Boundaries on the Exercise of Rights in Rehabilitation and Bankruptcy: Good Faith, the Duty to Explain, and Taking Over of Litigation

Question

How should it be determined whether the exercise of a right, after approval of the rehabilitation plan, seeking delivery of the leased object contravenes the principle of good faith in light of the status as a rehabilitation security right holder that the right holder has meanwhile secured within the rehabilitation proceedings? In particular, it is at issue what effect the difference in point in time before and after approval has on the determination of a violation of good faith.

Where a demand by the bankruptcy trustee or others for explanation or for submission of materials does not concern content essential to the progress of the bankruptcy proceedings, can the mere circumstance that the debtor's response was insufficient constitute the crime of failure to explain? Furthermore, it is at issue whether the circumstance that, even though there is no property capable of being liquidated, the debtor was urged to include it in the bankruptcy estate and refused may be taken into account adversely in the discharge examination.

Where an administrator conducts a lawsuit in the rehabilitation proceedings on the basis of the right of avoidance and the rehabilitation proceedings are then abolished, what procedural treatment is required at the stage of the final appeal, where the previous creditor succeeds to the action and must change the statement of claim to a claim asserting the creditor's right of revocation? If the abolition took place before the time limit for filing the statement of grounds for final appeal expired, it is also at issue what mode of adjudication the Supreme Court should adopt.

Material to check

First, the composition of the facts stated in each judgment must be verified precisely. The work of separately organizing the points in time of the conclusion and the termination of the lease agreement, the procedural stage at which the claim for delivery of the object was made, the circumstances in which the creditor acted as a rehabilitation security right holder, and how the pattern of exercising rights differed before and after approval of the rehabilitation plan must precede all else.

The materials on points in time remaining in the procedural records are key. The respective times of the decision approving the rehabilitation plan, the decision abolishing the rehabilitation proceedings, and the expiry of the time limit for filing the statement of grounds for final appeal must be cross-checked. In particular, the sequence between the abolition decision and the progress of the final appeal forms the decisive foundation for applying the legal principle requiring succession and a change of the statement of claim.

The original text of the relevant provisions must be read together. It must be examined how the principle of good faith under Article 2 of the Civil Act and the creditor's right of revocation under Article 406 of the Civil Act, Article 59 (4), Article 100, Article 113 (2), Article 321, paragraphs (1) and (2) of Article 383, Article 384, Article 391, Article 492 subparagraph 11, paragraphs (1) and (2) of Article 564, and Article 658 of the Debtor Rehabilitation and Bankruptcy Act, and Article 262, Article 267 (2), Article 423, Article 431, and Article 432 of the Civil Procedure Act mesh with one another.

Finally, the boundary is confirmed as to what each judgment left as matters to be established by the court of fact and what it dealt with as questions of legal principle. Unless the portions that the Supreme Court considered to require further examination are viewed separately from the portions in which it clarified the legal principle without separate fact-finding, the meaning of the judgment will be exaggerated or diminished.

Possible readings

As to the first issue, one interpretation is possible to the effect that, since the creditor's status was fixed by the approval of the rehabilitation plan, a claim for delivery based on that fixed status should in principle be permitted. Against this, an opposing interpretation holds that a claim for delivery made after approval should be restricted, because it produces a result contrary to the purpose of the rehabilitation proceedings, namely the debtor's efficient rehabilitation, and because the right holder would obtain an unjust benefit in light of the status already obtained within the proceedings. The Supreme Court, while enumerating the decision factors from the latter perspective, avoided a categorical ruling and considered that further examination was necessary.

As to the second issue, one interpretation is possible to the effect that, where the demand is made by the bankruptcy trustee or others, the debtor must cooperate broadly and any non-performance must be evaluated adversely. To the contrary, there is an interpretation that the crime of failure to explain presupposes a demand concerning content essential to the progress of the bankruptcy proceedings, and an opposing interpretation holds that the circumstance of not complying with a recommendation to include property in the bankruptcy estate where there is no property capable of being liquidated cannot be taken into account adversely in the discharge examination. The Supreme Court took the essentiality of the content demanded as the standard for establishing the crime.

