the right to manage and dispose of his own property. However, if management of the property is still left at the discretion of the debtor, there is a possibility that the debtor may make changes to the status of, or reduce his property and thus, it will be difficult or impossible to agree on a plan for composition and implement the terms and conditions therein. In consideration of the above situations, Article 31 of the Composition Act specifies certain acts that a debtor may be allowed or forbidden to conduct during the period from application for commencement of a composition proceeding to determination thereof. Denial in case of insolvency set forth in Item 2 of Article 64 of the Bankruptcy Act is different from a denial specified in Article 33 of the Composition Act in terms of requirements for constitution of denials and effects of the provisions. In this regard, it cannot be deemed that, just because a certain act falls under the category of any of the acts which are not restricted under Article 31 of the Composition Act, or are restricted pursuant to the above Article 31, but may not be denied as set forth in the proviso of Article 33 of the Composition Act, it is reasonable to exclude the certain act from acts which may be denied under the Bankruptcy Act. Therefore, if the debtor, after he has filed commencement of the composition proceeding after suspension of payment set forth in Item 2 of Article 64 of the Bankruptcy Act, repays its debts which become due and payable specified in the same provision, and such repayment meets the requirements for constitution of exercise of the right of denial under the Bankruptcy Act, then, even though such act of repayment falls under the category of acts which are not restricted under Article 31 of the Composition Act, or may not be denied as set forth in the proviso of Article 33 of the Composition Act, such act may be denied by Item 2 of Article 64 of the Bankruptcy Act.
[3] Article 17 of the Composition Act provides for the principle of priority in composition to the effect that if both the application for bankruptcy filed by a creditor, and the application for commencement of a composition proceeding filed by a debtor are pending in a court, the composition proceeding prevails over the bankruptcy proceeding, and thus, the pending bankruptcy proceeding shall be suspended until the end of the composition proceeding while only the composition proceeding shall be implemented. However, nothing in the above Article 17 shall be construed to give priority to the provisions of the Composition Act, in case where a certain act may be denied in accordance with the Bankruptcy Act, but not be denied pursuant to the Composition Act.
[4] In some cases, we can find that even though a certain act that was denied under the Bankruptcy Act, was detrimental to a bankruptcy creditor, such act may be deemed to be necessary, reasonable, or inevitable for benefits of society in light of the unique and specific situations at the time of such act and thus it was desirable that the bankruptcy creditors willingly suffer from the reduction of the debtor's bankrupt asset base or inequality between creditors. In such exceptional cases, we conclude that the act shall not be denied under Article 64 of the Bankruptcy Act in light of the spirit and the idea of justice of the Bankruptcy Act, which intended to realize equality between creditors, protect debtors, and coordinate conflicting interests surrounding bankruptcy.
[5] Whether a debtor's act of repayment is reasonable or not shall be determined based on review of not only the debtor's personal situations, including the status of his property and business operation, and objective, intention and motives of the act, but also the source of repaid amounts, the relation between the bankrupt debtor and the creditor, or whether the creditor was in collusion with the debtor or exercised influence over the debtor by putting pressure on the debtor to repay debts, in light of good faith and idea of equality. In addition, it is the opposing party, the beneficiary of repayment, who shall bear the burden of alleging and establishing that such repayment was not unreasonable.
【Reference Provisions】 [1] Article 64 Item 2 of the Bankruptcy Act / [2] Articles 31 and 33 of the Composition Act; Article 64 Item 2 of the Bankruptcy Act / [3] Article 17 of the Composition Act; Article 64 Item 2 of the Bankruptcy Act / [4] Article 64 of the Bankruptcy Act / [5] Article 64 of the Bankruptcy Act
Article 64 of the Bankruptcy Act (Acts Which May be Denied) Any of the following acts may be denied for preservation of bankrupt foundation.
