Cho Jae-2017- Daejeon-1401 ( October 17, 2017)

Whether it is possible to deduct bad debt tax amount of bonds converted into investment by rehabilitation plan approval

It is reasonable to view that the book value of shares issued after a decision to authorize a rehabilitation plan that involves a debt-to-equity swap is the acquisition value of the bonds subject to debt-to-equity swap in a lump sum without judging whether the market price is much and the total amount of the bonds is extinguished.

Article 45 of the Value-Added Tax Act (Special Cases)

Cheongju District Court-2017-Gu Partnership-2832

○ Head of tax office

△ stock company

November 29, 2018

.01.10

1. Details of the disposition;

A. The Plaintiff is a company established on June 17, 197 and engaged in the manufacture and sale of an industrial partner hall, building and piping pipes.

B. The Plaintiff received goods equivalent to KRW 1,536,366,476 from AA (hereinafter “A”) during the first and second taxable periods of the value-added tax in 2015, and paid as the price for the said goods the sum of KRW 1,536,366,476 (hereinafter “instant bill”) from July 2015 to September 201, and filed a value-added tax return by deducting the relevant input tax amount from the output tax amount.

C. When the financial failure has occurred due to the aggravation of the financial structure, the cumulative business losses, and the increase of financial costs, the Plaintiff received a decision to commence the rehabilitation procedure on October 23, 2015 on September 22, 2015 (Seoul Rehabilitation Court 2015 Gohap******) pursuant to the Debtor Rehabilitation and Bankruptcy Act (hereinafter referred to as the " Debtor Rehabilitation Act").

D. Under the above rehabilitation procedure, the Seoul Rehabilitation Court approved the above rehabilitation plan on June 21, 2016, as the Plaintiff’s rehabilitation plan prepared and submitted by the Plaintiff’s administrator (hereinafter “instant rehabilitation plan”) satisfies the requirements for a resolution under the Debtor Rehabilitation Act.

E. The rehabilitation plan of this case provides that 25% of the rehabilitation claims against the plaintiff of AA, a commercial credit (hereinafter referred to as "the rehabilitation claims of this case"), shall be repaid in cash for 10 years, and the remaining 75% shall be converted into equity shares of 5,00 won per share, and the amount of a debt-to-equity swap shall be substituted for the repayment of the rehabilitation claims of this case on the date when the shares newly issued by the plaintiff pursuant to the rehabilitation plan, and the shares shall be re-combined at 30:1 percent to be adequate after the debt-to-equity swap. The specific amount of the rehabilitation claims of this case and the amount of the claims subject to repayment under the rehabilitation plan of this case shall be as specified in Table 2 below.

F. Meanwhile, the Promissory Notes was disposed of in arrears on October 8, 2015, November 9, 2015, and December 9, 2015, and around August 2016, AA applied for a tax credit of value-added bad debt pursuant to Article 45(1) of the Value-Added Tax Act, Article 87(1) of the Enforcement Decree of the same Act, Article 19-2(1)9 of the Enforcement Decree of the Corporate Tax Act, and Article 19-2(1)1 of the Enforcement Decree of the Corporate Tax Act (hereinafter “instant bad debt tax amount”) with respect to the bad debt tax related to the said claim. BB tax was deducted from the bad debt tax amount of KRW 136,217,150 (hereinafter “instant bad debt tax amount”).

G. On January 12, 2017, the Defendant notified the Plaintiff of the foregoing taxation data from BB tax office, pursuant to Article 45(3) of the Value-Added Tax Act, issued a notice of correction of KRW 136,217,150 of the value-added tax (hereinafter “instant disposition”). On March 28, 2017, the Plaintiff filed a tax appeal with the Tax Tribunal on the grounds that the Plaintiff was dissatisfied with the instant disposition, but the Tax Tribunal dismissed the said appeal on July 10, 2017.

H. On the other hand, on March 8, 2017, the Plaintiff received a decision to terminate the rehabilitation procedure from the Seoul Rehabilitation Court pursuant to Article 283(1) of the Debtor Rehabilitation Act. [Grounds for recognition] The Plaintiff did not dispute any of the grounds for recognition; entries in Gap’s subparagraphs 1 through 7; Eul’s subparagraphs 1 through 4 (including the serial number; hereinafter the same shall apply); and the purport of the entire pleadings.

