[1] In a case where financial statements did not have profits available for dividends and payment of dividend and corporate tax to shareholders was made by dividing them into financial statements, whether the company’s losses have occurred (affirmative), and whether the causal link between the above window dressing accounting act and the company’s losses is severed solely on the ground that such financial statements must go through the resolution by the board of directors for approval (negative)

[2] Requirements for offsetting profit and loss in calculating the amount of damages

[3] The case holding that the company cannot have obtained new benefits in proximate causal relation due to the above window dressing accounting in case where a loss carried forward occurs as a result of appropriating the processed profit generated by the window dressing accounting as a special loss in the next business year, and the profit from the debt exemption accrued by the delay thereafter was appropriated for compensating the loss carried forward

[4] In a case where an executive officer or employee of a company causes damage to the company by engaging in an unlawful window dressing accounting, etc. in accordance with a representative director’s instruction, whether the company’s claim for damages against such executive officer or employee is against the good faith principle (negative)

[5] In a case where a director or an auditor is liable for damages to the company by committing an act in violation of statutes, etc., whether the amount of damages can be limited by taking into account all the circumstances such as the background leading up to the breach of duties (affirmative), and whether the fact-finding or the decision of the ratio is a matter of fact-finding authority

[1] In accordance with the corporate accounting standards, even though net losses have occurred during the pertinent business year and there are no profits available for dividends, in cases where financial statements are divided as if there are profits available for dividends and payment of corporate tax are made based on the financial statements as if there are profits available for dividends, it is reasonable to view that the company, barring special circumstances, has suffered losses due to the payment of dividends to shareholders who will not be disbursed due to the window dressing accounting and corporate tax payment. Barring special circumstances, it cannot be said that the causation between the window dressing accounting act of financial statements and the above losses suffered by the company, solely on the ground that the company must undergo such procedures as the resolution of the board of directors and the resolution of the general meeting of shareholders, etc

[2] In calculating the amount of damages, in order to allow the offsetting of profits and losses, the victim has obtained new benefits due to the act causing the damages liability, and there should be a proximate causal link between the act causing the profit and the damage liability.

[3] The case holding that the company cannot be deemed to have obtained new benefits in proximate causal relation due to the above window dressing accounting in case where a loss carried forward occurs as a result of appropriating the processed profit generated by the window dressing accounting as a special loss in the next business year, and the profit from the debt exemption accrued by the delay thereafter was appropriated for compensating the loss carried forward

[4] Not only has a separate legal personality but also where a company’s major shareholder and representative director’s instructions are unlawful, the company’s officers and employees cannot be deemed to have a legal obligation to comply with the company’s instructions. Thus, in a case where an officer and employees of the company engaged in an unlawful window dressing accounting, etc. in accordance with the company’s instructions, and thereby causing loss to the company, the company’s compensation for damages to the company’s officers and employees cannot be deemed to go against the principle of good faith. This does not change on the ground that the company’s credit rating higher due to the company’s unlawful window dressing accounting, thereby obtaining a tangible and intangible economic profit in the course

[5] In a case where a director or an auditor is liable for damages to the company by committing an act in violation of Acts and subordinate statutes or the articles of incorporation or neglecting his duties, the scope of damages shall be limited in light of the ideology of the damage compensation system fair in allocation of damages, taking into account all the circumstances such as the contents and nature of the pertinent business, the background leading up to the pertinent director or auditor's breach of duties and the manner of the pertinent violation of duties, the degree of objective circumstances or degree of involvement in the occurrence and expansion of damages to the company, the pertinent director or auditor's contribution to the company, the pertinent director or auditor's profit from the pertinent violation, the pertinent director or auditor's failure in the organization system, and the establishment of risk management system, and further determination of facts and ratio for mitigation of liability belongs to the exclusive authority of

[1] Articles 399, 447, and 449 of the Commercial Act / [2] Article 393 of the Civil Act / [3] Article 399 of the Commercial Act, Article 393 of the Civil Act / [4] Article 399 of the Commercial Act, Article 2 of the Civil Act / [5] Article 399 of the Commercial Act, Article 396 of the Civil Act

[2] Supreme Court en banc Decision 88Meu16867 Decided December 26, 1989 (Gong1990, 356) Supreme Court Decision 2003Da69638 Decided October 28, 2005 (Gong2005Ha, 1847) / [5] Supreme Court Decision 2002Da60467, 60474 Decided December 10, 2004 (Gong2005Sang, 87) Supreme Court Decision 2005Da34766, 34773 Decided December 11, 2007 (Gong2007Ha, 1750)

Administrator Kim-type (Law Firm Mad Co., Ltd., Counsel for the defendant-appellant)

Defendant 1 and one other (Law Firm Bew, Attorneys Lee Ho-woo et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2004Na90679 Delivered on February 17, 2006

All appeals are dismissed. The costs of appeal are assessed against the Defendants.

The grounds of appeal are examined.