2. Provision of any collateral, acts related to extinguishment of liabilities and other acts of prejudicing a bankruptcy creditor after the bankrupt debtor was ordered to suspend any payment or there was an application for bankruptcy; provided, however, that this provision shall not be applicable to the person who benefits from such acts if he did not know the existence of such suspension or application for bankruptcy at the time of the acts.
Article 17 of the Composition Act (Suspension of Bankruptcy Proceeding) If both applications for bankruptcy and composition proceedings are pending in a court, the pending bankruptcy proceeding shall be suspended until the end of the composition proceeding.
Article 31 of the Composition Act (Restriction of Acts Imposed on Debtor) (1) A debtor shall not conduct any of the acts falling under the category of those not permitted customarily during the period from application for commencement of composition and determination thereof.
(2) In case a trustee in preservation is appointed after the application for commencement of the composition, the debtor shall not conduct any acts to which the trustee objects even though the acts are permitted customarily.
(3) The debtor may repay any of the following debts incurred after the application for commencement of the composition, with the trustee's consent, even though such repayment is not permitted customarily.
(4) In case no trustee in preservation is appointed, the debtor may repay the debts set forth in the above Paragraph 3 with the consent of a court.
Article 33 of the Composition Act (Composition Creditor's Right of Denial) The acts not in compliance with the provisions of the above Article 31 may be denied by a composition creditor; provided, however, that the other party knew the facts at the time of the acts.
【Plaintiff, Appellee】 Trustee in Bankruptcy, Kim Chil-jun of Bankrupt Blue Hill Department Store (Law Firm Dasan, Attorneys Lim Chang-gi and 7 others, Counsel for Plaintiff-Appellee)
【Defendant, Appellant】 LG Electronics, Inc. (Law Firm Lee & Ko, Attorneys Park Uh-dong and 2 others, Counsel for Defendant-Appellant)
【Court of First Instance】 Suwon District Court Judgment 2000Gahap18786 delivered on April 10, 2001
【Court of Second Instance】 Seoul High Court Judgment 2001Na26240 delivered on October 31, 2001
【Disposition】 The appeal shall be dismissed. All costs of appeal are assessed against the defendant.
【Reasoning】 1. Basic Facts Acknowledged by the Court Below
Based on relevant evidence, the court below acknowledged the following facts:
i) Blue Hill Department Store, Inc. (hereinafter referred to as 'the Company Before Bankruptcy') was established on July 27, 1990. The Company Before Bankruptcy started to run the Blue Hill Department Store in 14, Sunae-dong, Bundang-gu, Seongnam City, Korea on August 30, 1996.
ii) The defendant started to lease certain space for a store in the department store on the same day and has run the store to sell electric house-wares. As for transactions between the defendant and the Company Before Bankruptcy, the defendant paid all the proceeds from sales of goods generated for a month, to the Company Before Bankruptcy and received the amounts calculated by deducting fees, etc. from such proceeds from the Company Before Bankruptcy on the fifth day of the following month.
iii) The Company Before Bankruptcy failed to pay matured bills presented for payment to relevant financial institutions and was declared insolvent on December 26, 1997, and filed an application for commencement of a composition proceeding with Seongnam Branch of the Suwon District Court on the same date. After filing of the application, the Company Before Bankruptcy began to pay sales proceeds received from the defendant, less fees, etc. to the defendant in cash on the date immediately following such receipt, as requested by shop tenants including the defendant.
iv) On January 16, 1998, the Suwon District Court ordered a preservative measure regarding the property of the department store, and the department store notified such fact to the shop tenants. In response to the notice, some of the shop tenants closed and withdrew from their shops in the department store at that time, and other shop tenants including the defendant notified the department store that they would also cease to conduct business, and withdrew their shops in the department store. In a request to resume and normalize its business operation, the Company Before Bankruptcy asked some tenants that had withdrawn from their shops to return and induced remaining tenants including the defendant to stay. In response, the tenants notified the Company Before Bankruptcy that they would not return or stay if the Company Before Bankruptcy failed to reimburse outstanding amounts out of the sales proceeds paid by the tenants prior to insolvency of the department store. Under such circumstances, the Company Before Bankruptcy repaid the defendant the total amount of 96 million won (hereinafter referred to as 'the Act of Repayment') as advance payment (46 million won and 50 million won respectively on April 27 and May 14, 1998). The aggregate amounts paid by the Company Before Bankruptcy to tenants including the defendant as advance payment at that time totaled 3,240,346,978 won. Upon the Act of Repayment, the defendant stayed and continuously ran its shop.