2. Whether the instant disposition is lawful

A. The rehabilitation plan of this case was approved when six months have passed since the date of the Plaintiff’s assertion on the debt-equity swap and cash repayment had become final and conclusive under Article 19-2(1)9 of the Enforcement Decree of the Corporate Tax Act. The Defendant should be deemed to have been repaid as much as the market price of the above rehabilitation plan. The difference between the book value and the market value of the bonds is exempted from the unrepaid claim. The Plaintiff’s stock value of the rehabilitation company, which is a rehabilitation company, is 0 won under the supplementary assessment method of the Inheritance Tax and Gift Tax Act (hereinafter “Inheritance Tax and Gift Tax Act”), and the total book value of the bonds, which were converted into a debt-equity swap, should be deemed to have been exempted from the total book value of the bonds, and even if they were to have been repaid as equal to the book value, the portion of BB debt-equity swap, which was in violation of the principle of no taxation without law, should be deemed to have been in violation of the principle of no taxation without law, and thus, it should be deemed that the existing rehabilitation plan was unlawful from the date of 160 days.

B. Relevant statutes

It is as shown in the attached Form.

C. Violation of the disposition of the instant case

In full view of the following circumstances, it is reasonable to view that the amount equivalent to the book value of the rehabilitation claim of this case, which was converted into investment pursuant to the rehabilitation plan of this case, was repaid to AA, and the amount of the rehabilitation claim of this case was extinguished accordingly. Therefore, Article 45(4) of the Value-Added Tax Act applies to this case. Nevertheless, the disposition of this case, which was made by deducting the amount of the bad debt of this case from the input tax amount of the first quarter of 2016 pursuant to Article 45(3) of the Value-Added Tax Act, without applying it, is unlawful.

1) In principle, the Enforcement Decree of the Corporate Tax Act provides for the market price at the time of acquisition of stocks acquired through a conversion of investment. However, in exceptional cases, where a conversion of investment is made according to a rehabilitation plan authorization order under the Debtor Rehabilitation Act, the book value of the converted bonds is stipulated to be the acquisition value (Articles 72(2)4-2 and 15(4)1 of the Enforcement Decree of the Corporate Tax Act). In light of the purport of these statutes, it is reasonable to view that the book value of the stocks issued through a rehabilitation plan subject to a conversion of investment is based on the premise that the market price is the acquisition value of the bonds subject to a conversion of investment and the total amount of the bonds is extinguished, without determining whether there is a specific market price for the stocks issued by a rehabilitation plan subject to a conversion of investment. Accordingly, it is reasonable to view the rehabilitation claim of this case as the "total amount of the book value" by acquiring stocks equivalent to the book value equivalent

2) Such interpretation also accords with the requirements for taking effect of the issuance of new shares under the Commercial Act and the principle of capital adequacy. In other words, where stocks are issued through a debt-to-equity swap, it shall be recognized that the entire debt-to-equity swap has been paid as the subscription price for the stocks (see Articles 421 and 423 of the Commercial Act, and Supreme Court en banc Decision 2010Du17564, Nov. 22, 2012). As such, even in the instant case, it is reasonable to deem that the effect of the extinguishment of the obligation on the total book value upon the payment of the total amount of the bonds subject to the said debt-to-equity swap as the subscription price for the stocks

3) Article 206(1)4 of the Debtor Rehabilitation Act provides that "the amount of debts that may be reduced by the issuance of new shares" as one of the matters to be prescribed in the rehabilitation plan when the debtor, a stock company, makes a conversion of investment to rehabilitation creditors by the method of issuing new shares (Article 206(1)4). If the rehabilitation plan provides for the conversion of investment, it can be interpreted that the above provision is based on the premise that the rehabilitation creditor is at the same time when the issuance of new shares is taken place

4) Rehabilitation creditors, rehabilitation secured creditors, shareholders, equity right holders are prepared and authorized under the premise that the rehabilitation plan is modified according to the rehabilitation plan (Article 252(1) of the Debtor Rehabilitation Act). The rehabilitation creditors of this case, on the premise that the rehabilitation plan is revised, are deemed to be fully exempted from and partially repaid claims on the premise that the rehabilitation creditors of this case were fully examined whether only part of them were repaid and whether they would substitute for repayment through a debt-equity swap, and then decided whether to consent to the rehabilitation plan. As can be seen, rehabilitation creditors should comply with the rehabilitation plan inasmuch as the rehabilitation plan is approved upon meeting the requirements for approval of the rehabilitation plan. In other words, agreement existing between many interested parties on the matters indicated in the rehabilitation plan should be respected. Furthermore, it is difficult to deem that there is any unreasonable reason to recognize the change of the rehabilitation claim to substitute for a debt-to-equity swap or rehabilitation security right. Rather, if the rehabilitation creditors of this case, who selected a debt-to-equity swap, did not regard it as repayment in the case of a debt-to-equity swap and are contrary to equity relationship with other creditors.

