[edit] Supreme Court Decision 2000Da9086 delivered on March 15, 2002 [Damages]
【Main Issues】
[1] Legal nature of a company's intervention in a shareholder's derivative action under Article 404, Paragraph 1 of the Commercial Code (=joint intervention in litigation)
[2] Whether Article 394, Paragraph 1 of the Commercial Code, which provides for the auditor's capacity to represent the company, applies in case where, although the relationship of rights which is the subject of litigation occurred during the term of a director, such person has already left the company and is no longer a director when the company brings a lawsuit against him (negative)
[3] A case which ruled that application of Article 394, Paragraph 1 of the Commercial Code is excluded so that the person who represents the company is not the auditor but the representative director, if the company participates in a shareholders' derivative action against former directors.
[4] In case where the company files application for joint intervention in a shareholders' derivative suit before the court renders a decision of dismissal based on the plaintiffs' failure to maintain the share disposition requirements, whether such intervention by the company is legal (affirmative)
[5] In case where a joint intervention takes place in the appellate proceeding, after which the existing suit shall be dismissed due to a defect in requirements for action, whether such joint intervention is not permitted as a deprivation of rights in the current instance (negative)
[6] Substance of the fiduciary duty of a director of a bank, which is a financial institution, and criteria for determination as to whether a director of a bank has neglected his obligations in breach of his fiduciary duty
[7] A case which recognized liability of a representative director or director of a bank toward the company, on the grounds that he neglected his obligations in breach of his fiduciary duty in deciding upon a loan
【Summary of Decision】
[1]In case of a shareholders' derivative action, if the plaintiff shareholders (Plaintiff Shareholders) fail to conduct the suit properly as plaintiffs or if there is a possibility of infringement of the company's interest because the rights of the company may not be properly protected due to their collusion with the company's directors who are opponents in the suit, it is necessary for the company, which is rights holder who will be affected by the decision, to participate in the lawsuit as a party properly having the right to conduct the suit, in order to prevent such infringement or to protect its rights. Considering that the company's intervention in the derivative action would promote cost efficiency of the proceedings, that there is no possibility that it would cause any contradiction or conflict in the decision, and the legislative intent in providing specifically for intervention in Article 404, Paragraph 1 of the Commercial Code to protect the company's rights and interests through the peculiar nature of a shareholders' derivative action, it would be reasonable to interpret the company's intervention provided for in Article 404, Paragraph 1 of the Commercial Code to mean joint intervention in litigation. Further, such interpretation is not contradictory to Article 234 of the Civil Procedure Act, which prohibits duplicate lawsuits.
[2] Article 394, Paragraph 1 of the Commercial Code provides for the auditor, who is in a relatively objective position, to represent the company in a lawsuit between the company and its directors, in order to prevent a conflict of interest between the parties which can easily arise in such suits, and to guarantee fairness in conducting the litigation. Absent special circumstances, Article 394, Paragraph 1 of the Commercial Code does not apply in case where, although the relationship of rights which is the subject of litigation occurred during the term of a director, such person has already left the company and is no longer a director when the company brings a lawsuit against him.
[3] A case which ruled that application of Article 394, Paragraph 1 of the Commercial Code is excluded so that the person who represents the company is not the auditor but the representative director, if the company participates in a shareholders' derivative action against former directors.
[4] Even if the shareholders' derivative action is destined to be dismissed, because the plaintiff Shareholders failed to maintain their share disposition requirements for a plaintiff in such action until close of hearings in the trial instance of the suit, they would have had standing to sue at the time of intervention by the company as joint intervenor for the plaintiffs, and therefore the intervention by the company, as joint intervenor for the plaintiffs, was legal. In addition, the plaintiff Shareholders' derivative action is in progress unless and until it is conclusively dismissed. Accordingly, if the company applied for joint intervention as a plaintiff before the decision for dismissal is rendered, it cannot be considered that the suit to be intervened ceased to be pending at the time of such intervention or that the intervention becomes illegal for such reason.