v) Meanwhile, the Company Before Bankruptcy withdrew its application for commencement of the composition proceeding and filed an application for a commencement of a company reorganization proceeding with the Suwon District Court on June 29, 1998. However, the court rejected the application for the company reorganization on February 19, 1999, and declared the department store bankrupt on March 4, 1999 by exercising its authority and further, appointed the plaintiff as a trustee in the bankruptcy proceeding.
vi) As of June 30, 1998, total assets and liabilities of the Company Before Bankruptcy amounted to 166.1 billion won and 223.6 billion won respectively, which means the liabilities exceeded the assets.
2. Judgment on the Grounds for Appeal (Supplementary grounds are examined only to the extent that they concern grounds for appeal)
A. On the Issue of Detrimental Nature
Article 64 of the Bankruptcy Act provides any of the following acts may be denied for preservation of bankrupt asset base, and defines the above acts more specifically in Item 2 thereof as an offering of any further collateral, acts related to extinguishment of liabilities and other acts of prejudicing a bankruptcy creditor after the bankrupt debtor was ordered to suspend any payment or there was an application for bankruptcy (provided, however, that this provision shall not be applicable to the person who benefits from such acts if he did not know the existence of such suspension or application for bankruptcy at the time of the acts). In particular, the acts of prejudicing a bankruptcy creditor, which may be denied when a bankruptcy debtor faces insolvency as set forth in Item 2 of Article 64 of the Bankruptcy Act, are deemed to include not only a fraudulent act of absolutely reducing general assets of the bankrupt debtor, but also a biased act of obstructing equality between creditors. Therefore, we conclude that if the bankrupt debtor repays debts that become due and payable during the period of formal crisis, such act is considered as repayment, which causes inequality between creditors, and thus may be denied in case of a debtor's crisis under the Bankruptcy Act.
According to the court below's decision, the Company Before Bankruptcy was declared insolvent on December 26, 1997 and was already faced with suspension of payment at the time of the Act of Repayment. Since the department store was in a crisis, as shown above, the Act of Repayment falls under the category of acts related to extinguishment of liabilities after the bankrupt debtor was ordered to suspend any payment. Therefore, the Company Before Bankruptcy's acts related to extinguishment of liabilities after the court order of payment suspension may be denied pursuant to the Bankruptcy Act unless the defendant did not know the existence of the court order at the time of the Act of Repayment.
Based on the review of the foregoing, we conclude that the court below's judgment is justifiable based on that the Act of Repayment met the requirements in establishing detrimental nature in light of the above legal principle and there was no reversible error in matters of law as to requirements for establishing detrimental nature for the exercise of the right of denial pursuant to the Bankruptcy Act.
B. On the Issue of Article 31 of the Composition Act, Etc.
Article 31 of the Composition Act provides the following:
(1) A debtor shall not conduct any of the acts falling under the category of those not permitted customarily during the period from application for commencement of composition and determination thereof.
(2) In case a trustee in preservation is appointed after the application for commencement of the composition, the debtor shall not conduct any acts to which the trustee objects even though the acts are permitted customarily.
(3) The debtor may repay any of the following debts incurred after the application for commencement of the composition proceedings with the trustee's consent, even though such repayment is not permitted customarily.
(4) In case no trustee in preservation is appointed, the debtor may repay the debts set forth in the above Paragraph (3) with the consent of a court.
According to Article 33 of the Composition Act, the acts not in compliance with the provisions of Article 31 of the Composition Act may be denied by a composition creditor; provided, however, that the other party knew the facts at the time of the acts.