As to the third issue, one interpretation is possible to the effect that, since the right of avoidance is a distinctive system vested exclusively in the administrator, the party to the lawsuit and the content of the claim must change together with the abolition of the rehabilitation proceedings. To the contrary, an interpretation is also possible that the matter may be handled without a change of the statement of claim, out of concern for the economy of examination in the final appeal or for delay of the lawsuit. The Supreme Court set out as the default the course of reversing the judgment of the court below and remanding the case after granting succession, in order to provide an opportunity to change the statement of claim.

What the decisions held

Supreme Court Judgment 2018Da210690 delivered 14 October 2022 set out the criteria for applying the principle of good faith under Article 2 of the Civil Act in a case concerning the termination of a lease contract and the exercise of the right of segregation after confirmation of a rehabilitation plan. It stated that the determination must be made by comprehensively considering, among other things, whether there is a risk of a result contrary to the purpose of rehabilitation proceedings, which seek the efficient rehabilitation of the debtor, and whether permitting the exercise of the right would allow the right-holder to obtain an unjust benefit in light of the position already accorded to it within the rehabilitation proceedings. In addition, it considered that there appeared to be room to hold that a party who had acted as a rehabilitation secured creditor may not be permitted to demand delivery after confirmation, and took the position that further examination by the fact-finding court was needed to settle this.

Supreme Court Order 2024Ma6789 dated 26 December 2024 addressed the relationship between the debtor's duty to explain and discretionary discharge. It held that, unless a request by the bankruptcy trustee or others for an explanation or for the submission of materials concerns matters essential to the conduct of the bankruptcy proceedings, the crime of breach of the duty to explain can hardly be regarded as established even if the debtor's explanation or submission of materials in response is insufficient. It held that, in cases such as where there is no property to be liquidated, the debtor must not be urged to contribute assets to the bankruptcy estate, and the debtor's failure to comply with such urging may not be taken into account against the debtor in the discharge review; and that, considering the content and degree of the conduct constituting grounds for refusing discharge, the debtor's will to recover economically and the need for rehabilitation, and whether creditors filed objections and the grounds for them, there were considerable reasons to grant a discretionary discharge.

Supreme Court Judgment 2022Da241998 delivered 27 October 2022, concerning the handling of litigation after discontinuance of rehabilitation proceedings, proceeded on the premise that the right of avoidance under Article 100 of the Debtor Rehabilitation and Bankruptcy Act is a right that only the administrator may exercise, on the premise that the rehabilitation proceedings are ongoing. Accordingly, it stated that where rehabilitation proceedings are discontinued while an avoidance action taken over by the administrator is pending, the original creditor must take over the litigation and change the claim to one under the creditor's right of revocation. It held that where rehabilitation proceedings are discontinued at the final appeal stage before the period for submitting the statement of grounds of appeal has expired, the Supreme Court, absent special circumstances, must permit the taking over and then reverse the judgment below and remand the case in order to give an opportunity to change the claim.

Practical checklist

First, it must be confirmed accurately from the records whether the exercise of the right in question took place before or after approval of the rehabilitation plan, and what status the creditor held within the rehabilitation proceedings at that time. The records of the point in time and the status become the starting point of the totality of circumstances in determining whether good faith has been violated.

Second, it must be distinguished, according to the content of the demand, whether a demand by the bankruptcy trustee or others for explanation or for submission of materials is in fact essential to the progress of the bankruptcy proceedings, or is merely incidental or merely a recommendation concerning the inclusion of uncertain property. Unless the nature of the demand is divided first, the question whether the crime of failure to explain is established and the question whether adverse evaluation is made in the discharge examination become intermingled.

Third, it must be confirmed at which stage of the lawsuit the point in time of the abolition of the rehabilitation proceedings falls, in particular whether the time limit for filing the statement of grounds for final appeal has expired. Depending on that point in time, the procedures for succession and for the change of the statement of claim must be designed differently.

Fourth, the scope of examination required by each judgment must be reconfirmed. By separately organizing the portions for which the Supreme Court required additional examination at the court of fact and the portions in which it declared the legal principle directly, it must be separated which facts must additionally be proved in an actual case and which points must be left as matters of legal principle debate.