[5] Considering that a joint intervention in litigation may take place in an appellate proceeding, and in view of the peculiarities of a joint intervention, i.e. that it is recognized only if the objective of the suit is confirmed to be identical as between one of the parties and a third party, a problem of deprivation of interest in the current instance does not arise.
[6] A bank, which is a financial institution, is operated in the form of a joint stock company. However, a bank is different from other joint stock companies, of which the sole objective is the pursuit of profit, in that it is in the position of serving the public role of contributing to stabilization of the financial market and development of the national economy by protecting assets of depositors, maintaining credit order, and maintaining efficiency in intermediating monetary transactions. Accordingly, directors of a bank who carry out such duties discharge not simply the fiduciary duty generally imposed on the directors of joint stock companies, but the fiduciary duty that befits such public aspect of a bank. Thus, in determining whether a director of a financial institution has neglected his obligations in breach of such fiduciary duty, it should be determined whether there was a fault in his decision as a reasonable loan officer to extend the loan, which cannot be overlooked, from the standpoint of the public role of financial institutions, generally taking into account various factors such as the terms, substance, amount and repayment plan of the loan, availability and substance of collateral. and the assets, management status and growth potential of the borrower.
[7] A case which recognized liability of a representative director or director of a bank toward the company, on the grounds that he neglected his obligations in breach of his fiduciary duty in deciding upon a loan.
【Reference Provisions】[1] Article 403 and Article 404, Paragraph 1 of the Commercial Code, Articles 76 and 234 of the Civil Procedure Act / [2] Article 394, Paragraph 1 of the Commercial Code / [3] Article 394, Paragraph 1, Article 403 and Article 404, Paragraph 1 of the Commercial Code / [4] Article 403 and Article 404, Paragraph 1 of the Commercial Code, and Article 76 of the Civil Procedure Act / [5] Articles 76 and 226 [Filing of Suit] of the Civil Procedure Act / [6] Article 382, Paragraph 2 and Article 399, Paragraphs 1 and 2 of the Commercial Code, Article 681 of the Civil Code / [7] Article 399, Paragraphs 1 and 2 of the Commercial Code
【Reference Cases】[2] Supreme Court Decision 77Da295 delivered on June 28, 1977 (Gong1977, 10197) / [5] Supreme Court Decision 62Da144 delivered on June 7, 1962
【Joint Intervenor for Plaintiffs, Appellee】 Joint Intervenor for Plaintiffs (the Bank) (Law Firm Chung-jeong, Attorneys Choi Woo-young and 4 Others, Counsel for joint intervenors for plaintiffs-appellee)
【Defendants, Appellants】Defendant 1 and 3 Others (Law Office Dongyang, Attorneys Choi Kwang-ryul and 6 Others, Counsel for defendants-apellants)
【Court of First Instance】 Seoul District Court Judgment 97Gahap39907 delivered on July 24, 1998
【Court of Second Instance】 Seoul High Court Judgment 98Na45982 delivered on January 4, 2000
【Disposition】 The appeal shall be dismissed. All costs of this appeal are assessed against the defendants.
【Reasoning】
1. Argument of misunderstanding legal principles as to the nature of intervention
In case of a shareholders' derivative action, if the plaintiff shareholders (Plaintiff Shareholders) fail to conduct the suit properly as plaintiffs or if there is a possibility of infringement of the company's interest because the rights of the company may not be properly protected due to their collusion with the company's directors who are opponents in the suit, it is necessary for the company, which is rights holder who will be affected by the decision, to participate in the lawsuit as a party properly having the right to conduct the suit, in order to prevent such infringement or to protect its rights. Considering that the company's intervention in the derivative action would promote cost efficiency of the proceedings, that there is no possibility that it would cause any contradiction or conflict in the decision, and the legislative intent in providing specifically for intervention in Article 404, Paragraph 1 of the Commercial Code to protect the company's rights and interests through the peculiar nature of a shareholders' derivative action, it would be reasonable to interpret the company's intervention provided for in Article 404, Paragraph 1 of the Commercial Code to mean joint intervention in litigation. Further, such interpretation is not contradictory to Article 234 of the Civil Procedure Act, which prohibits duplicate lawsuits.