5) If the Defendant decided to retire shares issued through a debt-to-equity swap without requiring a separate payment under the rehabilitation plan without requiring a separate payment for the debt-to-equity swap, it would not be able to exercise the shareholder’s rights and be retired without any other consideration. Thus, it is reasonable to deem that rehabilitation claims, etc., which are the premise of such debt-to-equity swap, have become final and conclusive as impossible to recover according to the rehabilitation plan. In light of the Supreme Court Decisions 2017Du68295 Decided June 28, 2018; 2016Du6565 Decided July 11, 2018, the legality of the disposition of the instant case is asserted on the same issue. However, the above precedents are cases where “the creditors cannot hold shares of the rehabilitation company by means of the debt-to-equity swap without compensation” under the rehabilitation plan, whereas this case is also cases where the Plaintiff’s share ratio cannot be applied by comparing the above net assets to the amount of capital reduction without compensation before and after the said debt-to-equity swap without consideration.

6) Supreme Court Decisions 2005Da34643 Decided April 13, 2006, 2009Da45344 Decided March 25, 2010, and 2001Da64073 Decided August 2, 2003, the defendant asserted that it is the consistent position of the Supreme Court that it is equivalent to the market price at the time of the occurrence of new shares that have been repaid in the event of a debt-equity swap in accordance with the rehabilitation plan, and that it is equivalent to the market price at the time of the occurrence of the new shares that have been repaid in the event of a debt-equity swap in accordance with the rehabilitation plan. However, from among the decisions cited by the defendant, it is difficult to view that the case of a debt-equity swap in the main debtor or the rehabilitation security right to be applied to the case of a debt-equity swap in lieu of the repayment of all or part of the rehabilitation claim or rehabilitation security right of a debtor, and it is also difficult to view that the above decision is applied directly to the previous rehabilitation plan.

7) The Defendant asserts that the share consolidation ratio differs between existing shareholders and rehabilitation creditors in the instant rehabilitation plan. However, since the nature of shares and claims are different, it cannot be determined uniformly by simply comparing the share consolidation ratio for rehabilitation claims with the existing shareholders’ share consolidation ratio. In a case where the rehabilitation plan itself plans plan plans to issue new shares and re-merger for the future conversion of shares, the aforementioned share consolidation ratio cannot be deemed as a violation of the fair and equitable principle. As such, the aforementioned share consolidation ratio cannot be deemed as a violation of the fair and equitable principle, solely on the ground that the share consolidation ratio differs between the existing shareholders and rehabilitation creditors (see Supreme Court Order 2002Da121, Dec. 10, 2004).

8) Meanwhile, since the rehabilitation claim of this case has 25% of the total amount of the rehabilitation claim of this case, which should be paid in cash in addition to 75% of the total amount of the total amount of the bad debts tax, and the defendant has taken the disposition of this case, it is not a matter of issue that only a part of the disposition of this case should be revoked, even if the part of the rehabilitation claim of this case was paid in a debt-equity swap upon acceptance of the plaintiff's claim. However, it is unlawful that the defendant did not recognize the repayment of the 75% portion of the debt-equity swap and made a deduction of bad debts tax amount without recognizing the repayment of the 75% portion of the debt-equity swap as seen earlier. However, even if the part of the rehabilitation claim of this case was converted into a debt in the lawsuit of this case, it is impossible for the defendant to calculate the corresponding amount of the bad debts tax amount to be lawfully imposed (refer to the fourth pleading argument report), so long as the court fails to prove the calculation of the legitimate tax

Furthermore, as seen earlier, considering that the rehabilitation plan is prepared and approved on the premise that the rights of rehabilitation creditors, rehabilitation secured creditors, shareholders and equity right holders are modified according to the rehabilitation plan (Article 252(1) of the Debtor Rehabilitation Act), it is reasonable to view the case where payment in cash is made in the future in the approved rehabilitation plan as "a claim confirmed to be impossible to be recovered" under Article 19-2(1)5 of the Corporate Tax Act, and this cannot be deemed any different from the case where the bill issued as in this case was in default. If it is deemed that the portion of the payment in cash is subject to a bad debt tax deduction on the ground that the payment in cash is not yet made in accordance with the rehabilitation plan, it would be excessively borne by the rehabilitation company and difficult to implement the normal rehabilitation plan, and ultimately, the rehabilitation itself would be impossible. Accordingly, the portion of the payment in cash in the future should not be deemed as subject to a bad debt tax deduction, and thus, any one shall be deemed as the mother or the disposition in this case must be revoked in its entirety.

3. Conclusion

Therefore, the plaintiff's claim is reasonable, and it is decided as per Disposition.