Can Payments and Security Given in Exchange for New Funds or New Services Be Avoided? Contemporaneous Exchange and the Assessment of Harmfulness

Question

The Debtor Rehabilitation and Bankruptcy Act allows the administrator in rehabilitation procedures (Article 100(1)) and the bankruptcy trustee in bankruptcy procedures (Article 391) to avoid, among other things, acts prejudicial to creditors. The courts hold that prejudicial acts include not only fraudulent acts that reduce the debtor's general assets but also preferential acts that favour a specific creditor in distribution. On that view, payments made or security provided by a debtor in crisis to a specific creditor will usually be subject to avoidance.

Yet a debtor in crisis must still transact in order to keep its business going, for example by providing security when borrowing new funds, or by paying immediately for goods or services as they are received. If all such acts were avoidable, counterparties willing to deal with companies in crisis could disappear. The question of this brief is whether acts made in exchange for a new performance are subject to avoidance.

This brief looks at three strands. First, contemporaneity and exchange: what was exchanged for what, and when. Second, balance of value: whether there is a reasonable balance between the performance received by the debtor and the obligation extinguished, or between the borrowed amount and the value of the collateral. Third, unity: where a specific debt was repaid with money borrowed from a third party, whether the borrowing and the repayment can be viewed together as a single act.

This brief does not determine whether any individual transaction is avoidable. It sets out the materials to be checked and the divergent readings within the scope of what the summaries of the judgments in two bankruptcy cases and one rehabilitation case state. Because Article 100(1) for rehabilitation and Article 391 for bankruptcy have similar but not identical structures, the two are read side by side; whether the current provisions are the same as those in force at the time of the transactions is left as a separate matter to be checked.

Material to check

First, Article 391, the avoidance provision for bankruptcy, can be checked. Subparagraph 1 covers acts done by the debtor with knowledge that they would prejudice bankruptcy creditors, but excludes cases where the person who received a benefit did not know, at the time of the act, of the fact that bankruptcy creditors would be prejudiced. Subparagraph 2 covers acts prejudicial to bankruptcy creditors and acts relating to the provision of security or the extinguishment of obligations done after a suspension of payment or a petition for bankruptcy; subparagraph 3 covers the provision of security or the extinguishment of obligations not falling within the debtor's obligations, done after a suspension of payment or a petition for bankruptcy or within 60 days before it; and subparagraph 4 covers gratuitous acts, and onerous acts that may be equated with them, done after a suspension of payment or a petition for bankruptcy or within six months before it.

Second, Article 100, the avoidance provision for rehabilitation, can be checked. The subparagraphs of paragraph (1) set out four types similar to those in Article 391, framed by reference to rehabilitation creditors or secured rehabilitation creditors, and refer collectively to a suspension of payment, a petition for the commencement of rehabilitation procedures or a petition for bankruptcy as a "suspension of payment, etc." Paragraph (2) provides that paragraph (1) does not apply to the provision of security or the extinguishment of obligations made by the debtor to a person having the authority to collect, in respect of the claims under Article 140(1) and (2), namely claims for fines, minor fines and the like, and claims collectable under the National Tax Collection Act or the Local Tax Collection Act. Decision 2016Da247209 held that all four types in paragraph (1) share the harmfulness of the act as a common requirement.

Third, the method of exercising the right of avoidance can be checked. Article 105(1) and Article 396(1) provide that the administrator or the bankruptcy trustee exercises the right of avoidance by way of an action, a claim for avoidance or a defence, and paragraph (3) of each provision places actions and claims for avoidance within the exclusive jurisdiction of the court in which the rehabilitation case is pending or the court in which the bankruptcy case is pending. Because Decision 2016Da247209 was a case in which the creditor that received payment was the plaintiff and the debtor's administrator was the defendant, the summary of the judgment can be read with the stage of the proceedings in mind.

Fourth, the timeline of the transaction. The date of the loan agreement, the date the funds were received, the date security was created, the date of payment, the period during which services were provided, the time the consideration was agreed, and the time when the inability to pay or the suspension of payment began can be placed on a single line and aligned. Where, as in Decision 2017Da287648, the agreement on consideration was first made subject to a condition precedent and the drawing up of a contract or the giving of notice followed, which point in time is treated as the act subject to avoidance may be decisive of the outcome.