Accordingly, the court below's rejection of the defendants' assertion that insofar as the action herein by the plaintiffs (who were joined by the joint intervenors) and joint intervenors in the court of first instance proceeding (all of whom are shareholders of the company whose claims were dismissed by the court below; hereinafter referred to as plaintiffs and the joint intervenors in the court of first instance proceeding) is invalid for lack of standing to sue, the intervention by the joint intervenors for the plaintiffs in the court below proceeding (hereinafter referred to as the plaintiffs' joint intervenor) is also invalid, on the premise that such intervention was a intervention for assistance in the nature of joint litigation, was in accord with the above legal principles and was accordingly justified. Such ruling was not a reversible error as a misapplication of the legal principles on the nature of participation by plaintiffs' joint intervention. This part in the defendants' grounds for appeal cannot be accepted.
2. Argument of misunderstanding legal principles as to a representative
Article 394, Paragraph 1 of the Commercial Code provides for the auditor, who is in a relatively objective position, to represent the company in a lawsuit between the company and its directors, in order to prevent a conflict of interest between the parties which can easily arise in such suits, and to guarantee fairness in conducting the litigation. Absent special circumstances, Article 394, Paragraph 1 of the Commercial Code does not apply in case where, although the relationship of rights which is the subject of litigation occurred during the term of a director, such person has already left the company and is no longer a director when the company brings a lawsuit against him. (See Supreme Court Decision 77Da295 delivered on June 28, 1977.)
The evidence in the records show the following: (i) The board of directors resolved to amortize the shares held by the plaintiffs and joint intervenors of the court of first instance without consideration, which gave rise to concerns that such parties may forfeit their standing to sue in the derivative action. (ii) As such, on July 1, 1999 when the court below proceeding was in progress, plaintiffs' joint intervenor, which is a corporation, entered a joint intervention under representation by its representative director, in this action for damages against the defendants who are former representative director or directors of the participant company, on grounds of lack of due diligence during their respective term of office. (iii) However, all of the defendants had already been displaced from their offices of representative director or director of the participant company before the date of joint intervention, and did not hold any position as of the date of joint intervention. In addition, no special circumstances can be found which would raise any doubt about a fair conduct of litigation as between the representative director of the participant company and the defendants. Under these circumstances, the person who should represent the joint intervenor company in the action by intervention herein is the representative director thereof in accordance with the general principles, and therefore it is not correct to say that it is the auditor that represents the company, by applying Article 394, Paragraph 1 of the Commercial Code.
For the foregoing reasons, it was proper for the court below to find that the plaintiffs' joint intervenor's joint intervention herein through representation by its representative director was valid, and such finding was not affected by any misapplication of the legal principles on representative of a company in a lawsuit.
Accordingly, this part of the grounds for appeal of the defendants 3, 4 and 1 is also unacceptable.
3. Argument of misunderstanding legal principles as to requirements for the intervention for plaintiffs
The records show that it was on July 9, 1999, after the application date for intervention by the plaintiffs' joint intervenor, that the plaintiffs and the court of first instance joint intervenor forfeited their standing to sue in the derivative action due to the amortization of all of their shares without consideration. Accordingly, even if the shareholders' derivative action is destined to be dismissed, because the plaintiff Shareholders failed to maintain their share disposition requirements for a plaintiff in such a action until the closing of hearings in the first instance of the lawsuit, they would have had standing to sue at the time of intervention by the company as joint intervenor for the plaintiffs, and therefore the intervention by the company, as joint intervenor for the plaintiffs, was legal. In addition, the plaintiff Shareholders' derivative action is in progress unless and until it is conclusively dismissed. Accordingly, if the company applied for joint intervention as a plaintiff before the decision for dismissal is rendered, it cannot be considered that the suit to be participated in ceased to be pending at the time of such intervention or that the intervention becomes illegal for such reason.
