[1] The standard for determining whether an executive officer of a financial institution neglects his/her duties in breach of duty of care

[2] Whether a claim for damages equivalent to the amount of reduction or exemption ceases to exist on the ground that a financial institution partly reduced or exempted a debtor's debt for a loan for which the composition procedure is in progress (negative)

[3] In a case where a director's liability for damages is recognized, whether the amount of damages can be limited by taking into account all the circumstances such as the background leading up to the director's breach of duty (affirmative

[4] Whether the principle of business judgment applies to a case where a director causes a loss to the company due to a violation of laws and regulations under Article 399(1) of the Commercial Act (negative)

[5] The case where the acquisition of company's shares in the name of a third party constitutes the acquisition of treasury shares prohibited by Article 341 of the Commercial Act

[6] Whether Article 341 of the Commercial Code and Article 23 (1) of the Merchant Banks Supervision Regulations apply to a director of a merchant bank (negative)

[7] Whether liability for damages under Article 399 or 414 of the Commercial Act is established even in cases where a proximate causal relationship is not established between a director or auditor’s violation of the statutes, articles of incorporation, or a violation of duties and the damage incurred as a result thereof (negative)

[8] The case holding that a loan agreement concluded by a merchant bank for the purpose of acquiring treasury stocks in the name of a third party under its own account is null and void, and the portion of the loan paid as stock price shall not be deemed as actual loss to the above company, but the portion of expenses paid for acquiring treasury stocks shall be deemed as loss to the company due to violation of the duties of directors and auditors

[1] An executive officer of a financial institution bears the duty of due care of a good manager with respect to the financial institution to which he/she belongs. Thus, whether an executive officer of a financial institution has neglected his/her duties due to the above good manager's duty of care shall be determined comprehensively in light of various matters such as compliance with all the regulations, terms and conditions of the loan, size, repayment plan, existence and content of security, debtor's property and management status, growth potential, etc.

[2] Where an executive officer of a financial institution causes damage that is difficult to recover from the financial institution by neglecting his/her duties, even if the financial institution grants partial reduction or exemption to the debtor taking into account the debtor's repayment ability, which is in progress with the composition procedure, it shall not be deemed that the director who caused damage to the company due to the violation of duties at the time of the above loan has renounced his/her right to claim damages equivalent to the above reduced or exempted amount, or that his/her right to claim damages has expired, and it shall not be deemed that the financial institution's damage has been restored by considering

[3] In a case where a director acts in violation of Acts and subordinate statutes or the articles of incorporation or neglects his duties to compensate for damages to the company, the scope of the damages can be limited in light of the ideology of the fair compensation system, such as the content and nature of the pertinent business, the background leading up to the pertinent director's breach of duties and the manner of the pertinent director's violation of duties, objective circumstances or degree involved in the occurrence and expansion of damages to the company, contribution by ordinary director to the company, the pertinent director's benefits from the violation, existence of the pertinent director's benefits from the violation of duties, defects in the company organization, and

[4] Article 399 of the Commercial Act provides that a director shall be liable for damages to a company when he/she commits an act in violation of the law and regulations. When a director performs his/her duties as above, such act constitutes a default on the company, and as long as damage to the company was caused by such an act, barring special circumstances. Meanwhile, even where a director is liable for damages due to a director’s breach of the duty of care in performing his/her duties, if a reasonable executive officer of a financial institution performs his/her duties in good faith for the maximum profit of the company according to procedures appropriate under the circumstances at the time, and the decision-making process and contents are not considerably unreasonable, such officer’s act is within the scope of discretion permitted to conduct business judgment. However, in principle, the business judgment rule does not apply to an act in violation of

[5] Even if a company acquires shares in a third party’s name, if the fund for acquiring such shares is made by the company’s contribution and the profit or loss from the acquisition of such shares reverts to the company, the acquisition of such shares constitutes the acquisition of treasury shares prohibited by Articles 341, 625 subparag. 2, and 622 of the Commercial Act, since it is likely to endanger the company’s capital foundation by making the company’s account, unless it falls under exceptional causes under the Commercial Act or other Acts.

