Priority Repayment System for Depositors

[18-2 KCCR 403, 2003Hun-Ka14·15(consolidated), November 30, 2006]

Held, the relevant provisions of the former version of the Act on Mutual Trust Depository(February 1, 1992 Law number 5738), which guarantee a person who deposit in a mutual trust depository(now called a Mutual Savings Bank) an opportunity to participate in the liquidation process "prior to any other creditors within the limit of his/her depository" are in violation of the Constitution.

Background of the Case

The bankrupt, Kisan Mutual Trust Depository Stock Company (hereinafter referred to as the "the Bankrupt") was declared bankrupt by Seoul District Court on March 29, 1999. Hanareum Mutual Trust Depository Stock Company(hereinafter referred to as the "A"), which was fully financed by Korea Deposit Insurance Corporation, began to buy bonds from depositors pursuant to the Depositor Protection Act, starting from November 30, 1998. Thereafter, A(a plaintiff) filed a suit against Korea Deposit Insurance Corporation(a defendant, hereinafter referred to as the "B"), which was a trustee in bankruptcy to confirm bankruptcy

bond(Seoul District Court docket number 99KaHap95994), and Korea Federation of Savings Banks(thereafter "C")1), which was a general creditor, joined the suit for the sake of B. After Seoul District Court found that the bond with priority, which A should pay first, is amounted to 4,954,393,557 won, C brought an intermediate appeal. C, claiming that the provisions at issue are in violation with the Constitution, filed a motion to Seoul District Court for referral to the Constitutional Court for a judgment on the constitutionality of the Act at issue(2001KaKi1034) and the District Court, granting the motion, made the referral to the Constitutional Court on June 30, 2003.

Summary of the Decision

The Constitutional Court has held, in 6 : 2 decision, that provisions at issue are not in conformity with the Constitution. The summary of the grounds for the court's decision is stated in the following paragraphs.

1. Majority Opinion of Six Justices

When the statutory provision at issue was firstly enacted, it was necessary to give the priority repayment right to the depositors of Mutual Trust Depository for the sake of its public credibility. However, after the enactment, the financial environments have faced a great change. The systems, which is to implement preventive measures against insolvency as well as to promote sound development of such institutions have been supplemented, making a great move for the financial freedom/openness, resulting in the Mutual Trust Depository business prosper in quality as well as in quantity. This development made Mutual Trust Depository virtually the same financial institution compared with other general ones. Furthermore, pursuant to the Depositor Protection Act the depositors of Mutual Trust Depository have been awarded with the same protection as other depositors' of general banks starting from December 31, 1997. Therefore, it became hard to say the need for extra protection by giving the right to be repaid prior to general creditors, which was not allowed to depositors of general banks,

still exists.

Considering the history and background of how Depositor Priority Repayment System came in place, the purpose of the System was to guarantee the public credibility of the institution where small business people are most customers and to protect the depositors who are the commonality. However, the fact that the provisions at issue in this case give the absolute guarantee of the priority repayment irrespective of the types and sizes of such depository leaves a room for doubt whether the purpose of enactment is being realized. Even if there is a need for special protection for the depository right in case the deposit is being made in Mutual Trust Depository, the legislator should not award a non-restrictive right for repayment irrespective of types and sizes of the depository. Rather, pursuant to the purpose of the enactment, legislators have a constitutional duty to limit the types and sizes of depository where such special protection is being awarded, therefore minimizing any possible property right invasion of general depositors.

After all, Depositor Priority Repayment System is to give a favorable treatment to the depositors of Mutual Trust Depository, therefore inevitably sacrificing the general creditors of such Depository, resulting the infringement of their right to equality and their property right. Therefore, the statutory provisions at issue in this case are in violation of Article 11 Paragraph 1 and Article 23 of the Constitution.

2. Dissenting Opinion of Two Justices

Legislators are authorized to introduce a necessary system in order to promote the financial convenience of the commonality, to nurture Mutual Trust Depository which is a small size financial institution, and to protect depositors of such institution. While the enactment purpose of Depositor Priority Repayment System in this case is to protect depositors of Mutual Trust Depository prior to the general creditors of such Depository, Deposit Insurance System is to give absolute protection for certain deposit amount. Therefore, the two Systems are different in the purpose and the subject. For the reason above, whether there should be any change in Depositor Priority Repayment System upon the introduction of Deposit Insurance System should be referred to legislators and the decision by them should be respected without any further consideration. In short, considering the characteristics of statutory provisions at issue, the public interest and necessity of the purpose of such enactment, it is hard to note that legislators departed from the

power of legislation. Therefore, the provisions at issue in this case are not in violation of the Constitution.