Fifth, materials showing the balance of value. Appraisal reports, market price data and fee agreements may be gathered that allow comparison of the borrowed amount with the value of the collateral, and of the value of the goods or services received by the debtor with the amount of the obligation extinguished in consideration for them. Where the consideration for services is at issue, whether the fee agreement is unreasonably excessive may also be examined; Decision 2017Da287648 also stated the legal principle that, where there are special circumstances in which the agreed fee is unreasonably excessive so as to be regarded as contrary to the principle of good faith or the notion of equity, only a fee within the range recognised as appropriate may be claimed.

Sixth, the flow of funds and the agreement on their use. Account records and contracts can be compared to establish whether it was agreed (expressly or impliedly) that money lent by a third party would be used to repay a specific debt, whether it was actually used in accordance with that agreement, what the borrowing terms were (interest, due date, whether security was provided) and what the relationship between the lender and the debtor was, and whether the debtor's assets can be regarded as not having decreased before and after the borrowing. In the case of the provision of security, whether a risk arose that the borrowed funds would be concealed or donated is also a matter to be checked.

Possible readings

The starting reading treats preferential acts broadly as subject to avoidance. Because prejudicial acts include not only fraudulent acts that absolutely reduce general assets but also preferential acts that undermine equality among creditors, where a debtor borrowed funds from a third party and repaid only a specific creditor, that repayment is in principle subject to avoidance. Decisions 2016Da247209 and 2017Da287648 confirmed this principle.

The next strand recognises an exception for contemporaneous exchange. On this reading, where a payment or the provision of security is made contemporaneously and in exchange for a new performance, and there is a reasonable balance between what was received and what was given, something came into the debtor's assets to the extent that something left them, so the act cannot be regarded as prejudicial to other creditors. Decision 2017Da287648 applied this reading to the extinguishment of obligations in exchange for the supply of goods or the provision of services, and Decision 2015Da240447 applied it to the provision of security in exchange for new borrowing. For the provision of security, a further requirement was added: that it does not create a risk of a disposition prejudicial to bankruptcy creditors, such as concealing or donating the borrowed funds.

The unity reading views the acts as a whole rather than splitting them. Where borrowing and repayment were made as an integrated transaction, harmfulness should not be assessed by isolating individual agreements; if the agreement on use, repayment in accordance with that agreement, repayment substantively made with the borrowed funds, and the absence of any decrease in assets before and after the borrowing are established, then, viewed as a whole, the transaction does not prejudice rehabilitation creditors and others. The opposing reading isolates the act of repayment and focuses on the fact that a specific creditor was favoured, but the summary of the judgment in Decision 2016Da247209 states that such a separate assessment must not be made.

The reading of the reference point in time also creates a divergence. Decision 2017Da287648 held that harmfulness is assessed as at the time of the act, and that the same applies, absent special circumstances, even to an act subject to a condition precedent. On this reading, the time when the agreement on consideration was made is the time of the act, and a contract or notice drawn up later may be assessed as an act satisfying the requirements for perfection against third parties. Conversely, if the later drawing up of documents is treated as a new disposition, the matter is reassessed by reference to the state of the assets and the exchange relationship at that time, and the outcome may differ.

It should also be read that the exception for contemporaneous exchange is a matter filtered out at the harmfulness stage. Separately from that, Decision 2017Da287648 stated the principle of reasonableness, under which even a harmful act cannot be subject to the exercise of the right of avoidance if, in light of the individual and specific circumstances at the time of the act, it is recognised as socially necessary and reasonable or unavoidable, and the principle that, since the beneficiary's bad faith is presumed, the beneficiary must itself prove its good faith. Depending on the stage at which an issue is addressed, who must assert what may differ.

Which reading to adopt is for the reader to judge after aligning the transaction timeline, the value comparison materials, and the flow of funds and agreement on use. This brief does not conclude whether any particular transaction is avoidable.