[6] Article 23 (1) of the former Merchant Banks Act (amended by Act No. 5750 of Feb. 5, 1999) provides that "no merchant bank shall grant a loan to anyone in order to purchase the relevant merchant bank's shares, whether directly or indirectly," which aims to prevent a director of a merchant bank from undermining the purpose of Article 341, Article 625 subparagraph 2, or Article 622 of the Commercial Act. In addition, if a director of a merchant bank violates Article 341, Article 625 subparagraph 2, or Article 622 of the Commercial Act and violates Article 23 (1) of the Regulations on Supervision of Merchant Banks (amended by Act No. 5750 of Apr. 1, 1998), it shall not be deemed that the business judgment rule is applied.

[7] The director's liability for damages under Article 399 of the Commercial Act and the liability for damages under Article 414 of the Commercial Act due to the director's violation of laws, articles of incorporation, or the director's violation of duties are limited to the damage which is proximate to such violation. Thus, even if the director or the auditor committed a violation of laws, articles of incorporation, or duties in the course of performing duties, if there is no proximate causal relation between the loss caused by such violation and the loss caused by such violation

[8] The case holding that a merchant bank's loan agreement for the purpose of acquiring treasury stocks in the name of a third party under its own account is null and void, and the portion of the loan paid as stock price shall not be deemed as actual loss to the above company, but the remainder of the loan paid as expenses for acquiring treasury stocks shall be deemed as loss caused by violation of the duties of directors and auditors involved

[1] Articles 382 (2) and 399 of the Commercial Act, Article 681 of the Civil Act / [2] Article 399 of the Commercial Act / [3] Article 399 of the Commercial Act / [4] Article 399 of the Commercial Act / [5] Articles 341, 622, and 625 subparagraph 2 of the Commercial Act / [6] Articles 341, 399, and 622 and subparagraph 2 of Article 625 of the Commercial Act, Article 21 of the former Merchant Banks Act (amended by Act No. 5750 of Feb. 5, 1999) / [7] Articles 39 and 414 of the Commercial Act / [8] Articles 341, 399, 414, 622, 622, and 625 subparagraph 2 of the Commercial Act, Article 5 of the former Merchant Banks Act (amended by Act No. 575 of May 25, 1995)

[1] [4] Supreme Court Decision 2001Da52407 decided Jun. 14, 2002 (Gong2002Ha, 1650) / [1] Supreme Court Decision 2000Da9086 decided Mar. 15, 2002 (Gong2002Sang, 864) / [3] Supreme Court Decision 2003Da69638 decided Oct. 28, 2005 (Gong2005Ha, 1847) / [3] Supreme Court Decision 2002Da60467, 60474 decided Dec. 10, 2004 (Gong2005Sang, 874 decided Nov. 9, 2006) / [3] Supreme Court Decision 2004Da416305 decided Oct. 26, 2005; 2005Da4205379 decided Apr. 16, 20065

The bankruptcy trustee of the comprehensive financial company against the bankrupt (Law Firm Square, Attorneys Kim Jong-soo et al., Counsel for the plaintiff-appellant)

Defendant 1 (Law Firm, Kim & Lee LLC, Attorneys Kang Han-soo et al., Counsel for the defendant-appellant)

Defendant 2 and one other (Law Firm Pacific et al., Counsel for the defendant-appellant)

Defendant 4 and one other (Law Firm Pacific et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2002Na44283 delivered on April 21, 2006

Of the part of the judgment of the court below against the plaintiffs, the part concerning the claim for damages related to loans to the Maritime Food Services Co., Ltd. is reversed, and that part of the case is remanded to the Seoul High Court. The plaintiffs' appeals against Defendants 2 and 3 and all appeals against Defendants 2 and 3 are dismissed. The costs of appeal against the dismissed appeal are borne by the appellant

The grounds of appeal are examined.

1. As to the excessive credit granting limit to large shareholders and affiliates

A. Whether the defendant 2 and 3 violated their duties

An officer of a financial institution bears the duty of due care of a good manager with respect to the financial institution under his/her control. Thus, whether an officer of a financial institution neglects his/her duties in breach of the above duty of due care as a good manager shall be determined comprehensively in light of various matters such as compliance with all the regulations, terms and conditions of the loan, contents, size, repayment plan, existence and contents of security, debtor's property and management status, possibility of growth (see Supreme Court Decision 2001Da52407, Jun. 14, 2002).

