“We should get the KRW 300 million first” — a mortgage on a bankrupt company’s property
Contested through the right of avoidance: full win at first instance, and the claim was reduced to about half on appeal

Hello, this is Kwon & Partners Law Office.
When a company collapses, what is left must be shared fairly among all creditors. But when one creditor says “pay me first” based on a mortgage, every other creditor’s share shrinks.
Today we share a case where we represented the bankruptcy trustee of a bankrupt printing company and contested a paper maker’s claim for KRW 300 million in priority payment. We won in full at first instance, and on appeal the claim was reduced to about half.

The paper maker sold printing paper to a distributor, and the distributor resold it to the printing company. By the end of April 2012, the printing company owed the distributor about KRW 610 million, and the distributor owed the paper maker about KRW 620 million.

In May 2012, the three companies signed an agreement to “offset KRW 300 million each” of their claims and debts. When the printing company could not pay by the promised date, it agreed to give a mortgage with a maximum secured amount of KRW 300 million on its commercial unit instead. But the registration named the distributor, not the printing company, as the debtor, and the paper maker as the mortgagee. The printing company had pledged its property for the distributor’s debt, not its own.

About 4 months later, in November 2012, the printing company applied for rehabilitation. The paper maker reported the KRW 300 million as a secured rehabilitation claim, but the administrator in the rehabilitation stage exercised the right of avoidance and objected. The paper maker applied for a claim determination ruling; later the rehabilitation was terminated and bankruptcy was declared, and the bankruptcy trustee took over the case. In May 2022, the Seoul Bankruptcy Court ruled that “the paper maker’s secured claim does not exist.” The paper maker objected by filing a lawsuit, and Kwon & Partners represented the bankruptcy trustee (the defendant).

There were three key issues.

① Can giving security for someone else’s debt be reversed as a “gratuitous act”?
The law lets such acts within 6 months before the crisis be reversed (the right of avoidance). The Supreme Court treats giving security for another party as gratuitous unless the giver gets a direct and real economic benefit (Supreme Court Decision 2014Da765, May 29, 2014). The paper maker argued that the printing company gained a payment extension and a waiver of late-payment interest.

② Can a claim different from the registration be called the “real secured debt”?
The paper maker argued that the printing company had agreed to pay it KRW 300 million directly. But the registered debtor was the distributor.

③ Does the administrator’s avoidance still stand after rehabilitation ends and bankruptcy begins?
The paper maker argued that the trustee did not exercise the right again within 2 years after bankruptcy was declared. On appeal, it also argued that the trustee’s takeover of the lawsuit itself was improper.

Kwon & Partners responded on two fronts: the structure of the security and the procedure.

First, we confronted the “security for someone else’s debt” structure head on. Because the registered debtor was the distributor, the printing company had put up its property for another’s debt, which is a gratuitous act with no return. Even if the printing company had agreed to pay the paper maker directly, it gave security to only one of several creditors, so the act should be reversed anyway.

Second, we carried forward the avoidance already exercised in the rehabilitation stage. The administrator had already exercised the right and objected, and that is how the claim determination proceedings began. So we argued there was no need to exercise it again in the bankruptcy.

Third, we blocked the procedural attack on appeal. We pointed out that the other side’s evidence could not show whether the documents were served, and that even the Supreme Court decision it submitted (2018Da286994, January 28, 2021) held that this claim determination proceeding was still pending.