What the decisions held

In bankruptcy procedures, Supreme Court Decision 2015Da240447 rendered on 21 September 2017 held that "even if a debtor in a state of inability to pay provided security to a specific creditor, where this was done contemporaneously and in exchange for new borrowing, a reasonable balance can be recognised between the borrowed amount and the value of the collateral, and it does not thereby create a risk that the debtor will make a disposition prejudicial to bankruptcy creditors, such as concealing or donating the borrowed funds, such an act of providing security cannot be regarded as an act prejudicial to bankruptcy creditors and does not constitute an act that may be avoided under the subparagraphs of Article 391 of the Debtor Rehabilitation and Bankruptcy Act". The operative part dismissed all the appeals and ordered the plaintiff to bear the costs of the appeal.

Supreme Court Decision 2016Da247209 rendered on 12 April 2018 held that all the subparagraphs of Article 100(1) governing rehabilitation procedures require the harmfulness of the act, and that where funds were borrowed from a third party and only a specific creditor was repaid, the repayment is in principle subject to avoidance. It went on to hold that "where acts were made as an integrated whole, unless, assessed in their entirety, they cause disadvantage to rehabilitation creditors and others, harmfulness must not be found by separating out individual agreements alone"; that where the agreement on use, repayment in accordance with it, repayment substantively made with the borrowed funds, and the absence of any decrease in assets before and after the borrowing are established, the repayment is not subject to avoidance; and that "such an agreement between the third party and the debtor need not necessarily be made expressly and may also be made impliedly". The operative part dismissed the appeal and ordered the defendant to bear the costs of the appeal.

In bankruptcy procedures, Supreme Court Decision 2017Da287648 rendered on 25 October 2018 held that even an act extinguishing obligations in a state of inability to pay, "where it was done contemporaneously and in exchange for a new supply of goods, provision of services or the like, and a reasonable balance can be recognised between the value of the performance received by the debtor and the amount of the obligation extinguished by the act, cannot, absent special circumstances, be regarded as an act prejudicial to bankruptcy creditors", and does not constitute an act that may be avoided under Article 391, subparagraph 1. In addition, it has not been possible to confirm what that judgment stated regarding the assessment made by reference to the time of the act.

Since the facts and circumstances of the same judgment, the point in time of the assessment, and its operative part could not be checked against the original judgment either, they are not stated as confirmed in this brief.

Practical checklist

This section is not advice but a set of questions that may be asked when checking the record. First, the procedure and the provisions: whether the case is a rehabilitation or a bankruptcy, whether the person exercising the right of avoidance is the administrator or the bankruptcy trustee, under which subparagraph of Article 100(1) or Article 391 the act in question is contested, and which method was used to exercise the right among an action, a claim for avoidance and a defence.

Second, contemporaneity and exchange: contracts and payment records can be compared to establish how far apart in time the receipt of the new performance (funds, goods, services) and the payment or provision of security were, whether the two were agreed from the outset as conditions of each other, and whether an existing debt was repaid or the consideration for the new performance was paid.

Third, balance and changes in assets: materials can be used to establish whether the value of the performance received and the value of the payment or security given can be compared as at the same reference date, whether the debtor's assets decreased before and after the borrowing, and, in the case of the provision of security, whether a risk arose that the borrowed funds would be concealed or donated.

Fourth, the time of the act: it can be set out chronologically which of the agreement subject to a condition precedent, the prior delivery of documents, and the later drawing up of a contract and giving of notice is to be treated as the act subject to avoidance, and whether the debtor was unable to pay and what the exchange relationship was at each point in time. This is strictly a list of materials to be checked; the conclusion is for the reader to draw.

Glossary

A preferential act refers to an act, such as payment to or the provision of security for a specific creditor, that affects the debtor's property relations so as to favour a specific creditor in distribution and undermine equal distribution among creditors. It is distinguished from a fraudulent act that absolutely reduces general assets, and the judgment holds that both are included in the prejudicial acts subject to avoidance.

In this brief, contemporaneous exchange is used to refer to a payment or the provision of security made contemporaneously and in exchange for a new performance. The summaries of the judgments express this requirement with the words "done contemporaneously and in exchange" and "reasonable balance".

Harmfulness means that the act subject to avoidance has the character of prejudicing rehabilitation creditors and others or bankruptcy creditors. Decision 2016Da247209 held that all four types in Article 100(1) share this requirement, and that the harmfulness of acts made as an integrated whole must be assessed by reference to the effect of the acts as a whole.