Further, considering that a joint intervention in litigation may take place in an appellate proceeding (See Supreme Court Decision 62Da144 delivered on June 7, 1962), and in view of the peculiarities of a joint intervention, i.e. that it is recognized only if the objective of the suit is confirmed to be identical as between one of the parties and a third party, a problem of deprivation of interest in the current instance does not arise.
It was justified for the court below to decide, on the same grounds, that the intervention of the plaintiffs' joint intervenor in the appellate proceeding was legal, and such decision was not affected by any misapplication of the legal principles on the requirements for joint intervention in litigation.
Accordingly, we find that this part of the grounds for appeal of the defendant is also unacceptable.
4. Argument of misunderstanding facts, failing to do full deliberation and misunderstanding legal principles on liability for damages
A. Determination of the court below
Having recognized the facts as set forth in its decision based on the adopted evidence generally, the court below made the following determinations on liability of the plaintiffs' joint intervenor for damages arising out of the defendants' neglect of their duties:
(1) In or around October, 1993 when the plaintiffs' joint intervenor extended a new loan to Hanbo Steel Co., Ltd. (Hanbo Steel), Hanbo Steel had invested an enormous amount of funds borrowed from external sources to construct the Dangjin Steel Works. Most of the said funds comprised of short-term loans, thus weakening the financial structure of Hanbo Steel. The defendants knew or could have easily known that Hanbo Steel lacked ability to repay its debts due to the said financial difficulties, through the credit investigation on Hanbo Steel which the plaintiffs' joint intervenor conducted on its own in or around August, 1993. Further, the credit opinion prepared at the time of extension of the said new loan stated that the financial conditions of Hanbo Steel was worse than other companies in the same industry, that Hanbo Steel had a low contribution ratio, ability to repay short-term and long-term borrowings and ability provide collateral, so that it scored an average of 36 points and that it was given a rating of E, which meant that extension of loans to it was prohibited in principle, as a result of evaluation under the credit evaluation standards. In view of the foregoing, the defendants, who were representative director and directors of the plaintiffs' joint intervenor, should not have extended the new loan to Hanbo Steel, and if did, they should have made their best efforts to take the necessary measures to preserve the claim of the plaintiffs' joint intervenor against Hanbo Steel by e.g. securing reliable collaterals. Nevertheless, the defendants proceeded to grant the said new loan to Hanbo Steel without obtaining any collateral, relying only on the promise of Person 2 to provide collateral after completion of the reclamation work, thereby violating the basic requirements of credit operation as executives of a bank. As such, the defendants have breached their fiduciary duties and duties of good faith toward the plaintiffs' joint intervenor.
(2) Even after the actions described in (1) above, defendants committed the following faults while serving as representative director and directors of the plaintiffs' joint intervenor, the principal bank of Hanbo Steel:
(A) In relation to loans extended to Hanbo Steel thereafter, Hanbo Steel did not have any asset to provide as collateral. other than the steel works under construction, and it was unclear whether the business through the steel works under construction would be successful. Accordingly, the defendants should have taken the preparatory measures by e.g. securing reliable collateral for each loan extended. Nevertheless, the defendants neglected such duties and extended loans based only on credit, thereby causing the risk that the loans would become unrecoverable.
(B) The financial conditions of Hanbo Steel continued to deteriorate, leading to analysis on the change in construction plan of Hanbo Steel's steel works and particulars of the business according to such change, increase in amount of funds necessary for the business, and other related problems, in the detailed credit analysis report of the National Information & Credit Evaluation Inc. (NICE) issued in or around January 1994, credit inspection by the plaintiff's joint intervenor on its own and the business evaluation report issued by Korea Ratings in 1995, and the company diagnosis report issued by NICE in September 1996. Further, various concerns continued to be expressed as to the business viability of the steel complex in Asan Bay which Hanbo Steel was constructing in reliance on external funding. Under these circumstances, the defendants should have reviewed the business plan of Hanbo Steel carefully, forecasted whether Hanbo Steel could successfully complete the construction in question and determined a proper scale of loans to be granted to Hanbo Steel, and if Hanbo Steel's ability to repay its debts was doubtful, the defendants should have taken the necessary measures to manage credit comprehensively and effectively, by e.g. reducing the amounts of such loans and securing collateral immediately. Nevertheless, the defendants did not take any measures to recover the existing loans granted to Hanbo Steel, but on the contrary, drastically increased the amount of loans and resolved to continue granting enormous amounts of loans without any collateral.
