When is a provision of collateral 'an act belonging to the company's obligations' for avoidance under the former Company Reorganization Act? Decision 2004Da32503 and the meaning of 'company's obligations'

Question

Article 78(1)(3) of the former Company Reorganization Act, quoted in the decision, provides that where a company, after a suspension of payment or within 60 days before it, provides security or discharges a debt in a transaction that does not belong to the company's obligations, or in a manner or at a time that does not, the avoidance right may be exercised unless the creditor did not know that the act impaired equality with the other reorganization creditors and the like, or, where the act followed a suspension of payment, did not know that fact either. The question is what it means for such a transaction to 'belong to the company's obligations'.

Decision 2004Da32503 raises the question on a creditor's appeal from the Seoul High Court's judgment of 20 May 2004 (2003Na50308). The plaintiff, which held bills against Non-party 3 and took collateral from Non-party 3 directly, argued that the collateral answered a duty of Non-party 3 and so fell outside the avoidance provision; the defendant, the company that succeeded to the litigation of Non-party 1, the administrator of the reorganization company Co., Ltd. △△, resisted on the ground that the grant was avoidable.

Material to check

The statute is Article 78(1)(3) of the Company Reorganization Act, a former version, repealed by Article 2 of the Addenda to the Debtor Rehabilitation and Bankruptcy Act (Act No. 7428, 31 March 2005). The decision quotes the provision as set out above, and its reference provision points to Article 100(1)(3) of the current Debtor Rehabilitation and Bankruptcy Act. The earlier decision it cites quotes an earlier text of the same article, as it stood before its amendment by Act No. 6085 of 31 December 1999, which used a 30-day period instead of 60 days.

The decisions are Decision 2004Da32503 (29 June 2006) and Decision 2000Da26067 (8 December 2000), which it cites. Decision 2000Da26067 held that the phrase means a concrete obligation whose performance the creditor may demand, and that a clause in standard credit terms under which, where a circumstance such as a change in the debtor's credit, a fall in the value of the security or another reasonable need for preserving the claim has arisen, the debtor, on the creditor's request, provides security or additional security approved by the creditor, or establishes a surety or adds one, imposes only a general and abstract duty to provide security, so that security given under it is not an act belonging to the company's obligations.

Possible readings

The first reading comes from the words of Article 78(1)(3) as the decision quotes them, read with Decision 2000Da26067. A general and abstract obligation is not enough. The transaction belongs to the company's obligations only where the company bears a concrete obligation and the creditor holds a right to claim performance of that particular obligation.

The second reading follows from the treatment of standard credit terms in Decision 2000Da26067 and in the decision itself. Where the terms impose only a general and abstract duty to provide security, the debtor's refusal does not entitle the creditor to sue for performance; the creditor's only consequence is the loss of the benefit of time under the note or credit agreement, so that the debt can be recovered at once. Security given under such terms is therefore outside the exception.

A third reading looks to the substance of the transaction. The decision holds that where the provision of collateral is in substance no different from giving security to obtain an extension of bills that have already matured or to escape dishonour proceedings, it is not an act belonging to the company's obligations, and says that this is so even though funds for settling the old bills actually changed hands. The form of the arrangement does not decide the point.

What the decisions held

Decision 2004Da32503 dismissed the appeal, with the appeal costs borne by the plaintiff, and thus upheld the judgment of the Seoul High Court of 20 May 2004 (2003Na50308). On the third ground of appeal it held that the court below was right to find that the plaintiff acquired the collateral at issue not through Non-party 2 but directly from Non-party 3, that is, Co., Ltd. △△ before the reorganization, as the beneficiary, and that no error in the rules of evidence affecting the result had been shown.

On the main ground the Supreme Court stated the rule quoted above, citing Decision 2000Da26067, and then applied it. The collateral secured the plaintiff's bill claim acquired against Non-party 3, but the acquisition of that claim did not oblige Non-party 3 to give the plaintiff security. The record showed that Non-party 3, whose finances had deteriorated so that it could not meet matured bill debts, agreed after close discussions among the plaintiff, Non-party 2 and Non-party 3 that Non-party 3 would on 13 September 2001 issue new bills, have Non-party 2 discount them, and at once have the plaintiff buy them and settle the old bills with the price, while giving the plaintiff the collateral directly. That was in substance no different from giving security to obtain an extension of the old bills or to escape dishonour, so the grant did not belong to Non-party 3's obligations even though funds actually moved. Nor did clause 6(3) of the loan agreement help: it imposed only a general and abstract duty to provide security, under which the creditor cannot demand performance and can only accelerate the debt. The court below had rejected the plaintiff's argument on the same footing, and was right to do so.

On the second and fourth grounds of appeal the Supreme Court held that the court below was right to find that both the plaintiff and Non-party 3 knew at the time of the grant that it impaired equality with the other reorganization creditors and the like, and that the grant was accordingly subject to the avoidance right under Article 78(1)(3), with no error of law or evidence shown.

Points left open

The decision leaves open how the substance test treats arrangements that are not, on the facts, a disguised extension or escape from dishonour. It says the collateral was in substance no different from security for an extension of matured bills or for avoiding dishonour, and that the actual transfer of settlement funds does not change that; it does not say what would be required for collateral given in a refinancing to count as a concrete obligation.

The decision also leaves open the position under the current text. It points to Article 100(1)(3) of the Debtor Rehabilitation and Bankruptcy Act as the corresponding provision but does not construe it, and it does not decide whether the 60-day period had been satisfied on these facts, or anything about the periods and knowledge elements under later versions of the article.

When to reconsider

We revisit this brief if the Supreme Court construes Article 100(1)(3) of the Debtor Rehabilitation and Bankruptcy Act on what a concrete obligation requires, if it addresses collateral given in a refinancing where the creditor can claim performance, or if that article is amended.

Statutes referred to

• 구 회사정리법 제78조

Decisions referred to

• 대법원 2006. 6. 29. 선고 2004다32503 판결 · Decision ledger
• 대법원 2000. 12. 8. 선고 2000다26067 판결

Verification status

The former Company Reorganization Act was read as the decision cites it, at the National Law Information Center on 24 October 2026, together with the decision in its published items, holdings and full reasons. The cited decision, Decision 2000Da26067, was read in its published items and holdings.