The beneficiary refers to the person who received a benefit from the act subject to avoidance. The provisos to Article 391, subparagraph 1 and Article 100(1), subparagraph 1 provide that the act cannot be avoided where the beneficiary did not know, at the time of the act, of the fact that creditors would be prejudiced, and Decision 2017Da287648 held that, since the beneficiary's bad faith is presumed, the beneficiary itself bears the burden of proving its good faith.

Sources and limitations

The source for the statutory provisions is the current text on the National Law Information Center. Articles 100, 105, 140, 391 and 396 of the Debtor Rehabilitation and Bankruptcy Act are as in Act No. 21490 [effective 2 October 2026], and the date of checking is 16 October 2026.

The source for the judgments is the issues decided, the summary of the judgment and the operative part of the three judgments published on the National Law Information Center. The cited summaries reproduce the original wording, and the parties, amounts and specific circumstances of the transactions are not stated beyond what appears in the summaries. Decision 2017Da287648 is published on the National Law Information Center together with case 287655 as 2017Da287648, 287655.

The text of the Debtor Rehabilitation and Bankruptcy Act in force at the time of the transactions, the full reasoning of the judgments, and the lower court judgments were not checked in this brief. Since paragraph (3) of Articles 105 and 396 bears an amendment notation dated 27 December 2016, the wording in force at the time needs to be checked separately for procedures commenced before that date.

Points left open

The summaries of the judgments do not specify, as a period of time, how close in time acts must be to be regarded as contemporaneous. As Decision 2017Da287648 found the act to be substantively a contemporaneous exchange with the provision of services, how far an assessment that looks to the substance of the exchange relationship rather than the time interval may extend is a matter that will be settled as cases accumulate.

The standard for assessing a reasonable balance also remains open. At what point in time and by what method the value of collateral should be assessed, and how the reasonableness of consideration for services should be linked to the principle limiting fees, are not determined by the summaries of the judgments alone.

It may also be asked whether the difference in the structure of the provisions governing rehabilitation and bankruptcy makes a difference to the application of the contemporaneous exchange principle. Decisions 2015Da240447 and 2017Da287648 dealt with Article 391, while Decision 2016Da247209 dealt with Article 100(1); whether the same reasoning applies to the same extent in both procedures requires separate confirmation.

Where a specific debt is repaid through third-party borrowing in a structure in which the lender becomes a new creditor, how the assessment that assets did not decrease before and after the borrowing varies depending on the lending terms (interest, due date, whether security was provided) is a further point to be examined. Decision 2016Da247209 listed these terms as factors in the assessment but left the specific standards to the facts of each case.

When to reconsider

This brief will be rewritten if the avoidance provisions of the Debtor Rehabilitation and Bankruptcy Act are amended, or if the Supreme Court issues a new decision on the harmfulness of contemporaneous exchanges or of acts made as an integrated whole.

At that time, the assessment of contemporaneity, balance and unity will be set out again, by reference to the law in force at the time of the transactions and within the scope of what the issues decided and the summaries of the three judgments and the new judgment state.

Statutes referred to

• 채무자 회생 및 파산에 관한 법률 제100조, 제105조, 제140조, 제391조, 제396조

Decisions referred to

• 대법원 2017. 9. 21. 선고 2015다240447 판결 · Decision ledger
• 대법원 2018. 4. 12. 선고 2016다247209 판결 · Decision ledger
• 대법원 2018. 10. 25. 선고 2017다287648 판결 · Decision ledger

Verification status

The cited provisions (Articles 100, 105, 140, 391 and 396 of the Debtor Rehabilitation and Bankruptcy Act) were checked against the current text on the National Law Information Center on 16 October 2026. The cited judgments (Supreme Court Decision 2015Da240447 rendered on 21 September 2017, Supreme Court Decision 2016Da247209 rendered on 12 April 2018, and Supreme Court Decision 2017Da287648 rendered on 25 October 2018) were checked against the issues decided, the summary of the judgment and the operative part in the original judgments on the National Law Information Center. The statutory text in force at the time of the transactions and the full reasoning of the judgments were not checked.