[edit] Supreme Court Decision 2002Da40081 delivered on November 22, 2002 [Confirmation of Claims in Bankruptcy]

【Main Issues】

Whether the former claims of creditors who participated in a composition proceeding are revived if, after the composition was authorized under the Composition Act (hereinafter referred to as 'the CA'), the debtor is declared bankrupt during a composition proceeding without revocation of the composition decision (affirmative)

【Summary of Decision】

If, during a composition proceeding, a debtor is declared bankrupt without revocation of the composition decision, the need to revive the claims previously held by creditors does not differ from that in those cases where the court declares bankruptcy ex officio during a composition proceeding on other grounds set forth in Article 9 of the CA, or where, during a bankruptcy proceeding, a bankruptcy declaration is entered without cancellation of a compulsory composition. Therefore, on the analogy of Article 71 of the CA and Articles 316 and 310 of the Bankruptcy Act (hereinafter referred to as 'the BA'), it is proper to revive the former claims of creditors where the debtor is declared bankrupt after the composition decision but before full termination of the composition proceeding.

【Reference Provisions】 Article 310 and Article 316 of the Bankruptcy Act; Article 9 and Article 71 of the Composition Act

Article 310 of the Bankruptcy Act (Amount of Claim in Reopened Bankruptcy) With respect to any creditor who has been subject to compulsory composition, the amount of his bankruptcy claim shall be the amount calculated by deducting the amount received under the conditions as stipulated by the compulsory composition, from the amount of the previous claim.

Article 316 of the Bankruptcy Act (New Bankruptcy prior to Execution of Compulsory composition) The provisions of Articles 303 (1) and 310 through 313 shall apply mutatis mutandis in case where the bankruptcy is declared before the compulsory composition is fully executed. This provision shall also apply to cases where a compulsory composition decision may be revoked under Article 305, and bankruptcy declared.

Article 9 of the Composition Act (Transfer to Bankruptcy Proceedings) (1) If composition is cancelled, or if composition is disapproved or a decision on the cancellation of composition becomes final and conclusive, the court shall make an adjudication of bankruptcy ex officio: provided, that the same shall not apply to the case where the cause of bankruptcy is nonexistent.

(2) If the adjudication of bankruptcy has been made pursuant to the provisions of the preceding paragraph, the entrustment of registration or record under the provisions of the preceding Article shall be made with the entrustment of registration or record of bankruptcy.

Article 71 of the Composition Act (Progress of Bankruptcy Proceeding by Cancellation of Composition) Articles 310, 312 and 313 of the Bankruptcy Act shall apply mutatis mutandis to the adjudication of bankruptcy under Article 9.

【Plaintiff, Appellee】 Korea Asset Management Corporation (Law Firm Bumeoh, Attorney Kim Joong-gi and 5 others, Counsel for plaintiff- appellee)

【Defendant, Appellant】 Lee Heui-tae as the receiver of bankrupt Company Bosung, Inc. and 1 other

【Court of First Instance】 Daegu District Court Judgment 2001Gahap9827 delivered on September 20, 2002

【Court of Second Instance】 Daegu High Court Judgment 2001Na8821 delivered on June 14, 2002

【Disposition】 The appeal shall be dismissed. All costs of this appeal are assessed against the defendants.

【Reasoning】 Article 310 of the BA provides that in case where the bankruptcy proceeding proceeds due to the cancellation of the compulsory composition under the CA, a compulsory composition creditor is entitled to a bankruptcy claim in the amount of his/her former bankruptcy claim minus the amount received under the terms and conditions of the compulsory composition. Article 316 of the BA also provides that in case where bankruptcy is declared after the compulsory composition is authorized, but before it is fully executed, Article 310 shall apply mutatis mutandis. The rationale for the application of Article 310 in the above case is that the bankruptcy declaration against a debtor in a composition proceeding causes the creditor's property to be absorbed into the bankruptcy estate, naturally rendering the execution of the composition impossible, and therefore, assuming the concessions made by the creditor during the composition are rescinded by virtue of the cancellation of the compulsory composition, the composition creditor's former bankruptcy claim should be revived so that he/she may now take part in the new bankruptcy proceeding as a bankruptcy creditor.

Article 71 and Article 9 of the CA provides that, although the former bankruptcy claim shall be revived by applying mutatis mutandis Article 310 of the BA in cases where the court declares bankruptcy ex officio on the ground of cancellation of the composition, neither Article 310 nor Article 316 of the BA regarding newly entered bankruptcy decision shall apply to the ex officio bankruptcy declaration in case where bankruptcy is declared without cancellation of the composition. However, if, during a composition proceeding, a debtor is declared bankrupt without revocation of the composition decision, the need to revive the claims previously held by creditors does not differ from that in those cases where the court declares bankruptcy ex officio during a composition proceeding on other grounds set forth in Article 9 of the CA, or where, during a bankruptcy proceeding, a bankruptcy declaration is entered without cancellation of a compulsory composition. Therefore, on the analogy of Article 71 of the CA and Articles 316 and 310 of the BA, it is proper to revive former claims of creditors where the debtor is declared bankrupt after the composition decision but before full termination of the composition proceeding.

In this case, the court below noted the following facts: (i) Bosung, Inc. (hereinafter referred to as 'Bosung') filed an application for composition with the Daegu District Court and obtained approval for composition from the court, which decision was finalized; (ii) Bosung filed an application for reorganization with the Daegu District Court, which was rejected, and the court declared Bosung bankrupt ex officio pursuant to Article 23 Paragraph (2) of the Company Reorganization Act, without expressly revoking the composition decision made previously; (iii) before the bankruptcy declaration, plaintiff held joint and several guaranty claims in the total amount of 9,634,692,561 won, which included principal and interest on loan transferred by Daedong Bank to plaintiff as indicated in the judgement of the court below; and (iv) plaintiff reported its claims as bankruptcy claims during the claims filing period, but during the claim examination period, defendants filed objections to the creditor's claim for interest on loans and damages for delay in the total amount of 2,603,256,385 won on grounds of discrepancy between the plaintiff's reported claims and the terms and conditions of the composition and lack of evidentiary documents. The defendants argued that the plaintiff's claims to which defendants filed an objection should be excluded from the bankruptcy claims, pursuant to the terms and conditions of the composition proceeding that provide for a grace period and partial release of the loan interest. The court, however, dismissed defendants' argument on the ground that the bankruptcy claims held by plaintiff were no longer subject to the terms and conditions of the composition because a bankruptcy declaration has been newly entered against Bosung after the authorization of the composition proceeding and thus, the claims previously held by plaintiff are revived.

We find that the decision of the court below, as stated above, was justified, and the court below did not err in determining the scope of bankruptcy claims or misinterpreting the legal principles as to composition under the Composition Act and compulsory composition under the Bankruptcy Act.

Therefore, all of the appeals shall be dismissed, and this decision is delivered with the assent of all Justices who reviewed the appeal.

Justices Yoo Ji-dam (Presiding Justice)

Cho Moo-Jeh

Kang Shin-wook

Son Ji-yol (Justice in charge)

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