Under Korean law, there are three types of bankruptcy proceedings:

　

- Corporate Reorganisation Proceeding: This is a count-supervised procedure for rehabilitation of insolvent companies through debt restructuring. A receiver is appointed by the court to manage the company, an examiner evaluates the company's assets and liabilities, and secured creditors are restrained from taking action against their collateral. Under the Corporate Reorganisation Proceeding, the incumbent management of the subject company is normally replaced by the court-appointed receiver. The court continues to monitor the implementation of the Corporate Reorganisation Plan until its full execution.

The governing statute is the Corporate Reorganization Act (Act No.1214 of 12 December 1962 as last amended on 31 December 1999).

　

- Composition Proceeding: This is also a procedure for rehabilitation of insolvent companies through various means of debt restructuring. A court plays a mediating role in the stages of the creditors drawing up a consensual composition plan. Unlike the Corporate Reorganisation Proceeding, however, the court's involvement ends upon the court's approval of the composition plan, and thereafter the composition plan is to be carried out by the subject company itself under the monitoring of the creditors. The Composition Proceeding cannot be used by large companies. The Composition Process does not affect the rights of secured creditors and shareholders.

Companies in Korea use the composition proceeding mainly because it enables the current management to maintain continued control.

The governing statute is the Composition Act (Act No 997 of 20 January 1962 as last amended on 12 January 2000).

　

- Bankruptcy Proceeding: This is a process towards the dissolution of insolvent companies and the liquidation of their businesses, although the proceeding is also available to individuals. The Bankruptcy Proceeding does not affect the rights of secured creditors.

The governing statute is the Bankruptcy Act (Act No 998 of 20 January 1962 as last amended on 12 January 2000).

　

Out of the three types of bankruptcy proceedings in Korea only one was used by two companies investigated (Daedong and Samho), namely the Corporate Reorganisation Proceeding. The analysis will, therefore, be limited to that proceeding.

　

The Corporate Reorganisation Proceeding takes place under the supervision of the court having jurisdiction over the subject company and provides for corporate restructuring measures for the rehabilitation of the insolvent companies. Thus, the above procedure has essentially the same purpose as the workout process. Moreover, if the Corporate Reorganisation Plan is not adopted by the creditors at the creditors' meeting, the Corporate Reorganisation Proceeding is terminated. Therefore, the creditors' consent to the plan is crucial for rehabilitating the insolvent company. The voting requirements for adoption of the creditors' approval for the Corporate reorganisation are as follows: Decisions are taken with the consent of (a) the unsecured creditors holding claims totalling not less than two-thirds (2/3) of the total unsecured claims, and (b) the secured creditors holding claims totalling not less than four-fifths (4/5) of the total secured claims⁴⁶.

In that respect, the role of the court in the proceeding is principally to ensure that the rights of all parties concerned have been respected; the court has no power to determine whether, or not, any assistance should be provided to the subject company nor the amount or type of any assistance; this is an issue entirely within the hands of the creditors.

　

　

In general, the restructuring plans adopted in these statutory insolvency proceedings typically involve debt rescheduling, debt-for-equity swaps, interest relief, debt forgiveness and other alterations or modifications of the rights of creditors as under the workout process.

　

　

Halla Heavy Industries Ltd. and Daedong Shipbuilding Co., Ltd. have used the Corporate Reorganisation Proceeding.

　

Halla was established in 1977. On 6 December 1997 Halla went bankrupt and filed a petition for the commencement of corporate reorganisation proceedings with the Court. In November 1998 as part of the reorganisation plan, RH Engineering & Heavy Industries Co Ltd ("RHHI") was incorporated as a bridge company to take over outstanding assets and liabilities of Halla. Pursuant to the plan, on 18 September 1999 RHHI acquired from Halla Heavy Industries, the shipbuilding and construction equipment business units. On 27 October 1999 a debt-to-equity swap was completed and RHHI changed its name to Samho Heavy Industries Co Ltd. Halla is currently under liquidation procedures. The creditors of Halla (all financial institutions) also agreed to write-off substantial amounts of debt and interests.

　

For further details see Annex.

　

Daedong Shipbuilding Co Ltd ('Daedong') has not co-operated with the TBR investigation. Daedong is a private limited company solely involved in shipbuilding and specialised in medium-sized newbuildings in the 30,000 to 80,000 Dwt range.

