How to Secure Feed Debts with Livestock as Collateral in South Korea

1. What is a Chattel Security Interest in South Korea?

Definition of Security Interest by Transfer

A chattel security interest (양도담보, Yangdo Dambo) is a security system under which a debtor transfers ownership of certain property to the creditor in advance for the purpose of securing a debt. If the debt is repaid, the property is returned; if the debt is not properly performed, the creditor can dispose of the property and receive priority repayment from its value, or definitively acquire ownership of the property as a method of debt repayment.

The security interest by transfer is a non-typical security that developed through commercial practice and case law. Although there are no explicit provisions in the Korean Civil Code, its legal principles have been established through Supreme Court precedents. Security interests can be established not only on real estate but also on movables, claims, intellectual property rights, and various other property rights.

Difference Between Security Interest and Pledge

The traditional method of providing movables as security is a pledge (질권). However, since a pledge requires the creditor to possess the collateral (Article 329 of the Korean Civil Code), it is inconvenient when the debtor needs to continue using the collateral. In contrast, a security interest can be established through constructive delivery, allowing the debtor to continue possessing and using the collateral. This is why security interests by transfer are widely used in practice in South Korea.

Development of Movable Property Security Systems in Korea

Since June 11, 2012, the Act on Security over Movables, Claims, etc. has been in effect in South Korea, introducing the movable property security registration system. Now there are three main methods for establishing security over movables: first, security interest by transfer; second, pledge; and third, movable property security registration. Each has its advantages and disadvantages, so the appropriate method should be chosen according to the situation.

2. Can Livestock Be Used as Collateral Under Korean Law?

Recognition of Collective Chattel Security Interests

The Supreme Court of Korea has ruled that security interests can be established even on movables that fluctuate constantly, such as livestock. Generally, for a mass of movables that constantly fluctuate, such as eels in an eel farm, pigs in a pigsty, or inventory in a factory, where there is no proper way to identify each item individually, but the owner has a socioeconomic need to use them as collateral, as an exception to the principle of “one thing, one right” (一物一權主義), it is possible to conclude a so-called collective chattel security agreement treating these as one thing, one property right, for the purpose of securing claims (Supreme Court Decision 2015Da221286, April 28, 2016).

Precedent on Collective Livestock Security Interests

The Supreme Court made an important ruling regarding pigs raised in large quantities in a pigsty used as collateral for a collective security interest. Since these pigs naturally fluctuate in number due to breeding, death, sale, and purchase, even without the security holder entering into separate security agreements or making constructive delivery declarations each time, the security interest continues to apply to the current collective mass as long as it maintains its identity as one collective unit (Supreme Court Decision 2004Da22858, November 12, 2004).

According to this precedent, even when establishing a security interest on cattle, there is no need to enter into separate security agreements for newly born or newly purchased cattle—the existing security interest automatically applies to them. This is a very favorable legal principle for agricultural corporations seeking to secure feed payments.

Effect on Transferees of Floating Collective Property

Furthermore, the Supreme Court has ruled that when a transferee who has not acquired good faith title to the collateral of a floating collective property security agreement mixes their own property of the same type with the collateral, making the scope of the original security interest unclear, it is consistent with the principle of equity to require the transferee to prove the existence and scope of property not subject to the security interest (Supreme Court Decision 2004Da22858, November 12, 2004).

3. How to Specify Collateral in a Collective Chattel Security Interest?

Necessity of Specifying the Collateral

In the case of a so-called floating collective chattel security agreement that treats a mass of fluctuating movables as one property for security purposes, the collateral must be specified to clarify the scope of the security interest, prevent unforeseen damage to third parties, and ensure that enforcement procedures are not unduly delayed (Supreme Court Decision 2002Da72385, March 14, 2003).

Methods of Specification

The collateral must be externally and objectively specified so that it can be distinguished from the security provider’s other property, using methods such as designating the type, location, or quantity (Supreme Court Decision 2002Da72385, March 14, 2003). For example, clothing products in a warehouse can be described as “all clothing products in warehouse X, approximately 10,000 items.”

When establishing a security interest on cattle, it can be specified as “all Korean native cattle (Hanwoo) being raised in the barn located at [specific address].” With such specification, newly born or purchased cattle automatically fall under the existing security interest when they enter the same location as the same type of collateral, without any additional action required (see Supreme Court Decision 2015Da221286, April 28, 2016).

