Joint and Several Liability of Executive Officers and Oligopolistic Stockholders Case

[14-2 KCCR 106, 2000Hun-Ka5, etc.,(consolidated), August 29, 2002]

In this case, the Constitutional Court rendered a decision of limitedunconstitutionality against the provision of the Mutual Savings andFinance Company Act holding the executive officers and oligopolisticstockholders jointly and severally liable for the debts of the mutualsavings banks.

A. Background of the Case

The Mutual Savings and Finance Company Act stipulates that

executive officers except the auditors and oligopolistic stockholders(stockholders and those individuals who have special relationship with the stockholders specified by a presidential decree. The total numberof shares owned by these individuals need to be over 51% of the totalnumber of issued shares) are jointly and severally liable for debts of mutual savings banks.

The provision stipulating joint and several liabilities was adopted with the legislative objective of "protection of customers through responsible management of executive officers" after numerous cases of bad management by executive officers of savings banks led to monetary loss by many bank customers.

The petitioners in the instant case are directors or oligopolisticstockholders of mutual savings banks that went bankrupt because ofimproper management. They petitioned the Court to request the con- stitutional review of the instant statutory provision when creditors ofthe mutual savings banks filed lawsuits against petitioners under theinstant provision, arguing that the instant statutory provision violatedthe right of equality and property rights protected under the Consti-tution. The Court granted the motion, and requested the constitu-tional review of the instant statutory provision to the ConstitutionalCourt.

B. Summary of the Decision

The Constitutional Court rendered a decision of limited unconsti-tutionality against the instant statutory provision on a majority voteof six Justices (five voting for limited unconstitutionality, one votingfor nonconformity to the Constitution) as follows:

(1) Opinion of Limited Unconstitutionality by Five Justices

(A) Executive officers are held jointly and severally liable for the debts of the mutual savings banks under the instant statutory provi- sion on the premise that they took active parts in unsound or evasivelending, or that they either cooperated or overlooked unreasonabledemands of the oligopolistic stockholders. Oligopolistic stockholders, on the other hand, are held jointly and severally liable for the debts of mutual savings banks on the premise that they, using their influ-ence as oligopolistic stockholders, directed or demanded officers to makedecisions, thus taking part in improper management of the banks. Ifthe legislative objective of the instant statutory provision is to preventthe bankruptcy of mutual savings banks from improper management orprivatization of the savings, thus protect the bank customers, indi- viduals subject to the regulation by the provision should be limitedto "persons who took part in improper management of the banks."

(B) There might be some executive officers who may be registeredas directors of the company in the register but who had not taken anypart in management of the savings banks or who were excluded fromthe decision making process in making decisions. These officers shouldnot be held liable for improper management of the banks. It would be excessive to hold these officers jointly and severally liable during theirtenure as well as for three years after their retirement. It wouldeffectively prevent corporate governance by professional managers whomay be equipped with the expertise and efficiency but do not havespecial ties with the oligopolistic stockholders. This would not pro-mote separation of management and ownership, but instead, wouldpromote unification of management and ownership against the legis- lative objectives of the above statute.

(C) In case of oligopolistic stockholders, too, only those "individ-ual stockholders who directly caused an undesirable result either throughexercise of shareholders' rights or through use of his influence on thebank management by ordering or demanding officers to take certainactions" should be burdened with joint and several liabilities for thecompany debts. It would only be justified to burden oligopolisticstockholders with almost unlimited liability equal to that borne bymembers in a partnership or partners with unlimited liability in limitedpartnership company when there is no separation of management andownership or when such stockholders wielded influence on manage- ment. Not all oligopolistic stockholders take part in management ofthe savings bank. Some may be formally oligopolistic stockholdersbecause they are relatives of other stockholders, but they may nottake any part in the management of the banks. It would be againstthe legislative spirit of the instant statutory provision as well as thatof the entire Mutual Savings and Finance Act to hold such oligopo- listic stockholders liable for improper management of the banks.

(D) Considering its legislative purpose, the scope of application ofthe instant statutory provision should be limited to only those "execu-tive officers responsible for mismanagement of the bank" and "oligopo-listic stockholders who wielded their influence on the management."Since every executive officer and oligopolistic stockholders, withoutexception, are jointly and severally liable for the debts of the savingsbank under the instant provision, the provision violates the freedomof association, property rights, and the principle of equality.

(E) It is not unconstitutional to hold executive officers and oli-gopolistic stockholders jointly and severally liable for the debts of thebanks. However, it is unconstitutional to hold those officers andoligopolistic stockholders who had no part in improper management ofthe banks liable for the debts of the banks. The unconstitutionality of the statute could be removed by limiting the scope of executiveofficers and oligopolistic stockholders to be jointly and severally liable.If the Court were

to declare the statutory provision simply unconsti- tutional, all of the executive officers and oligopolistic stockholders ofthe savings banks will only bear responsibilities stipulated under theCommercial Act, and this would not protect the interests of bank cus-tomers, creditors of the banks. Therefore, the Court should interpretthe law maintaining its effect if at all possible. Considering thelegislative objective of the instant statutory provision, the scope ofexecutive officers to be held jointly and severally liable for bank debts should be limited to those officers directly responsible for mismanage-ment of the bank, and the scope of oligopolistic stockholders to bearthe financial responsibilities should be limited to those stockholderswho wielded their influence on the management, thereby causing the financial crisis. It would be against the Constitution to hold jointlyand severally liable for the company debts, those officers who are notresponsible for improper management or those oligopolistic stockholderswho did not cause improper management of the bank using theirinfluence.

(2) Opinion of Nonconformity by One Justice

To interpret the instant statutory provision in a limited manner asdone by the majority of Justices would exceed the limits of inter-pretation of law, and it would be tantamount to legislation by theConstitutional Court, ignoring the opinion of the legislators objectivelyexpressed in the written statute. In such case, it would be consti-tutionally more desirable if the Constitutional Court were to render adecision of nonconformity to the Constitution and let the legislatorsenact a new law reflecting the opinion of this Court within a short period of time.

(3) Dissenting Opinion of Three Justices

Considering the facts that there is not complete separation betweenownership and management of the banks and that the oligopolisticstockholders exert dominant power in management of the banks, it isconstitutional to hold oligopolistic stockholders jointly and severallyliable for the debts of the banks in order to protect the customers. However, it would be excessive to hold all executive officers of thesavings banks jointly and severally liable, and hence, unconstitutional.