[1] Where a member of the audit committee of a stock company neglects his/her duties by intention or negligence in breach of his/her duty of due care as a good manager, whether he/she is liable to compensate for damages suffered by the company

[2] Standard for determining whether a financial institution’s audit committee member neglected its duties in breach of good manager’s duty

[3] In a case where Eul, a trustee in bankruptcy of Gap savings bank, sought compensation for damages suffered by Gap bank due to illegal or unjust loans that occurred at the time of his/her employment as a full-time audit committee at Gap bank, the case holding that Byung et al. erred in the misapprehension of legal principles, on the ground that Byung et al. could have easily known that loans were conducted without sufficient credit preservation measures, if he/she had examined the documents for loan application as a good manager's duty of care; thus, it is sufficient to deem that Byung et al. failed to perform its duty of care to investigate whether loans were illegal or unjust or to report the above facts to the board of directors through the audit committee and to request correction of illegal or unjust acts, etc., although Byung et al. knew or could have known of the fact that loans were illegal or unjust

[1] Articles 382(2), 391-2, 402, 412(1), 414(1), and 415-2(7) of the Commercial Act; Article 681 of the Civil Act / [2] Articles 382(2), 412(1), 414(1), and 415-2(7) of the Commercial Act; Article 681 of the Civil Act / [3] Articles 382(2), 412(1), 414(1), and 415-2(7) of the Commercial Act; Article 681 of the Civil Act

[1] [2] Supreme Court Decision 2017Da251694 Decided November 23, 2017 (Gong2018Sang, 13) / [1] Supreme Court Decision 2005Da58830 Decided November 16, 2007 / [2] Supreme Court Decision 2006Da33609 Decided July 26, 2007 (Gong2007Ha, 1346)

Seoul High Court Decision 201Na14488 decided May 2, 2012

Defendant 1 (Law Firm Min & Lee, et al., Counsel for defendant-appellant)

Defendant 2 and one other (Law Firm Handeok, Attorneys Han Han-han et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2015Na2049123 decided July 1, 2016

Of the part against the Plaintiff, the part of the lower judgment’s claim against Defendants 2 and 3 is reversed, and that part of the case is remanded to the Seoul High Court. Defendant 1’s appeal is dismissed. The costs of appeal between the Plaintiff and Defendant 1 are assessed against Defendant 1.

The grounds of appeal are examined.

1. Judgment on the Plaintiff’s grounds of appeal

A. The audit committee of a stock company shall audit the performance of duties by a director, and when a director is deemed to have committed, or is likely to commit, an act in violation of statutes or the articles of incorporation, it shall be reported to the board of directors, and when a director is likely to cause irreparable damage to the company, the director shall be obligated to request the maintenance of such act (Articles 415-2(7), 412(1), 391-2(2), and 402 of the Commercial Act). Members of the audit committee shall perform the above duties under the Commercial Act, or other duties under statutes or articles of incorporation as prescribed under the Commercial Act, with the care of a good manager, and shall be liable for damages incurred to the company (see Articles 415-2(7), 414(1), and 382(2) of the Commercial Act, and Articles 58Da5830, Nov. 16, 2007, etc.).

Meanwhile, since an executive officer of a financial institution has fulfilled his/her duty as a good manager with respect to the financial institution to which he/she belongs, he/she faithfully performs his/her duty as an executive officer. Whether a financial institution’s audit committee member neglected his/her duty in breach of the said good manager’s duty should be comprehensively determined in light of various matters, such as compliance with all the regulations, terms and conditions of the loan, details and scale of the loan, repayment plan, security and contents, debtor’s property and management status, possibility of growth (see, e.g., Supreme Court Decisions 2006Da33609, Jul. 26, 2007; 2017Da251694, Nov. 23, 2017).

B. Review of the reasoning of the lower judgment and the record reveals the following facts and circumstances.

1) Defendant 2 served as a full-time auditor registered in the daily savings bank from August 27, 1998 to August 23, 2001; as a director and a full-time auditor registered in the daily savings bank from August 24, 2001 to August 29, 2007; as an outside director and an audit committee member registered in the daily savings bank from September 3, 201 to September 17, 201; Defendant 3 served as a director and a full-time audit committee member registered in the daily savings bank from August 30, 2007 to September 17, 201.

2) According to the regulations on the duties of the Audit Committee of the Japanese Savings Bank, for loans of at least KRW 100 million, standing audit committee members shall review the contents of loans in advance or ex post facto, and shall audit them by means of a daily audit method to attach their opinions when necessary

3) According to the loan regulations of the Japanese Savings Bank, when dealing with a loan, it is necessary to use the loan, such as acquisition of collateral, guarantee agency's payment guarantee, etc., or to establish one or more joint and several sureties (excluding those who are deemed not to hinder recovery of claims by comprehensively examining the debtor's business feasibility, profitability, assets, credit standing, etc.), and to investigate the debtor's and guarantor's property, credit and business status in the prescribed form. In principle, the above investigation shall be conducted directly on the spot. The copy of the registration certificate, the certified copy of the company's register, other than the certified copy of the registration certificate, shall also be submitted. In addition, when applying for a loan, it shall be examined whether it is possible to secure repayment resources, the presentation of collateral, the outline and prospects of the project, the past transaction situation, and the current continuation of business of the applicant and the documents prepared within one year, and the application for a loan shall be accompanied by the credit investigation report of the debtor and the guarantor's transaction records, business plan and performance records, financial statements prepared within one year,

