Reference Point for the Granting of A Secured Rehabilitation Claim

In an appeal seeking for the recognition of a lien (relating to the payment for factory construction payable to SK Engineering & Construction (¨SKEC〃)) as a rehabilitation security claim against Ssangyong Motor Company (¨SMC〃), the Seoul High Court ruled on September 13, 2012 that KRW 8.8 billion out of a claim amount of 11.1 billion Korean won (¨KRW〃) is recognized as a secured rehabilitation claim, and remaining KRW 2.3 billion as a unsecured rehabilitation claim - that is, a decision in part in favor of the plaintiff, SKEC. (2011Na92611) Thereby, SKEC is recognized as a lien-holder of a secured rehabilitation claim of KRW 8.8 billion against SMC.

On July 11, 2008, SKEC became a subcontractor for the construction of SMC…s factory and its extension in Pyongtaek city. While the factory being under construction, SMC applied for the commencement of corporate rehabilitation proceedings on January 9, 2009. Right away, giving notice to SMC, SKEC exercised its lien concerning the contract price for its construction works. Based thereon, SKEC argued that its claim against SMC should be recognized as a secured rehabilitation claim, since it had occupied the Pyongtaek factory building at the commencement of SMC…s corporate rehabilitation proceedings, whereby it became a lien-holder. However, SMC argued that SKEC lost its right as a lien-holder because it just placed a sign and neglected the building after such commencement of the corporate rehabilitation proceedings, whereby losing a lien, and therefore that SKEC…s contract claim can be recognized just as a unsecured rehabilitation claim. Generally in Korea, when determined by a court in charge of corporate rehabilitation proceedings, the repayment ratio is higher for secured rehabilitation claims than that for unsecured one.

Finally, the Seoul High Court ruled that:

- a secured rehabilitation claim is not a security itself recognized under a substantive law, e.g., Korean Commercial or Civil Code, but a claim secured by a security, that is also a right recognized in corporate rehabilitation proceedings;

- a reference point for the determination of existence of such a claim is the time when the corporate rehabilitation proceedings concerned commence; and

- thus, a secured rehabilitation claim does not naturally lapse, even if a security under a substantive law no longer exists from or after the commencement of such proceedings due to the destruction, loss or the like of the object subject to security.

Meaningfully the decision has upheld the arguments of SKEC adeptly represented by Lee & Ko and this case is very important as a leading case on the reference point for the creation of a lien to be recognized as a secured rehabilitation claim.