On 27 May 2016, South Korea's STX Offshore &
Shipbuilding Co. ("STX OS"), once the country's
fourth-largest shipbuilding firm by revenue, filed for
court-supervised rehabilitation, in the Seoul Central District
The global maritime and shipbuilding industry has been reeling
since 2008, hit by what has been called a "perfect
storm" of factors such as a glut of vessels and low
freight rates. Multi-billion dollar financial bailouts have failed
to rescue companies such as STX OS and it appears that until
structural changes are implemented to the industry, the wave of
insolvency and rehabilitation proceedings will continue.
It is therefore apposite to revisit the effect of such
insolvency and rehabilitation proceedings on contractual
Can the contract be terminated?
The first step should be to review the terms of the contract to
ascertain whether the commencement of insolvency or rehabilitation
proceedings constitutes an event of default under the terms of the
contract, entitling termination. If no such contractual right to
terminate exists, then the counterparty may have to continue
performance whilst bearing the risk of not being paid.
However, a recent decision of the Singapore Court of
Appeal suggests that, even absent an express
contractual right to terminate, a counterparty may be able to argue
that the fact of an insolvency or rehabilitation application
constitutes an anticipatory repudiatory breach of the contract,
entitling the innocent party to terminate.
Statutory moratoriums against proceedings
One key feature of insolvency and rehabilitation proceedings in
most legal systems (including Korea) is the freezing of the
company's debts and the imposition of a moratorium against
proceedings by unsecured creditors.
This means that an unsecured creditor will be unable to recover
any uncollected debt directly from the insolvent company, leaving
it to prove its debt in the insolvency. Further, an unsecured
creditor will typically only receive a distribution in the
insolvency after secured and preferential creditors are paid. For
companies such as STX OS, which reportedly owes over 6 trillion won
(US$5 billion) to financial institutions, an unsecured creditor is
likely to receive a fraction (if any) of the total amount owed to
Foreign recognition of Korean insolvency or rehabilitation
For foreign counterparties contemplating proceedings against STX
OS outside of Korea, there is an additional question of whether the
Korean moratorium against proceedings will be recognized overseas.
South Korea has adopted the UNCITRAL Model Law on Cross Border
Insolvency ("the Model Law"), which makes it likely that
STX OS' rehabilitation order, when granted, will be given
recognition in other adopting states e.g. Australia, UK, USA, and
Japan. This means that proceedings in these jurisdictions are
likely to be stayed by a moratorium.
Singapore is not yet an adopter of the Model Law and is
"not bound by any stay of legal proceedings that flows
from a foreign winding-up order in the absence of local winding-up
proceedings". Whether and how the Singapore
court will render assistance to foreign winding-up proceedings
through the regulation of its own proceedings will depend on the
particular circumstances before it.
China is also not an adopter of the Model Law and will not
automatically recognize the Korean rehabilitation proceedings or
any moratorium imposed by the Korean courts.
Lastly, if your counterparty is at risk of insolvency but is not
yet the subject of a formal insolvency or rehabilitation
application, it may be worth considering whether to manoeuver into
a position where you can benefit from an insolvency set-off.
For example, if the counterparty owes you USD 1 million but you
owe it USD 750,000, after insolvency set-off takes place, your
liability to the counterparty is discharged and you need only prove
for the balance USD 250,000 in the insolvency. Effectively
therefore, you receive the benefit of USD 750,000.
To maximize the value of insolvency set-off, subject to the
terms of the contract, debt can be assigned from a party who is a
net creditor to a net debtor, such that the latter can rely on an
Note that any assignment of debt after the commencement of
insolvency or rehabilitation proceedings will generally be void.
Therefore, it is important to act quickly to effect such an
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