Glossary

The right of segregation is the right of the owner of property that has already been transferred to recover that property from a debtor undergoing rehabilitation or bankruptcy proceedings. Where the manner and timing of exercising the right of segregation are at issue after confirmation of a rehabilitation plan, the effect of that exercise on the purpose of the rehabilitation proceedings serves as material for the determination under the principle of good faith.

The right of avoidance is a mechanism specific to rehabilitation proceedings provided for in Article 100 of the Debtor Rehabilitation and Bankruptcy Act, and only the administrator may exercise it, on the premise that the rehabilitation proceedings are ongoing. By contrast, the creditor's right of revocation is grounded in Article 406 of the Civil Act and may be exercised in the creditor's own name; therefore, when rehabilitation proceedings are discontinued, the basis of the action shifts from the right of avoidance to the creditor's right of revocation, and the claim must be changed accordingly.

Discretionary discharge is a mechanism under which the court grants a discharge even where grounds for refusing discharge are found, by comprehensively considering the debtor's will to recover economically and the need for rehabilitation, whether creditors filed objections and the grounds for them, and the content and degree of the conduct constituting grounds for refusing discharge, among other things. Whether the crime of breach of the duty to explain is established and whether the conduct is weighed against the debtor in the discharge review rest on different criteria.

Sources and limitations

This white paper was prepared solely on the basis of the content stated in the three judgments, Supreme Court Decision 2018Da210690, Supreme Court Decision 2024Ma6789, and Supreme Court Decision 2022Da241998, and the provisions cited in those judgments. The provisions were stated limited to the Civil Act, the Debtor Rehabilitation and Bankruptcy Act, and the Civil Procedure Act.

This material is merely a general arrangement of information for research purposes and does not constitute any legal advice or basis for responding to a case. Since the conclusion in an individual matter may vary depending on the facts and the progress of the proceedings, an actual matter must be consulted with a qualified legal professional.

Points left open

As to whether the determination of a violation of good faith differs if the right of retrieval was exercised before approval of the rehabilitation plan, the three judgments only suggest the direction that the point in time is reflected in the determination and did not present a clear standard. Whether the point in time is itself an independent requirement or remains merely one element of the totality of circumstances can only be confirmed through further precedent.

The scope of cases in which the bankruptcy trustee must not recommend inclusion in the bankruptcy estate, and likewise the manner of handling cases where succession and a change of the statement of claim are necessary in the final appeal but special circumstances exist, also remain open. Specific standards beyond cases where there is no property capable of being liquidated or where it is uncertain whether the property is subject to avoidance have not yet been presented.

When to reconsider

This white paper must be reviewed again if the relevant provisions are amended, or if a Supreme Court decision is rendered that newly presents the standard for determining a violation of good faith, focusing on the timing of the exercise of rights before and after approval of the rehabilitation plan. In particular, attention is paid to whether the elements of the totality of circumstances develop from enumeration into typification.

If a decision presenting more specific standards on the requirements of the crime of failure to explain is rendered, or if a decision clarifying the types of special circumstances regarding the procedures for succession and the change of the statement of claim in the final appeal is handed down, the interpretation and confirmation items in the main text must be updated. A change of precedent or an amendment of statutes all constitute grounds for re-examination of this document.

Statutes referred to

• 민법 제2조, 제406조
• 채무자 회생 및 파산에 관한 법률 제59조 제4항, 제100조, 제113조 제2항, 제321조, 제383조 제1항, 제384조, 제391조, 제492조 제11호, 제564조 제1항, 제564조 제2항, 제658조
• 민사소송법 제262조, 제267조 제2항, 제423조, 제431조, 제432조

Decisions referred to

• 대법원 2022. 10. 14. 선고 2018다210690 판결 · Decision ledger
• 대법원 2024. 12. 26. 자 2024마6789 결정 · Decision ledger
• 대법원 2022. 10. 27. 선고 2022다241998 판결 · Decision ledger

Verification status

The relevant statutory provisions in their original text and the judgments in Supreme Court Decision 2018Da210690, Supreme Court Decision 2024Ma6789, and Supreme Court Decision 2022Da241998 were cross-checked against the National Law Information Center as of October 15, 2026. This white paper cites only the three judgments set out in the section on the decisions addressed.