When is providing security 'an act belonging to the bankrupt's duty', so that it escapes avoidance? Decision 2001Da55116 on a concrete duty to give security

Question

Article 64(4) of the former Bankruptcy Act, as quoted in the decision, made avoidable any grant of security or act extinguishing an obligation made by the bankrupt after payment was stopped or a bankruptcy petition was filed, or within 30 days before that, where the act did not belong to the bankrupt's duty, or its manner or timing did not. The provision then set out an exception: where the creditor, at the time of the act, was unaware that a payment stoppage or a bankruptcy petition had occurred, or was unaware of the fact that the bankruptcy creditors would be prejudiced. The question is what 'belonging to the bankrupt's duty' means, and whether a contractual promise to furnish approved security or additional security, or to add a guarantor or deposit money, when the creditor considers it necessary for preservation of its claim, falls inside that phrase.

Decision 2001Da55116 raises the question for a credit cooperative that, in raising funds before bankruptcy, agreed with the credit cooperative federation to clauses of that kind in a loan agreement, and that on 25 July 1998 granted the federation a pledge over a deposit claim of KRW 1,400,000,000 with the National Investment Trust. The federation then set off its obligation to return deposits to the bankrupt, treated as its passive claim, against its own claim on the bankrupt. The question was whether the pledge was an act belonging to the bankrupt's duty and so outside avoidance, and if not, whether the set-off could stand.

Material to check

The statutes are Article 64(4) and Article 95(2) of the Bankruptcy Act as it stood before its amendment by Act No. 6111 of 12 January 2000; both are cited by the decision in that former version and their content is left unstated here beyond the words the decision quotes. The decision quotes Article 64(4) in full, as the provision making avoidable a grant of security or an act extinguishing an obligation in the sensitive period where it does not belong to the bankrupt's duty, or its manner or timing does not, subject to the exception for a creditor unaware of the payment stoppage or the petition, or of the fact of prejudice to the bankruptcy creditors. Of Article 95(2) the decision quotes only the proviso phrase 'a case founded on a cause that arose before the bankrupt creditor knew of the payment stoppage or the bankruptcy petition'.

The decisions are Decision 2001Da55116 (8 February 2002) and the precedent it cites, Decision 2000Da26067 (8 December 2000). Decision 2000Da26067 held that 'belonging to the company's duty' in Article 78(1)(iii) of the former Company Reorganisation Act means a concrete obligation whose performance the creditor has a right to demand, and that standard terms obliging a debtor to furnish security or add a guarantor on request impose only a general and abstract duty, so security given under them is not an act belonging to the company's duty.

Possible readings

Read with Decision 2000Da26067, which the decision cites, 'belonging to the bankrupt's duty' in Article 64(4) of the former Bankruptcy Act requires more than a general and abstract obligation: the bankrupt must bear a concrete duty, and the creditor must hold a right to demand performance of that concrete duty. Where the debtor refuses to comply and all that follows is the loss of the benefit of time on the debt, letting the creditor recover the claim at once, the duty is not concrete, and security given under it is avoidable.

On that reading, the loan agreement clauses at issue, under which the debtor promised to provide security or additional security approved by the federation as soon as requested when considered necessary for preservation of the claim, to add a guarantor, and to pledge specified deposits and funds, imposed only a general and abstract duty to give security. The decision reasons that the creditor could not sue for performance, and the benefit of time on the debt was merely lost, so that the creditor could collect the claim at once under the acceleration clause.

A further reading follows from the decision's treatment of set-off. Once the grant of security is avoided because it did not belong to the bankrupt's duty, the bankrupt creditor's obligation to the bankrupt — here the federation's obligation to return the deposits, which the federation used as the passive claim in set-off — even if it was incurred as part of the procedure for exercising the pledge right, is not a debt within the proviso of Article 95(2), as quoted by the decision, founded on a cause that arose before the creditor knew of the payment stoppage or the bankruptcy petition. Set-off with such a passive claim, undertaken with knowledge of the payment stoppage, is not permitted.

What the decisions held

Decision 2001Da55116 dismissed the appeal and placed the costs of the appeal on the defendant, upholding the judgment of the Daegu High Court of 18 July 2001 (2000Na5832). It held that 'belonging to the bankrupt's duty' in Article 64(4) of the former Bankruptcy Act requires a concrete obligation which the creditor has a right to demand be performed, and that security given under a clause imposing only a general and abstract duty to furnish security is not such an act.

Applied to the facts, the decision found that the clauses in Article 10(1) and Article 10(6) of the loan agreement certificate, on furnishing approved security or additional security and a guarantor, and on pledging deposited monies and related funds, bound the debtor only in a general and abstract way. If the debtor refused, the creditor could not sue for performance; all that followed was the loss of the benefit of time on the debt, letting the creditor collect at once under Article 13 of the agreement. The pledge dated 25 July 1998 over the bankrupt cooperative's deposit claim of KRW 1,400,000,000 with the National Investment Trust was therefore not an act belonging to the bankrupt's duty and was the object of avoidance.

The decision added that, once the pledge was avoided, the federation's obligation to return the deposits to the bankrupt, incurred through a separate deposit as part of the procedure for exercising the pledge right and used as the passive claim in set-off against the federation's claim on the bankrupt, was not a debt within the proviso of Article 95(2). A set-off with a passive claim the federation had undertaken after learning of the payment stoppage was therefore impermissible. The court below had taken the same view, and the decision found no error in it, adding that the precedent relied on in the appeal was not apt.

Points left open

The decision fixes the test as a concrete obligation whose performance the creditor may demand, but it does not draw the line for all contract forms. A clause under which the creditor could sue for performance of a security undertaking, or one under a differently drafted acceleration provision, is not passed on, and the decision does not say which drafting features would convert a general duty into a concrete one.

The decision treats set-off as impermissible because, the grant of security being avoided, the burden of the federation's deposit-return obligation to the bankrupt fell outside the case stated in the proviso of Article 95(2) as quoted by the decision, even though that obligation was incurred as part of the procedure for exercising the pledge right, and because the federation undertook that obligation knowing of the payment stoppage. It leaves undecided how the analysis runs where the burden of the passive claim arose under a cause preceding the creditor's knowledge of the payment stoppage or the bankruptcy petition, and it does not state the effect of the creditor's good-faith exception in Article 64(4) beyond the facts before it.

When to reconsider

This brief is revisited if the successor legislation to the former Bankruptcy Act is held to carry the same phrase, if a later decision states when a security clause creates a concrete obligation or applies the proviso of Article 95(2) to debts tied to avoided security, or if the text of Article 64(4) or Article 95(2) is changed.

Statutes referred to

• 구 파산법 제64조, 제95조

Decisions referred to

• 대법원 2002. 2. 8. 선고 2001다55116 판결 · Decision ledger
• 대법원 2000. 12. 8. 선고 2000다26067 판결

Verification status

The texts read for this brief were all read at the National Law Information Center on 24 October 2026: the decision in its published items, holdings and reasons, and Decision 2000Da26067 in its published items, holdings and summaries. The articles the decision cites are former versions, and the decision's own words of Article 64(4) and of the proviso of Article 95(2) are those quoted in its reasons.