Consistency of the Creditor Protection Regime in Corporate Division of Korean Corporate Law

Under the Korean Commercial Code, several methods can be employed for companies to divide their business into separate legal entities. Having european origin, for instance, the Abspaltung creates a new company whose shares are distributed to the shareholders of dividing company. In the latest revision of 2011, however, the Commercial Code allowed a company to pay dividend in kind to the shareholders, and thus the spin-off, which has been widely used in the United States to divide the business, became legally accepted. Although both the Abspaltung and the spin-off can be understood as economically and legally the same institutions, but the legal structures, the creditor protection in particular, are different mainly because of their legal origins. This paper pursue to harmonize the two institutions introduced from different jurisdictions in terms of creditor protection. I firstly examine the corporate division by creating 100%-owned subsidiary. The Ausgliederung of the Commercial Code distributes the shares of a newly created company to the dividing company, not to the shareholders. Such division, however, can be achieved more simply by contributing a part of business in a new company. From the creditor protection perspectives, these two methods are quite different. The Ausgliederung requires notice and guarantee to all creditors, while contribution of business does not. To reconcile this inconsistency, I argue that the creditor protection regime of the Ausgliederung should be repealed, since the creditors of the dividing company are unlikely to be severely harmed by structurally subordination. As for reconciling the creditor protection associated with the Abspaltung and the spin-off, this paper also suggests to eliminate the creditor protection regime of the Abspaltung and only be reviewed by the distributable earning standard, which governs the spin-off transaction. Such reform would enhance the consistency of the corporate restructuring law.