Distinction from Security Interests on Specific Property

Basically, machinery and equipment installed in a factory can be specified by name, performance, specifications, manufacturer, serial number, etc., and because their types and values vary, they cannot be viewed as a mass of fluctuating movables constituting one property. The court’s position is that security agreements should be concluded with specified collateral for machinery and equipment that can be individually identified (Supreme Court Decision 2015Da221286, April 28, 2016). Therefore, for machinery and equipment that can be individually identified, the security agreement should be concluded with the collateral specifically identified.

4. How to Establish a Chattel Security Interest in South Korea?

Types of Establishment Methods

The method of establishing a chattel security interest varies depending on the type of collateral.

For Registered/Recorded Property: A security agreement and transfer of registration to the creditor are required.

For Stocks/Securities: A security agreement, transfer of the original securities (to the creditor), and name change registration are required.

For Tangible Movables: A security agreement and either actual delivery or constructive delivery are required. Livestock such as cattle fall into this category.

For Named Claims: A claim assignment agreement and notice or consent of claim assignment with a document bearing a certified date are required.

Meaning of Constructive Delivery

Constructive delivery (占有改定, Jeomyu Gaejung) means that the nature of possession has changed. Until now, the debtor possessed as owner, but now ownership is transferred to the creditor for security purposes, and the debtor continues possession on behalf of the creditor. In other words, while the state of possession appears the same from the outside, legally the ownership has been transferred to the creditor and the nature has changed so that the debtor possesses on behalf of the creditor.

Loss of Possession and Security Interest Effectiveness

The Supreme Court has ruled that once a security interest has been established on movables through constructive delivery, even if the security holder or the security provider loses possession of the movables, there is no effect on the validity of the security interest (Supreme Court Decision 99Da65066, June 2, 2000). Therefore, even if the debtor sells or transfers the cattle to another person after establishing a security interest through constructive delivery, the effectiveness of the security interest is maintained.

5. What Are the Effects of Notarizing a Security Agreement?

Significance of Notarized Deeds

A notarized deed (公正證書) containing a consent to compulsory execution in case of default can be prepared simultaneously with the conclusion of a security agreement over movables. Such a notarized deed, also called an execution deed, becomes an enforceable title that allows immediate compulsory execution without a separate lawsuit procedure in case of default.

Title of the Notarized Deed

In most cases, the collateral for a security interest is tangible movables, and such collateral incurs significant storage costs and is likely to depreciate significantly if stored for extended periods. For collateral that will significantly decline in value without immediate liquidation upon default or requires substantial storage costs, a notarized deed should be prepared for the security agreement so that compulsory execution can be carried out at any time. The title of such notarized deed is “Notarized Deed of Monetary Loan Agreement Secured by Chattel Transfer.”

Precautions When Preparing Notarized Deeds

When the collateral is machinery or equipment, it should be verified whether the company that sold the machinery sold it under conditions of retention of title. It should be determined through inspection of the movable property security register whether the property has already been provided as collateral to another creditor.

6. How to Enforce a Chattel Security Interest in Korea?

Principle of Enforcement

The security interest can be enforced when the secured debt in the security agreement is not performed. When the security provider fails to perform the debt at maturity, the security holder can request delivery of the collateral from the security provider for liquidation, and after receiving delivery of the collateral, can receive debt repayment by privately disposing of it (disposition settlement) or acquiring it and settling accounts (vesting settlement) according to the terms of the agreement (Supreme Court Decision 98Da47283, September 7, 1999).

Types of Liquidation Methods

There are three liquidation methods for enforcing a security interest.

Disposition Settlement: The collateral is sold, priority repayment is received from the proceeds, and any shortfall can be claimed against the debtor’s general assets.

Vesting Settlement: The security holder finally acquires ownership, and the debt is deemed repaid to that extent.

Compulsory Auction: Based on the execution deed, the collateral is seized and converted to cash through compulsory auction.

Enforcement Methods When There is a Notarized Deed

When a notarized deed with consent to compulsory execution upon default has been prepared simultaneously with the security agreement, the security holder may, without relying on the execution deed, liquidate by privately disposing of or acquiring the collateral and settling according to the terms of the security agreement, or may liquidate by seizing the collateral based on the execution deed and conducting a compulsory auction.

