[1] Whether liability for damages by an auditor under Article 170(1) of the former Financial Investment Services and Capital Markets Act and Article 17(2) of the former Act on External Audit of Stock Companies is recognized in cases where the auditor’s liability for damages is not recorded by negligence or made a false statement (affirmative)

[2] Requirements for investors, etc. to claim damages due to false entries, etc. in an audit report pursuant to Article 170(1) of the former Financial Investment Services and Capital Markets Act and Article 17(2) of the former Act on External Audit of Stock Companies

[3] In the case of liability for damages caused by a false entry of an audit report based on Article 170(1) of the former Financial Investment Services and Capital Markets Act and Article 17(2) of the former Act on External Audit of Stock Companies, whether the auditor may be exempted from all or part of liability by proving that there is no causation between all or part of the damage and the false entry (affirmative), and the method and degree of proving the absence of causation

[4] In a case where a normal share price was formed due to the removal of all the parts supported by false information after a false statement in an audit report was revealed, whether there exists a causal relationship between the price fluctuation after the normal share price formation date and the false statement (negative in principle)

[5] In the case of a claim for damages governed by Article 170 of the former Financial Investment Services and Capital Markets Act, whether offsetting negligence or limiting liability based on the equitable principle (affirmative)

[1] Article 170(1) of the former Financial Investment Services and Capital Markets Act (Amended by Act No. 12383, Jan. 28, 2014); Article 17(2) of the former Act on External Audit of Stock Companies (Amended by Act No. 12148, Dec. 30, 2013) / [2] Article 170(1) of the former Financial Investment Services and Capital Markets Act (Amended by Act No. 12383, Jan. 28, 2014); Article 17(2) of the former Act on External Audit of Stock Companies (Amended by Act No. 12148, Dec. 30, 2013); Article 17(2) of the former Act on External Audit [3] Article 170(1) of the former Financial Investment Services and Capital Markets Act (Amended by Act No. 12383, Dec. 13, 2014; Act No. 12513, Apr. 13, 2017>

[2] Supreme Court Decision 96Da41991 Decided September 12, 1997 (Gong1997Ha, 3078), Supreme Court Decision 2006Da16758, 16765 Decided October 25, 2007 (Gong2007Ha, 1806) / [3] Supreme Court Decision 2014Da207283 Decided January 29, 2015, Supreme Court Decision 2015Da218099 Decided October 27, 2016 / [4] Supreme Court Decision 2006Da16758, 1675 decided October 25, 207 (Gong2007Ha, 186) / [209Da2082975 decided October 29, 2015] Supreme Court Decision 2005Da208579 decided May 29, 2012

Han Bank Co., Ltd., a lawsuit taking over the lawsuit of Han Bank Co., Ltd. (LLC LLC, Attorneys Kim Il-sung et al., Counsel for the plaintiff-appellant

Samil Accounting Corporation (Law Firm, Kim & Lee LLC, Attorneys Hong-tae et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2014Na60257 decided August 21, 2015

The appeal is dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined.

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

A. As to the Plaintiff’s claim for damages against the Defendant under Article 170(1) of the former Financial Investment Services and Capital Markets Act (amended by Act No. 12383, Jan. 28, 2014; hereinafter “former Financial Investment Services and Capital Markets Act”) and Article 17(2) of the former External Audit of Stock Companies Act (amended by Act No. 12148, Dec. 30, 2013; hereinafter “former External Audit Act”), the lower court determined that the Defendant neglected the auditor’s duty as an adequate auditor’s opinion on the audit report, on the following grounds: (a) comprehensively taking into account the facts as indicated in its reasoning, the lower court neglected to collect sufficient and adequate audit evidence at the time of conducting external audits on the financial statements 9 and 10th, and without discovering the process of checking and verifying them; and (b) neglected to indicate the fact of subdivision of the audit report at the time of the lower court’s decision.

B. Examining the reasoning of the lower judgment in light of the relevant legal doctrine and the evidence duly admitted, the lower court did not err in its judgment by misapprehending the legal doctrine regarding the standard of determining whether an auditor neglected his/her duty of audit, or by exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules

2. Regarding ground of appeal No. 3

A. The liability of an auditor for damages under Article 170(1) of the former Capital Markets Act and Article 17(2) of the former External Audit Act is recognized not only where an auditor intentionally fails to enter important matters in an audit report or makes a false statement in an audit report, but also where an auditor fails to enter important matters by negligence or makes a false statement.

B. As stated in its reasoning, the lower court recognized the Defendant’s liability for damages under Article 170(1) of the former Capital Markets Act and Article 17(2) of the former External Audit Act with respect to the Defendant’s false entry of the audit report on the financial statements Nos. 9 and 10 of the Handok Tech on his negligence.

Examining the reasoning of the lower judgment in light of the aforementioned legal doctrine and evidence duly admitted, the lower court did not err by misapprehending the legal doctrine on the scope of application of Article 170(1) of the former Capital Markets Act and Article 17(2) of the former External Audit Act.

3. Regarding ground of appeal No. 4

A. Under Article 170(1) of the former Financial Investment Services and Capital Markets Act and Article 17(2) of the former External Audit Act, an investor or a third party shall have used the audit report in trust in order to claim compensation for damages caused by false entries, etc. in the audit report against the auditor. However, in stock transactions, the financial status of the subject company is one of the most important factors for forming the stock price. An audit report prepared through the audit by an external auditor on the financial statements of the subject company after the audit by the external auditor is provided and published as the most objective material for revealing the financial status of the subject company and has a critical effect on the formation of the stock price. Thus, an investor who invests in stocks must be deemed to have traded the subject company’s stocks in view of the belief that the financial statements of the business report showing the most well-known financial status of the subject company and the audit report on them were prepared and published properly, and that the stock price was formed based on them (see, e.g., Supreme Court Decisions 96Da4191, Sept. 12, 1997>

B. As stated in its reasoning, the lower court determined that there was a transactional causal relationship between the false statement in the audit report prepared by the Defendant and the Plaintiff’s purchase of the Plaintiff’s shares, and that the circumstance that the Defendant was friendly or the evidence submitted by the Defendant alone alone was insufficient to undermine the aforementioned presumption.