　

Daedong went into bankruptcy on 30 January 1997 and entered the Corporate Reorganisation Proceedings on 20 August 1998, under which the creditors approved a debt rescheduling plan and provided interest relief.

　

For further details see Annex.

　

Under the reorganisation procedure in Korea, there is a key group of creditors, normally the group's largest creditors, responsible for negotiating the terms of any debt restructuring meeting as a creditors' committee. It will be reasonable, therefore, to examine whether, in the cases of the debt restructuring of Halla and Daedong, the major creditors were, or not public bodies. Moreover as decisions on restructuring could be taken by unsecured creditors institutions holding more than 66 percent of the company's outstanding debt⁴⁷ the analysis will be limited to examine whether public bodies held more than that percentage.

　

In view of the above the key financial institutions holding more than 66 percent of the outstanding debt of Halla and Daedong were as follows:

　

　

Daedong did not co-operate with the Commission investigation so that it is necessary to apply facts available.

　

In view of the fact that mostly the same banks are involved in the court supervised insolvency proceedings of these two shipyards as in the case of Daewoo, the analysis under the workout process above applies.

In the light of the above analysis, assistance granted under the Corporate Reorganisation proceeding to Halla and Daedong constitutes a financial contribution within the meaning of Article 1.1(a)(1)(iv) of the ASCM.

　

The benefit conferred on Halla and Daedong would constitute of the amount of the debt forgiven through direct debt forgiveness, the conversion of debt to equity and of the interest saved through the rescheduling of repayment periods or the adjustment of interest rates. Halla's benefit is estimated at won 2,063 billion (US$ 1.5 billion).

Daedong's benefit is estimated at won 63.4 billion (US$ 48.3 million).

　

- Halla at the time of the restructuring was a non equityworthy or creditworthy company into which no investor would show interest even following substantial debt restructuring. In particular, Halla group entered into a restructuring consulting agreement with a consulting firm, which after having evaluated the equity and liquidation value of Halla proposed to establish a company to take over all outstanding assets and debts from Halla. All outstanding debts were to be repaid through bridge loans to be arranged by the consulting firm after the following generous debt restructuring: exemption of accrued interest on all outstanding loans, 52% of secured loans to be forgiven, 78% of unsecured loans to be forgiven and 80% of payment guarantee obligations to be extinguished.

　

However, the debt restructuring through bridge loans as proposed by the consultant failed to find foreign or domestic investors. Consequently, the receiver appointed by the court prepared a Revised Reorganisation Plan, which provided a further package of debt restructuring. (See Annex for details).

　

- The major creditors of Daedong and Halla⁴⁸ were KDB, KAMCO and KEXIM which, as explained under the Daewoo analysis, were all found to constitute public bodies having as their objectives to facilitate the development of the national economy. Considering that these public bodies' losses can be covered without limits by GOK shows that they can afford to, and that they do take decisions on a basis other than purely commercial ones.

　

- Lastly, as explained above under Daewoo, even assuming that in theory action under commercial considerations by independent private banks would have somehow involved debt rescheduling, the total amount of debt restructured (total of US$ 3.8 billion only for Halla and Daewoo) suggests that the package finally agreed was indeed quite generous and that the loss taken by Daewoo's and Halla's creditors would not have been affordable by commercial banks - facing themselves considerable financial difficulties - without the assurance of governmental support.

As explained above under the Daewoo analysis aid to shipyards could be considered export contingent within the meaning of Article 3 of the ASCM. Nevertheless there is strong evidence which indicates that the aid was specific to Halla as follows:

　

As explained above, the Corporate Reorganisation Proceeding takes place under the supervision of the court having jurisdiction over the subject company and provides for corporate restructuring measures for the rehabilitation of the insolvent companies. Thus, the above procedure has essentially the same purpose as the workout process.

The major difference between the Corporate Reorganisation Proceeding and the workout program is that, under the workout program, the financial institutions themselves carry out the workout process outside of the court, while the Corporate reorganisation Proceeding is supervised by the courts. The analysis of specificity with regard to the workout scheme therefore applies by analogy.

　

　

The GOK and KSA have claimed that the Corporate reorganisation Proceeding scheme is not specific since eligibility to the scheme is objective as decisions are made by the financial institutions themselves on the basis of the viability of the prospective beneficiary. Article 2.1(b) of the ASCM provides that the granting authority must establish "objective criteria or conditions governing the eligibility for, and the amount of, a subsidy" and that "the eligibility is automatic and that such criteria and conditions are strictly adhered to" (emphasis added).