1. As to the grounds of appeal Nos. 1 and 2

In light of the corporate accounting standards, in cases where, even if net income is generated during the pertinent business year and there are no distributable profits, financial statements are divided as if there are profits available for dividends, and the payment of dividends to shareholders is made based on such financial statements, and corporate tax is paid, it is reasonable to deem that the company, barring special circumstances, suffers losses equivalent to the amount of dividends to shareholders who will not be paid due to such window dressing accounts and corporate tax payment. Barring special circumstances, the mere fact that such procedures as the resolution of the board of directors and the resolution of the general meeting of shareholders in order to obtain approval for the financial statements under the Commercial Act is that the causal relationship between the window dressing accounting act of the financial statements and the above losses

In light of the above legal principles and records, the court below is just in holding that the financial statements of the 35th business year (from July 1, 1994 to June 30, 1995) and the 36th business year (from July 1, 1995 to June 30, 1996) of the 36th business year are divided, thereby causing losses or losses to the shareholders due to the payment of dividends or corporate tax, and there is no error in the misapprehension of legal principles as to the concept of damages or causation, as otherwise alleged in the ground of appeal.

2. As to the third ground for appeal

In order to allow offsetting profits and losses in calculating the amount of damages, there should be a proximate causal relationship between the victim's new benefit and the act which is the cause of the liability for damages (see, e.g., Supreme Court en banc Decision 88Meu1687, Dec. 26, 1989; Supreme Court Decision 2003Da69638, Oct. 28, 2005).

According to the reasoning of the judgment of the court below, the processed profits generated by the window dressing accounting in the 35th and 36th business years of neglect shall be included in special losses in the 39th and 40th business years thereafter, and the profits from the exemption of obligation arising in the 42th business years of neglect and the 42th business years shall be appropriated for compensating for losses brought forward in accordance with the appropriation of the above special losses. However, even if losses brought forward by including special losses in order to correct the losses after the window dressing accounting was completed, the reduction of corporate tax cannot be effective in the state of neglect and management. However, even though the profits from the reduction of corporate tax were obtained by the large-scale exemption of obligation in the 42th business years of neglect and the profits from the reduction of corporate tax by making it possible to utilize the carried-over losses as a result of the large amount of exemption of obligation, it cannot be said that there was a new profits that could have a proximate causal relation with the window dressing accounting of this case.

Although the court below's explanation of its reasoning is somewhat inappropriate, it is just to determine that the offsetting of profits and losses cannot be permitted, and it is not erroneous in the misapprehension of legal principles as to offsetting of profits and losses, which affected the conclusion of the judgment.

3. As to the fourth ground for appeal

Not only has a separate legal personality between the company and the majority shareholder and the representative director of the company, but also in cases where the company’s major shareholder and the representative director’s instructions are unlawful, the company’s officers and employees cannot be deemed to have a legal obligation to comply with such instructions. Thus, in cases where the company’s officers and employees engaged in illegal window dressing accounting, etc. in accordance with the company’s instructions and representative director’s instructions and thereby inflict losses on the company, the company’s damages claim against such executives and employees cannot be deemed to go against the principle of good faith. This does not change on the ground that the company’s credit rating higher due to such unlawful window dressing accounting would have

In light of the above legal principles and the records, the circumstance cited in the grounds of appeal by the Defendants alone cannot be deemed as violating the good faith principle to claim damages on the grounds of the Defendants’ breach of their duty as to window dressing accounting, and there is no other circumstance to reject the Plaintiff’s claim for damages. Therefore, there is no error in the misapprehension of legal principles as to the good faith principle as otherwise alleged in the grounds of appeal.

4. As to the fifth ground for appeal

In a case where a director or an auditor is liable for compensating the company for damages by committing an act in violation of Acts and subordinate statutes or the articles of incorporation or neglecting his duties, the scope of compensation for damages may be limited in light of the principle of fair compensation for damages by taking into account all the circumstances such as the contents and nature of the pertinent business, the background leading up to the pertinent director or auditor’s breach of duties and the manner of the pertinent violation of duties, the degree of objective circumstances involved in the occurrence and expansion of damages to the company, the degree of contribution to the relevant director or auditor, the pertinent director or auditor’s profit from the relevant violation, the existence of the pertinent director or auditor’s profit from the violation, the existence of the company’s organization failure in the risk management system, and the establishment of the risk management system, etc. Furthermore, the determination of facts and the ratio of liability for mitigation is within the exclusive authority of the fact-finding court (see, e.g., Supreme Court Decisions 2002Da60474, Dec. 10, 2004; 2005Da347673).

In light of the above legal principles and records, the lower court’s fact-finding or the lower court’s determination on the Defendants’ liability mitigation ratio cannot be deemed to be considerably unreasonable in light of the principle of equity. Thus, this part of the grounds of appeal cannot be accepted.

5. Therefore, all appeals are dismissed. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Park Si-hwan (Presiding Justice)