Examining the reasoning of the lower judgment in light of the aforementioned legal doctrine and evidence duly admitted, the lower court did not err in its judgment by misapprehending the legal doctrine regarding causation in the liability for damages pursuant to Article 170(1) of the former Capital Markets Act and Article 17(2) of the former External Audit Act, or by exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules.

4. Regarding ground of appeal No. 5

A. In the case of liability for damages arising from false statements in an audit report based on Article 170(1) of the former Capital Markets Act and Article 17(2) of the former External Audit Act, the amount of damages shall be presumed to be the amount calculated pursuant to Article 170(2) of the former Capital Markets Act. An auditor may be exempted from all or part of the liability by proving that there is no causation between all or part of the damages and the false statement in the audit report pursuant to Article 170(3) of the former Capital Markets Act. The absence of causation can be proven by means of proving that the absence of causation directly or indirectly affected the false statement in the audit report by any other factor than the false statement in the audit report in question (see, e.g., Supreme Court Decisions 2014Da207283, Jan. 29, 2015; 2015Da208979, Oct. 27, 2016).

In this case, the method of investigating the expected return when it is assumed that a specific case had not occurred based on the data before the occurrence of the specific case may be used by estimating the expected return and analyzing whether the specific case has a statistical meaning as to the share price by using the presumption of excess return, which is the difference between the expected return return and the actual return rate observed in the market. However, in light of the legislative intent of Article 170(2) of the former Capital Markets Act, which provides for estimating the amount of damages in terms of investor protection, for instance, in light of the legislative intent of Article 170(2) of the former Financial Investment Services and Capital Markets Act, which provides for estimating the amount of damages, it cannot be deemed that the presumption of the amount of damages is broken solely on the basis that it is unclear whether the price of the shares purchased after the announcement of the audit report containing false information was reduced due to the false entry of the audit report in the stock price formation or audit report after the announcement of the audit report (see, e.g., Supreme Court Decisions 2014Da207283, Jan. 29, 2015>

Meanwhile, in general, in a case where a normal share price is formed as a result of the occurrence of a false statement in an audit report after the occurrence of such false information, the difference between the normal share price and the actual disposal price (or the market price on the date of closing of argument) out of the amount of damages under Article 170(2) of the former Capital Markets Act shall be deemed to have been proven as to the difference between the normal share price and the actual disposal price (or the market price on the date of closing of argument) out of the amount of damages under Article 170(3) of the former Capital Markets Act, and the amount of damages in this case shall be the amount calculated by deducting the share price on the date of formation of the normal share price from the purchase price (see, e.g., Supreme Court Decisions 2006Da16758, Oct. 25, 2007; 2005Da16765, Oct. 29, 2016).

B. The lower court rejected the Defendant’s assertion that there was no causation between the Defendant’s damage and loss that the amount of the share price decline due to the so-called “incidation” was not related to the Defendant’s false statement in the audit report, on the grounds that the Defendant recognized liability pursuant to Article 170(1) of the former Capital Markets Act and Article 17(2) of the former External Audit Act and presumed the Plaintiffs’ damages pursuant to Article 170(2) of the former Capital Markets Act, and on the grounds stated in its reasoning, the portion of share price increase due to the reporting and disclosure of the plan for share acquisition by Handok and Samsung Heavy Industries Co., Ltd. and the stock price decline due to the so-called “incidation” was not related to the Defendant’s false statement in the audit report. In addition, the lower court rejected the Defendant’s assertion that the normal share price of the so-called “incidex shares,” whose effect was removed due to the false statement in the audit report, was KRW 8,670, Jul. 30, 20112.

Examining the reasoning of the lower judgment in light of the aforementioned legal doctrine and evidence duly admitted, the lower court did not err in its judgment by misapprehending the legal doctrine regarding the presumption of absence of causation under Article 170(3) of the former Capital Markets Act, or by exceeding the bounds of the principle of free evaluation of evidence in violation of logical

5. Regarding ground of appeal No. 6

A. In cases of a lawsuit seeking compensation for damages governed by Article 170 of the former Capital Markets Act, the basic ideology of the Compensation Act, which provides fair apportionment of damages, may be applied. Thus, comparative negligence may be set off or liability may be limited pursuant to the equitable principle on the ground that the victim was negligent in contributing to the occurrence and expansion of damages. In particular, given that there are extremely diverse and multiple factors at the same time, it is extremely difficult to assess when and to what extent certain factors have exercised influence, there may be cases where it is extremely difficult to prove the daily amount of damages arising from such other circumstances as the overall change in the company or the stock market for the period from the time of purchase to the time of occurrence of losses, other than the false entry in the audit report, even though it is extremely difficult to prove the occurrence of damages due to such other circumstances. In such a case, it is difficult to determine the amount of damages in light of the principle of equitable apportionment of damages (see, e.g., Supreme Court Decisions 2014Da208381, Jan. 29, 2015).

B. The lower court, on the grounds indicated in its reasoning, limited the Defendant’s liability for damages according to its holding.

Examining the reasoning of the lower judgment in light of the aforementioned legal doctrine and the evidence duly admitted, the lower court did not err by misapprehending the legal doctrine on offsetting negligence or limitation of liability.

6. Conclusion

Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices.

Justices Park Poe-dae (Presiding Justice)