RISCON Legal Brief · First edition · Corporate rehabilitation
When is a debtor in 'suspension of payment' so that a gratuitous act can be avoided? Supreme Court Decision 2006Da80636 on 'suspension of payment'
In Decision 2006Da80636 (24 August 2007), the Supreme Court read Article 64(5) of the former Bankruptcy Act as follows. 'Suspension of payment' means an express or implied outward indication that the debtor, for lack of means, is generally and continuously unable to pay debts as they fall due. Once approval of a composition becomes final, the earlier suspension or equivalent crisis may be regarded as provisionally resolved; where payments are then made under the composition terms before new circumstances or a new crisis lead to revocation and bankruptcy, only a suspension or equivalent crisis that is adequately causally connected to that bankruptcy counts.
First edition. Statute references are checked against the official text. Case law is cited only where the brief lists the decision below, checked against its official text. 2026-10-24
Question
Article 64(5) of the former Bankruptcy Act set the temporal requirement for a gratuitous act that may be avoided, measured by 'suspension of payment'. That Act was repealed by Article 2 of the Supplementary Provisions of the Debtor Rehabilitation and Bankruptcy Act (Act No. 7428, 31 March 2005), and the decision's citation note points to Article 391(4) of the current Act. The question is what state of the debtor the phrase describes and, where the debtor first went through a composition procedure and the composition was later revoked, which state satisfies it.
Decision 2006Da80636 raises that question for the bankruptcy trustee of Bankrupt Jinro General Distribution Co., who sued Korea Asset Management Corp, with HSJ Second Securitization Co. Ltd. joining as auxiliary participant for the defendant. The debtor had filed for composition when its funding deteriorated rapidly, obtained a composition approval that became final, then expressed its intention to pay the changed composition debts and continuously paid part of them for about five years, after which the composition was revoked ex officio and bankruptcy declared. The dispute was whether the state at the time of the composition commencement application counted as 'suspension of payment'.
Material to check
The statutes are former provisions, cited by the decision as the Bankruptcy Act and the Composition Act, both repealed by Article 2 of the Supplementary Provisions of Act No. 7428 of 31 March 2005: former Bankruptcy Act Article 64(5) (the citation note refers to current Article 391(4) of the Debtor Rehabilitation and Bankruptcy Act) and former Bankruptcy Act Article 298 (current text deleted), and former Composition Act Articles 9(1), 10(1), 61 (current text deleted) and 68(2) (current text deleted). Their content is left unstated here because the texts read for this brief give no current text for them.
The decisions are Decision 2006Da80636 and the three it cites. Decision 2000Da63554 (29 June 2001) explains 'suspension of payment' in Article 78(1) of the Corporate Reorganization Act and holds that a request for, or designation as a target of, the so-called moratorium agreement is not itself such a suspension. Decision 98Da59644 (26 March 1999) and Decision 2003Da16641 (16 April 2004) both state the effect of a final composition approval, and the latter adds that under composition terms remitting interest and exempting further interest and damages on performance of instalments, a composition creditor may claim delayed damages only after each instalment due date.
Possible readings
Read with Decision 2000Da63554, 'suspension of payment' in former Bankruptcy Act Article 64(5) means the debtor expressly or impliedly showing to the outside that, for lack of its own means, it cannot pay debts when due generally and continuously. Lack of means is not a mere state of liabilities exceeding assets: it means the debtor has no assets with which to pay and no credit to obtain a deferment of payment or financing sufficient to pay.
A second reading follows the effect of a final composition approval, which Decision 2006Da80636 takes from Decisions 98Da59644 and 2003Da16641. Once the composition approval becomes final, the composition procedure is for the time being ended and, for every composition claim, the same legal effect arises as a contract on the composition terms concluded between each composition creditor, the composition debtor and the composition participants, so all composition claims are changed generally and abstractly according to those terms. The payment suspension, or the equivalent state of crisis, that existed when the composition debtor filed its composition commencement application is therefore resolved once the approval becomes final.
A third reading states the limit. Where payment was performed under the composition terms after the approval became final and the composition was then revoked because of new circumstances or a new state of crisis and bankruptcy was declared, 'suspension of payment' in former Bankruptcy Act Article 64(5) should be confined to a state of suspension, or an equivalent state of crisis, that is directly connected with, that is within the range of an adequate causal relationship with, the bankruptcy declaration or the bankruptcy procedure. Treating the earlier suspension that caused the composition application as 'suspension of payment' without any limit, without regard to whether the earlier composition ended or to its duration and lapse, would expand the target of avoidance too far, make creditors' positions unstable and could harm the safety of transactions.
What the decisions held
The Supreme Court dismissed the appeal and ordered the unsuccessful plaintiff to bear the costs, holding that the appellate court's findings and judgment were proper and contained no misapprehension of the law on 'suspension of payment' in former Bankruptcy Act Article 64(5). It stated the definition of 'suspension of payment' and the effect of a final composition approval, and then set the causal limit where a composition is revoked and bankruptcy follows.
The Seoul High Court, in its judgment of 2 November 2006 (2006Na6425), found that the state of crisis equivalent to a payment suspension, caused by the rapid deterioration of Jinro General Distribution Co.'s funding at the time of its composition commencement application, was provisionally resolved when the composition approval became final; that the debtor then expressed its intention to pay the changed composition debts and continuously paid part of them for about five years; and that the state of crisis that had caused the composition application could not be regarded as directly connected with the bankruptcy declared about five years later. It therefore held that the composition commencement application could not be treated as 'suspension of payment', and that on those facts it was proper to treat the composition revocation decision as the 'suspension of payment' in Article 64(5). The court had revoked the composition ex officio under Composition Act Article 68(2), finding the debtor was defaulting in performance of the composition terms without just cause and had neither the will nor the ability to perform them in the future, and had declared bankruptcy under Composition Act Article 9(1).
The plaintiff was the bankruptcy trustee of Bankrupt Jinro General Distribution Co.; the defendant was Korea Asset Management Corp, with HSJ Second Securitization Co. Ltd. as auxiliary participant for the defendant. The Supreme Court found no error in the appellate court's reasoning and record, and left the definition of 'suspension of payment' and the causal limit as stated above to govern the case.
Points left open
The decision approves treating the composition revocation decision itself as the 'suspension of payment' on the facts of this case, but it states no general rule identifying which act or event marks that state whenever a bankruptcy follows a revoked composition, and it does not say how the classification should be made where the revocation and the bankruptcy declaration are close together in time.
The causal limit is stated as 'adequate causal relationship' without any measure of time or conduct. The gap of about five years, during which the debtor continuously paid part of the changed composition debts, defeated the connection here, but no threshold is fixed, and the decision does not say what follows where the debtor never performed the composition terms at all after the approval became final.
When to reconsider
This brief changes if a later Supreme Court decision fixes which act counts as 'suspension of payment' when a composition is revoked and bankruptcy is declared, or sets a time limit for the causal connection, or if Article 391(4) of the Debtor Rehabilitation and Bankruptcy Act, to which the decision's citation note refers for former Bankruptcy Act Article 64(5), is amended.
Statutes referred to
- 구 파산법 제64조, 제298조
- 구 화의법 제61조, 제9조, 제10조, 제68조
Decisions referred to
Verification status
All texts in this brief were read at the National Law Information Center (law.go.kr) on 24 October 2026: Decision 2006Da80636 in its published items and full reasons, and the three cited precedents in their published items and summaries. The cited articles are former versions whose current text the texts read for this brief do not give, so their content is left unstated.