4) The Credit Investigation Regulations of the Japanese Savings Bank provide that a loan trader, loan applicant, guarantor, or any other person deemed necessary shall be subject to the credit investigation. In principle, a new investigation shall be conducted on a regular basis once a year after loan is provided. In the case of an individual, a new investigation shall be conducted on a regular basis after loan handling, and a re-audit shall be conducted on a regular basis. In the case of an individual, an enterprise shall include property and revenue status, financial institution transaction status, financial transaction status, financial and profit and loss status, etc.; the trade books and financial statements of a person subject to investigation, data of other financial institutions and foreign credit investigative institutions; the business sector of the person subject to investigation;

5) On October 8, 2004 and on March 15, 2009 of the same month, the Japanese Savings Bank extended KRW 2 billion and KRW 4.5 billion to the Gold Mine Construction Co., Ltd., and KRW 2 billion to the Dobconton Co., Ltd. on March 23, 2006 and KRW 2 billion on June 29, 2006; KRW 5 billion on Nov. 29, 2006; KRW 5.2 billion on December 26, 2008 and March 30, 2009; KRW 5.2 billion on March 14, 2009; KRW 3 billion on May 26, 2006; and KRW 3 billion on June 29, 2009, respectively; and KRW 3 billion on March 30, 2000, respectively.

6) Defendant 2 and Defendant 3 examined the application for each of the instant loans, the credit transaction agreement, the pledge agreement, and the letter of guarantee as a member of the audit committee in relation to each of the instant loans, and signed on the said documents as a member of the audit committee. The said documents are either a credit loan that has no physical security regarding each of the instant loans, or a loan that has already been entered as a security by creating a senior security right only if there is no value of security

7) Although the Japanese Savings Bank, the equity capital of which was approximately KRW 60 billion, was a considerable amount of loan, it did not conduct a credit investigation on the principal debtor and joint guarantor having a decisive influence on whether to recover the claim, or did not confirm the property, income, etc.

8) In addition, each of the instant loans was submitted only to the copy of the principal debtor’s business registration certificate and the extent of the certified copy of the corporate register, and did not submit financial statements and the stockholders’ list, etc., and did not carry out any necessary documents, investigation and examination in accordance with the loan regulations and credit investigation regulations as seen earlier. In particular, even based on the loan application document, the loan application document was merely a capital of KRW 50 million, or a new-born company established immediately before the loan was merely a capital of KRW 50 million, and the remaining principal debtor companies are also suspected or uncertain. Nevertheless, there is no minimum statement or data to verify the business performance or ability to repay in each of the loan application documents.

9) Defendant 2 and Defendant 3 approved each of the instant loans without presenting any opinion, and did not take any additional measures.

C. Examining the legal principles as seen earlier in light of the above facts, Defendant 2 and Defendant 3 could easily have known that each of the loans of this case was made without due care as a good manager if they were to review each of the application documents for loans of this case signed by them as a full-time audit committee. Thus, there is sufficient room to deem that Defendant 2 and Defendant 3 failed to perform the duty of examination and inspection of whether the loans were unlawful or unreasonable through the request for submission of relevant documents, etc., or to report the above facts to the board of directors through the audit committee, and to request correction of unlawful or unjust acts. Furthermore, according to the regulations on the duties of the Japanese Savings Bank, there is sufficient reason to view that Defendant 3 did not perform the duty of examination and inspection of the Japanese Savings Bank, Inc., Ltd., Ltd., in addition to each of the loans of this case, since December 209, 209, since each of the loans of this case was subject to ordinary audit and inspection, the lower court neglected the duty of examination and supervision of the company’s directors and full-time savings.

D. Nevertheless, the lower court rejected all claims for damages against Defendants 2 and 3 solely on the ground that there is no evidence to acknowledge that each of the loans stated in the judgment by Defendants 2 and 3 was approved in advance and that each of the above loans was illegal or unjust. In so doing, the lower court erred by misapprehending the legal doctrine on liability for damages caused by breach of fiduciary duty by the audit committee members of a financial institution, thereby failing to exhaust all necessary deliberations, thereby adversely affecting the conclusion of the judgment. The grounds for appeal assigning this error are with merit.

2. Determination on Defendant 1’s grounds of appeal

For the reasons indicated in its holding, the lower court acknowledged the Defendant’s liability for damages, on the ground that Defendant 1 neglected to perform his/her duties by approving the loan without being offered security to the Nonparty, for whom the existence of the repayment of the loan is unclear, even though the borrower was obligated to obtain sufficient security and implement the loan, by examining whether Defendant 1 was the president of the Japanese Savings Bank and the director registered with the Chairperson of the Japanese Savings Bank, who is the

In light of the relevant legal principles and records, the lower court did not err by misapprehending the legal principles as to loans made on November 20, 2007 and loans made on November 20, 2008, and failing to exhaust all necessary deliberations, which affected the conclusion of the judgment.

3. Conclusion

Therefore, the part of the judgment below against the plaintiff as to the claim against the defendant 2 and 3 is reversed, and that part of the case is remanded to the court below for further proceedings consistent with this Opinion. The appeal by the defendant 1 is dismissed, and the costs of appeal incurred between the plaintiff and the defendant 1 are assessed against the losing party. It is so decided as per Disposition by the assent of all participating

Justices Noh Jeong-hee (Presiding Justice)