In light of the contents and effects of the above provisions, we conclude the following: Even though there is an application for a composition proceeding of a debtor, he still holds the right to manage and dispose of his own property. However, if management of the property is still left at the discretion of the debtor, there is a possibility that the debtor may make changes to the status of, or reduce, his property and thus, it will be difficult or impossible to agree on a composition plan and conditions therein. In consideration of the above situations, Article 31 of the Composition Act specifies certain acts that a debtor may be allowed or forbidden to conduct during the period from application for commencement of a composition proceeding to determination thereof. Denial in case of insolvency set forth in Item 2 of Article 64 of the Bankruptcy Act is different from a denial specified in Article 33 of the Composition Act in terms of requirements for constitution of denials and effects of the provisions. In this regard, it cannot be deemed that just because a certain act falls under the category of any of the acts which are not restricted under Article 31 of the Composition Act, or are restricted pursuant to the above Article 31 but may not be denied as set forth in the proviso of Article 33 of the Composition Act, it is reasonable to exclude the certain act from acts which may be denied under the Bankruptcy Act. Therefore, if the debtor, after he has filed commencement of the composition proceeding after suspension of payment set forth in Item 2 of Article 64 of the Bankruptcy Act, repays its debts which become due and payable specified in the same provision, and such repayment meets the requirements for the exercise of the right of denial under the Bankruptcy Act, then, even though such act of repayment falls under the category of acts which are not restricted under Article 31 of the Composition Act, or may not be denied as set forth in the proviso of Article 33 of the Composition Act, such act may be denied by Item 2 of Article 64 of the Bankruptcy Act. In addition, Article 17 of the Composition Act provides for the principle of priority of composition to the effect that if both the application for bankruptcy filed by a creditor and the application for commencement of a composition proceeding filed by a debtor are pending in a court, the composition proceeding prevails over the bankruptcy proceeding, and thus, the pending bankruptcy proceeding shall be suspended until the end of the composition proceeding while only the composition proceeding shall be implemented. However, nothing in the above Article 17 shall be construed to give priority to the provisions of the Composition Act in case where a certain act may be denied in accordance with the Bankruptcy Act but not be denied pursuant to the Composition Act.
With regard to this litigation, the defendant alleged that i) the Company Before Bankruptcy's repayment of the outstanding debts after application for commencement of a composition is valid in that it falls under the category of 'acts permitted customarily' as specified in Article 31 of the Composition Act, and ii) even though the Act of Repayment does not fall under the above category, since the defendant did not know that the Act of Repayment was not customarily permitted or there was no consent of the trustee in preservation or of the court, the Act of Repayment shall not be denied pursuant to Article 33 of the Composition Act. However, the court below rejected the defendant's allegation by judging that the Act of Repayment cannot be deemed to be acts permitted customarily, and even though the Act of Repayment falls under the category of acts which are not restricted under Article 31 of the Composition Act, or are restricted pursuant to the above Article 31, but may not be denied as set forth in the proviso of Article 33 of the Composition Act, it is not reasonable to exclude the act from the acts which may be denied under the Bankruptcy Act in the bankruptcy proceeding.
In addition, the defendant additionally asserted that the Bankruptcy Act cannot serve as the legal ground for denying the effects of the valid acts conducted in the process of the composition proceeding. The court below also rejected the defendant's additional assertion for the following reasons: Article 17 of the Composition Act provides for the principle of priority of composition to the effect that if both applications for bankruptcy and composition proceedings are pending in a court, the pending bankruptcy proceeding shall be suspended until the end of the composition proceeding. However, the provision provides for only priority between the two kinds of proceedings and nothing in the above Article 17 shall be construed to specify that whether the acts conducted in the composition proceeding are valid or not may be determined in the subsequent bankruptcy proceeding.
