The Debtor Rehabilitation and Bankruptcy Act (“DRBA”) amended on October 15, 2014 for the purpose of prohibiting business owners responsible for the bankruptcy of a company from reacquiring such company under reorganization through individual(s) who have aligned economic interests after the company receives a large amount of debt relief though rehabilitation proceedings, will be enacted on January 16, 2015.
The amended DRBA newly includes Article 231 (Special Provision on Excluding Reorganization Plan) and Article 243- 2 (Disapproval of Reorganization Plan) under which the court may exclude a reorganization plan (by not undergoing a hearing or not commencing a meeting of interested parties to pass a resolution) or decide to disapprove a reorganization plan. The court may exclude or disapprove a reorganization plan with regard to transactions listed under Article 57 of the DRBA, such as business or asset transfer of a company under reorganization or share transfer of a company under reorganization for the purpose of acquiring the control of the such company, if an acquirer (i) raises funds necessary for the acquisition through the funding of, or provision of security or loan guarantee by, a person who is significantly responsible for the commencement of the reorganization proceedings such as a director, auditor or manager of a debtor (“Responsible Director”), (ii) has an aligned economic interest with the Responsible Director regarding the business when taking into consideration circumstances such as current and past business relationships, shareholding structure and provision of funds, or (iii) is related to the Responsible Director, such as spouse or lineal blood relative (“Relative”) (Articles 231-2(1) and 243- 2(1) of the DRBA; Article 15-2 of the Enforcement Decree of the DRBA). Furthermore, the court must exclude a reorganization plan or decide to disapprove a reorganization plan if the acquirer or the Relative of the acquirer has committed fraud, embezzlement, breach of trust or breach of fiduciary duty against the debtor and has been sentenced to imprisonment or a heavier punishment and 10 years have not yet passed from the conclusion of the execution of such punishment (Articles 231-2(2) and 243-2(2) of the DRBA; Article 15-2 of the Enforcement Decree of the DRBA).
Under the amended DRBA, to achieve the effectiveness of the aforementioned new provisions (“New Provisions”) the court may order a debtor, administrator and/or other interested parties to provide information or produce documents in order to confirm whether reasons exist to exclude or disapprove a reorganization plan (Articles 231- 2(3) and 243-2(3) of the DRBA). In addition, if false information is provided or false documents are produced for the purposes of avoiding the application of the New Provisions, and as a result, the reorganization plan is approved and confirmed, the individual that has provided or produced such information/documents will be punished by imprisonment not exceeding 5 years or a fine not exceeding KRW 50 million (Article 644-2 of the DRBA). Moreover, an individual that refuses, avoids or hinders the provision of information or production of documents without a justifiable reason or provides false information or produces false documents can be subject to imprisonment not exceeding 1 year or a fine not exceeding KRW 10 million (Article 649-4(2)~(3) of the DRBA).After the enactment of the amended DRBA, to properly close a deal, parties contemplating M&A transactions with companies under reorganization should confirm in advance whether any issues related to the New Provisions may occur from the buyer’s side.