In light of the above legal principles and the facts acknowledged by the court below, we find the facts as stated in its reasoning after compiling the evidence adopted in the judgment of the court below. This paper provides that this kind of gold company under Article 15-2 (1) of the former Merchant Bank Act (amended by Act No. 5750, Feb. 5, 199; hereinafter "former Closing Bank Act") may not provide loans to its large shareholders and their affiliates exceeding 50/100 of its equity capital. Paragraph (2) of the same Article provides that "the scope of large shareholders and their affiliates under paragraph (1) shall be prescribed by Ordinance of the Prime Minister," and it is not so established by the Financial Supervisory Commission pursuant to Article 21 of the former Closing Bank Act (amended by Act No. 576, Apr. 1, 1998; hereinafter referred to as the "Rules for Supervision and Supervision of Private Funds") for the purpose of regulating the affairs under its jurisdiction over Class 3 directors and its affiliates, and therefore, it is not acceptable to determine the scope of the above regulations for supervision and supervision of the above company.

B. Whether the right to claim damages expires

Where an executive of a financial institution causes a loss that is difficult to recover from a financial institution by neglecting his/her duties, even if the financial institution grants a partial reduction of or exemption from his/her obligation to the debtor in consideration of the debtor's repayment ability, etc. during the composition procedure, it cannot be deemed that the said loan has waived the right to claim damages equivalent to the amount of reduction or exemption or the right to claim damages has expired, and it cannot be deemed that the financial institution's loss has been restored by the same agreement as the repayment under the original loan claims was made only with the foregoing agreement.

In full view of the evidence adopted in its judgment, the court below determined that it is just in holding that it is difficult to view that the above agreement was effective as a debt reduction and exemption, but it is not possible to have waived the above amount to Defendant 2 and 3 the damage claim equivalent to the above amount of reduction and exemption, and it is not acceptable to accept this part of the grounds of appeal by Defendant 2 and 3, as otherwise alleged in the grounds of appeal. The ground of appeal is dismissed. It is not acceptable to accept this part of the grounds of appeal.

C. Whether liability for damages is limited

In a case where a director commits an act in violation of Acts and subordinate statutes or the articles of incorporation or neglects his duties and thereby is liable to compensate the company for damages, the scope of damages can be limited in light of the ideology of the fair compensation system, taking into account all the circumstances such as the contents and nature of the pertinent business, the background leading up to the pertinent director's breach of duties and the manner of the pertinent director's breach of duties, the occurrence and expansion of the company's damages, the objective circumstance or degree involved in the ordinary director's occurrence and expansion of damages, the pertinent director's contribution to the company, the pertinent director's benefits accrued from the relevant violation, the existence of a company's organizational structure, and the establishment of a risk management system (see Supreme Court Decision 2003Da69

In light of the circumstances stated in its holding, the court below is just to limit the liability of Defendants 2 and 3 as stated in its holding, and there is no illegality in the misapprehension of legal principles as to the limitation of directors' liability for damages, violation of the rules of evidence, or deviation from discretionary power. The plaintiffs'

2. As to the acquisition of treasury stocks through bypassing loans to a piracy service company

Article 399 of the Commercial Act provides that a director shall be liable for damages to a company when he/she commits an act in violation of the laws and regulations. If a director commits an act in violation of the above-mentioned laws and regulations in performing his/her duties, such act itself constitutes nonperformance against the company, and thus, barring any special circumstance, he/she shall not be exempted from liability for damages to the company unless there is any special circumstance. Meanwhile, even where a director is liable for damages caused by a director’s breach of the duty of care in performing his/her duties, if a reasonable executive officer of a financial institution performs his/her duties in good faith for the maximum profit of the company in accordance with procedures appropriate in the current situation, and the decision-making process and contents are not considerably unreasonable, such officer’s act is within the permissible scope of business judgment, but in principle, the principle of business judgment does not apply to a director’s act in violation of the laws and regulations (see, e.g., Supreme Court Decisions 201Da52407, Jun. 14, 2002; 2003Da638, Oct.