Based on the review of the above holding, we conclude that the court below rendered an unnecessary judgment as to whether the Act of Repayment may fall under the category of the acts permitted customarily as specified in Article 31 of the Composition Act, but the court below justifiably rejected the defendant's allegation in light of the above legal principles and did not make a reversible error as to the legal principles regarding the acts that may be denied pursuant to the Bankruptcy Act.
C. On the Issue of Insufficiency of Unreasonableness
In some cases, we can find that even though a certain act as being detrimental to a bankruptcy creditor is deniable under the Bankruptcy Act, such act may be deemed to be necessary, reasonable, or inevitable for benefits of society as a whole in light of the unique and specific situations at the time of such act that the bankruptcy creditor should willingly suffer from the reduction of the debtor's bankrupt asset base or inequality between creditors. In such exceptional cases, we conclude that the act shall not be denied under Article 64 of the Bankruptcy Act in light of the spirit and the idea of justice of the Bankruptcy Act, which intended to realize equality between creditors, protect debtors, and coordinate conflicting interests surrounding bankruptcy. Furthermore, whether a debtor's act of repayment is reasonable or not shall be determined based on review of not only the debtor's personal situations, including the status of his property and business operation, and objective, intention and motives of the act, but also the source of repaid amounts, the relation between the bankrupt debtor and the creditor, or whether the creditor was in collusion with the debtor or exercised influence over the debtor by putting pressure on the debtor to repay debts, in light of good faith and idea of equality. In addition, it is the beneficiary of the repayment who shall bear the burden of asserting and establishing that such repayment was not unreasonable.
In the grounds for appeal, the defendant alleged that the Act of Repayment was intended to protect the benefits of rehabilitation and maintain the Company Before Bankruptcy. The defendant also claimed that it did not prejudice the bankruptcy creditor and was confirmed by the trustee in preservation after the Act. In light of the motives, objective, details of the Act of Repayment, benefits reaped by the Company Before Bankruptcy, and the attitude of the trustee in preservation after the act, etc., the defendant asserted that the Act of Repayment was not unreasonable and thus should not be denied.
However, the facts acknowledged by the court below and the relevant records indicate the following:
i) The Company Before Bankruptcy is not deemed to have been the only party that benefited from the Act of Repayment.
ii) After insolvency of the Company Before Bankruptcy, the defendant notified the Company Before Bankruptcy of its intention to close or withdraw its shop. In response to such notice, for normalization of the department store's business, the Company Before Bankruptcy induced the defendant to stay. Then, the defendant notified the Company Before Bankruptcy that it would not stay if the Company Before Bankruptcy failed to reimburse outstanding amounts out of sales proceeds paid by the defendant prior to insolvency of the department store. Under the circumstances, the Company Before Bankruptcy had no choice but to repay the outstanding amounts.
iii) As of June 30, 1998, the liabilities of the Company Before Bankruptcy amounted to 223.6 billion won, which exceeded its assets by as much as 57.5 billion won. Despite the huge amount of debt, since the relevant court had not yet determined whether to commence the composition proceeding, the Company Before Bankruptcy selected only 93 tenants including the defendant and repaid their advance payment in the aggregate amount of 3,240,346,978 won without reviewing the expected performance of their operation thoroughly.
iv) The Company Before Bankruptcy repaid the outstanding amounts without the consent of the trustee in preservation or of the court.
As shown above, in consideration of not only the status of property, business operation, and objective, intention and motives of the act and of the Company Before Bankruptcy, but also the source of repaid amounts, the relation between the bankrupt debtor and the creditor, or the degree of influence exercised by the creditor, etc., we conclude that the Act of Repayment is not deemed to be reasonable in light of good faith and the idea of equality and we, therefore, find the relevant point of the grounds for appeal also unacceptable.
3. Based on the foregoing, this appeal shall be dismissed. This decision is delivered with the assent of all Justices who reviewed the appeal.
It is so decided as per Disposition.
Justices Yoo Ji-dam (Presiding Justice)
Cho Moo-Jeh
Kang Shin-wook
Son Ji-yol (Justice in charge)
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