Request for Delivery of Collateral

When the debt is not being performed and the security provider continues to possess the collateral, a request for immediate delivery should be made. If they do not comply and a notarized deed exists, a seizure application can be immediately filed for compulsory auction. If only a certified copy or contract has been prepared, a provisional disposition prohibiting transfer of possession should be applied for at the court, and then a lawsuit for delivery of property should be filed.

7. What Happens When Other Creditors Seize the Collateral?

Priority Right to Repayment of Security Holders

In the liquidation procedure, the entire remaining amount after deducting liquidation costs from the proceeds of liquidation must be first applied to repay the security holder’s claims, and the security provider’s other creditors cannot demand pro-rata distribution against the security holder (Supreme Court Decision 99Da65066, September 7, 1999).

Special Nature of Compulsory Auction by Notarized Deed

If compulsory auction is conducted, although such auction procedure formally follows compulsory execution procedures, in substance it is not a general creditor’s compulsory execution procedure but a liquidation procedure for enforcing the chattel security right. Other creditors of the security provider who have competing seizures in that seizure procedure cannot be recognized as competing seizure creditors or claimants entitled to demand distribution against the security holder (Supreme Court Decision 2004Da37430, February 18, 2005).

Therefore, the remaining amount after deducting liquidation costs from the proceeds must be first applied to repay the security holder’s claims, and should not be distributed pro-rata according to each creditor’s claim amount among the security provider’s other creditors and other creditors who are competing seizure creditors (Supreme Court Decision 2004Da37430, February 18, 2005).

Practical Implications

This is a very favorable precedent for security holders. Even if the debtor’s other creditors seize the collateral, the security holder can receive priority repayment from the entire sale proceeds. Therefore, an agricultural corporation that has established a security interest on cattle as collateral for feed payments can receive priority repayment even if the livestock farmer’s other creditors seize those cattle.

8. Chattel Security Interest vs. Movable Property Registration: Which is Better?

Comparison of Three Security Methods

Advantages of Security Interest by Transfer

As shown in the table above, considering setup costs and the relationship with wage creditors among these three methods, the security interest by transfer is the best form of security in South Korea. There is generally no need to incur significant costs for security registration.

Advantages of Movable Property Security Registration

However, movable property security registration has the advantage of clear public notice through registration, making the right to assert against third parties definite. Additionally, by viewing the movable property security register, one can easily confirm whether a security right has been established on the relevant movables.

9. Key Considerations When Drafting a Security Agreement in Korea

Items to Confirm Before Contract Conclusion

First, confirm whether the contracting party for the security interest is the true owner. If a security interest is established on movables owned by another person, no rights can be acquired.

Second, confirm whether the collateral has already been provided as security to a third party. When a security interest has been provided twice, if the later recipient of the security interest does not meet the requirements for bona fide acquisition, only the first recipient of the security interest will be protected as the legitimate right holder (Supreme Court Decisions 99Da65066, June 23, 2000; 99Da65066, June 23, 2000). It should be determined through inspection of the movable property security register whether the property has already been provided as security to another creditor.

Third, when the collateral is machinery or equipment, verify whether the company that sold the machinery sold it under conditions of retention of title.

Items to Include in the Contract

Fourth, when the owner continues to possess the collateral, the contract should include a provision stating that “the preservation of natural and legal fruits of the collateral shall be continuously verified.”

Fifth, when the collateral is a floating collective property, the type, location, and method of quantity designation of the collateral should be specified so that it can be distinguished from the security provider’s other property (Supreme Court Decision 2002Da72385, March 14, 2003).

Recommendation for Notarized Deed Preparation

In most cases, the collateral for a security interest is tangible movables, and such collateral incurs significant storage costs and is likely to depreciate significantly if stored for extended periods. For collateral that will significantly decline in value without immediate liquidation upon default or requires substantial storage costs, a notarized deed should be prepared for the security agreement so that compulsory execution can be carried out at any time.

10. FAQ

Atlas Legal provides legal services in corporate advisory, corporate disputes, corporate counseling, and corporate crimes (fraud, breach of trust, embezzlement, tax law, customs law) in Songdo, Incheon, South Korea. We recently advised an agricultural corporation on establishing chattel security interests on livestock when supplying feed to livestock farmers. We have professional advisory experience and practical expertise in complex legal matters including establishing movable property security, drafting security agreements, utilizing notarized deeds, and enforcing security rights.

※ The case introduced in this article is based on an actual advisory matter, with some facts modified for clarity and client information protected.