Even if a company acquires shares in the name of a third party, if the funds for acquiring such shares are made by the company’s contribution and the profits or losses accrued from acquiring such shares accrue to the company, the acquisition of such shares constitutes the acquisition of treasury shares prohibited by Articles 341, 625 subparag. 2, and 622 of the Commercial Act (see Supreme Court Decision 2001Da44109, May 16, 2003). Meanwhile, Article 21 of the former Financial Supervisory Act provides that “The Financial Supervisory Commission may supervise the business of a merchant bank and issue an order necessary therefor,” and Article 23 subparag. 1 of the Enforcement Decree of the Financial Supervisory Act provides that “If a director violates Article 341, Article 625 subparag. 2, and Article 625 subparag. 2, subparag. 26, 205 of the Commercial Act, it shall not apply to the case of a violation of the purpose of Article 23 subparag. 26, 202 of the Commercial Act.”

According to the reasoning of the judgment of the court below, Defendant 5, who was the representative director of the Korea Food & Drug Corporation (hereinafter referred to as the "Dongnam Industry") and the Korea Food & Drug Corporation (hereinafter referred to as the "Korea Food & Drug Service"), extended money to the Korea Food & Drug Corporation (hereinafter referred to as the "Korea Food & Drug Corporation"), decided to accept new shares to be issued for the purpose of the Korea Food & Drug Corporation around March 25, 199. If the Korea Food & Drug Corporation (hereinafter referred to as the "Korea Food & Drug Corporation") purchased the above new shares as collateral for the redemption of the Maritime Food and Drug Fund (hereinafter referred to as the "Korea Food & Drug Corporation")'s 2's new shares acquisition of the above Maritime Food and Drug Services' 9.3's new shares acquisition of the above Maritime Food and Drug Services' 9's new shares acquisition of the above Maritime Food and Drug Services' 9's new shares acquisition of the Maritime Food & Drug Association's 9's new shares acquisition of the Maritime Food Services's 9000's new shares.

On the other hand, the director's liability for damages under Article 399 of the Commercial Act and the liability for damages under Article 414 of the Commercial Act due to the director's violation of the law, articles of incorporation, or the auditor's violation are limited to the damage in proximate causal relation with the violation. Thus, even if the director or the auditor committed a violation of the law, articles of incorporation or duties in the course of performing his/her duties, if the proximate causal relation is not acknowledged between the damage caused by such violation and the damage caused by such violation, the director or the auditor shall not be held liable for damages (see Supreme Court Decision 2005Da2820, Apr

The above agreement entered into between Daehan and Daehan service is entirely null and void including a loan agreement, and it is also null and void that the plaintiffs paid the price of new stocks with a loan to Daehan pursuant to the contract (see Supreme Court Decision 2001Da44109, May 16, 2003, etc.). Thus, it is difficult to deem that the portion of 2.5 billion won out of the loans to Daehan service, which was paid as the stock price of Daehan, was actually incurred, unless there are special circumstances, even though it is difficult to deem that the actual loss was caused to Daehan, as seen above, in violation of the prohibition of acquisition of treasury stocks, the expenses of 30 million won, which were disbursed for the acquisition of invalid treasury stocks, can be deemed as damage to Daehan due to the violation of the above duties.

Nevertheless, the court below determined otherwise, although the loan of the Korea Franchising service was in violation of Article 23 (1) of the Franchising Control Regulations as a loan to enable the Korea Franchising to purchase its own shares, the loan of the Korea Franchising service seems to be a business judgment within the limit of discretion permitted to be made in an imminent situation at the time for the existence of the Franchising loan for Franchising service, and it is difficult to view that the loan of the Korea Franchising service was paid as the stock price for the subsequent Franchising service to have caused any damage to the Korea Franchising. In so doing, the court below erred by misapprehending the business judgment rule, by misapprehending the legal principles on the occurrence of damage or the calculation of damages, and by misapprehending the legal principles

3. Conclusion

Therefore, among the part against the plaintiffs in the judgment of the court below, the part concerning the claim for damages related to the loan of piracy service is reversed, and that part of the case is remanded to the court below for a new trial and determination. The plaintiffs' appeal against the defendant 2 and 3 and the appeal against the defendant 2 and 3 are all dismissed. The costs of appeal against the dismissed part are assessed against each appellant. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Young-ran (Presiding Justice)