Set-off is recognized under Korean civil law as a mechanism that allows parties with mutual obligations of the same nature to extinguish their respective debts to the extent they overlap.  In ordinary commercial transactions, set-off is widely used as a credit-risk management tool and is frequently incorporated into contractual arrangements governing long-term supply, service, or financing relationships.

The legal treatment of set-off, however, changes significantly once rehabilitation proceedings are commenced against a counterparty in Korea.  From that point, the exercise of set-off rights is no longer governed solely by the Civil Act, but is also subject to the Debtor Rehabilitation and Bankruptcy Act (the “DRBA”), which imposes specific statutory restrictions to preserve equality among creditors and safeguard the debtor’s estate.

In practice, creditors often underestimate these insolvency-specific limitations.  A failure to properly assess the permissibility of a set-off under the DRBA results in its invalidation, the loss of procedural and voting rights, or even the exclusion of the relevant claims from the rehabilitation process.   

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