　

With regard to eligibility, GOK provided information that any company meeting the eligibility criteria has the right to apply for a Corporate reorganisation Proceeding. The eligibility, however, is limited to the application of the candidate company to the creditor banks; acceptance of a debt rescheduling plan is not automatic. In view of the fact that actual plans are decided by creditor banks on an ad hoc basis each restructuring package is different and affects only the company subject to the plan in question. The decision of banks to provide, or not, assistance to a company is purely discretionary; indeed GOK has insisted that the decisions are on a voluntary basis. There is no mandatory action prescribed by the law nor any penalty in case similar situations are treated differently. As a result eligibility of a company to assistance is not automatic as creditors need not justify a refusal to grant assistance to a "viable" firm or grant assistance to a non-viable one.

　

Furthermore, neither are the conditions governing the amount of the debt relief automatic. It is up to the creditors to determine the amount of debt relief on the basis of purely discretionary criteria. It is thus, possible to grant different amounts of debt relief to different companies under the Corporate reorganisation Proceeding. This is indeed what has happened with respect to Halla and Daedong ; although they were both subject to the same proceedings the type and amount of debt relief was completely different following discretionary decisions of the banks involved. This is even more so considering that largely the same creditors were involved in both proceedings (notably KDB).

　

As far as the role of the court in the proceeding is concerned, it is principally to ensure that the rights of all parties concerned have been respected and that the plan is "fair, equitable and feasible"⁴⁹; the court has no power to determine whether, or not, any assistance should be provided to the subject company nor the amount or type of any assistance; this is an issue entirely within the hands of the creditors. The court would not, for example, object if creditors decided to grant aid to non-viable firm by totally eliminating its debts; in such a case the court would only ensure in providing debt forgiveness the rights of other parties are not compromised. Subsidies provided in the context of a court-monitored proceeding can, therefore, still be considered as specific.

　

-De facto specificity: Halla is a major beneficiary

　

Article 2.1(c) of the ASCM provides that notwithstanding any appearance of non-specificity, the subsidy may be de facto specific if there are reasons to believe that there is, inter alia, use of a subsidy by a limited number of enterprises, the predominant use by certain enetrprises, the granting of disproportionately large amounts of subsidy to certain enterprises, and the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy.

　

With regard to eligibility, KDB's website informs that decisions were not in all cases on a neutral or objective manner: In particular, in answering the question "What role does KDB play in the corporate restructuring efforts ?" A senior manager of KDB replies: "KDB, in cooperation with other Korean creditor banks, has identified 56 companies suffering from temporary lack of liquidity and is supporting the recovery of these companies through tailored workout programs. As the commercial banks have undergone extensive restructuring and have been limited in their ability to provide new credit, KDB has selectively supported a number of credit-worthy export oriented companies and small/medium enterprises experiencing temporary liquidity problems."⁵⁰ (emphasis added). The fact that the above statement was made on the "frequently asked questions" of the KDB's english language visitors' web address shows that KDB perceives its role as one of pursuing certain public policy objectives independently of the form of the legal procedures used i.e. whether it is a workout procedure or a court-supervised restructuring. It is evident, therefore, that KDB has exercised its discretion in favour of certain categories of enterprises namely the export oriented ones. Due to the nature of the market shipbuilding companies are almost totally export oriented; indeed on the basis of information obtained during the investigation it was shown that almost all orders placed in the period of investigation were for customers outside Korea. Thus, Halla and Daedong would easily figure among the "selectively supported" companies.

　

Furthermore, FSS has declared that Korea's 22 commercial and specialised banks incurred a combined loss of won 13.6 trillion and won 15.7 trillion in 2000 and in 1999 respectively; KDB alone incurred losses of won 1.4 trillion in 2000. Considering that the estimated losses due to the debt restructuring of a single company Halla are at the range of won 1.8 trillion⁵¹ (see Annex for details) it is evident that a deisproportionately large amount of subsidy has been granted to Halla.

　

-Shipbuilding sector: a major beneficiary

　

It was shown above that with respect to DSME and Halla disproportionately large amount of subsidy have been granted in comparison to total losses incurred by the banks. The combined effect of the aid to both of these companies amply demostrates that the shipbuilding sector was treated in a privileged manner so that aid to other companies in the sector such as Daedong can be considered as specific.

　

In conclusion, the subsidies provided to Halla and Daedong under the Corporate Reorganization Proceeding are deemed to be specific within the meaning of the ASCM.