(C) Since the defendants resolved to grant enormous amounts of loan to Hanbo Steel, they had the duty to verify whether the loans were used for the intended purpose by inspecting the progress of the construction work of the steel works and checking whether the change of construction was reasonable or not, and controlling the loans properly by reviewing whether the scale of the loans was appropriate. However, despite increase in the scale of Hanbo Steel's business on seven occasions, starting with about 1.5 trillion won and being drastically increased to 3.69 trillion won in or about July 1994 and to 5.7256 trillion won in or around December, 1996, the defendants resolved to continuously provide loans as requested by Hanbo Steel, without thoroughly determining the reasons for such increase.
(D) Since a credit review opinion of a bank is the most important material in deciding whether to provide a loan, the personnel in charge should prepare such opinion after evaluating the borrower's credit status objectively through various materials and survey in terms of financial condition, business prospect, capability to provide collateral and ability to repay debts. Nevertheless, those of the defendants who were presidents of the bank made advance decisions to extend loans to Hanbo Steel, and instructed the personnel in charge to prepare the credit review opinion to the effect that Hanbo Steel was qualified for the loans. In addition, although the other the defendants knew or at least could have surmised that the credit review opinion was prepared in that manner, they did not raise any objections to the resolutions of the board of directors of the plaintiffs' joint intervenor approving the loans.
(E) The reason why Article 35 of the Banks Act provides for a limit on extension of credit to a given borrower is to prevent the risk arising out of granting excessive amounts of loans to the same borrower. Accordingly, if banking account loans subject to the limit on loans to a given borrower has reached the credit limit, then further loans should not be extended. Nevertheless, the defendants continuously provided further loans to Hanbo Steel through trust accounts that were not subject to the credit limit.
(F) Upon request of Person 2, the defendant 3 caused Hanbo Construction to acquire Yuwon Construction, and in the process, extended a loan of 209.8 billion won to Hanbo Steel. This was a means of having an additional enormous amount of loan extended to Hanbo Steel.
(G) the defendants 3 and 4 received enormous amounts of bribery from Person 2 in return for granting the loans to Hanbo Steel as explained above, thereby breaching their respective fiduciary duties and duties of good faith toward the plaintiffs' joint intervenor.
(3) In deciding upon loan extensions, the officers of a bank have the duty to carefully determine whether the borrower is able to repay its debts based on objective materials, and to avoid extending the loan if there is any concern that the borrower may be unable to repay its debt; and if the loan is extended, then to avoid damage to the bank by securing reliable collateral.
In light of the foregoing, the defendants 3 and 4 have neglected their duties as the CEOs of a bank in that although they clearly could have foreseen the risk that the loans to Hanbo Steel cannot be recovered, they ignored it and instructed their subordinates to continuously provide enormous loans to Hanbo Steel without collateral, in collusion with Person 2. The defendants 1 and 2 clearly neglected their duties as directors of the plaintiffs' joint intervenor in that although they were well aware of the risks relating to the loan extensions to Hanbo Steel during their tenure as directors of the plaintiffs' joint intervenor, they did not object to the reckless and arbitrary decision of the defendants 3 and 4, but rather approved such decisions through resolutions of the board of directors. Accordingly, each of the defendants is liable for compensation to the plaintiffs' joint intervenor for damages arising out of their actions described above.
B. Determination of this Court
A director of a joint-stock company has a fiduciary duty toward the company (Article 382, Paragraph 2 of the Commercial Code and Article 681 of the Civil Code), and thus is deemed to have fully discharged his duties only if he has faithfully performed that duty.
As asserted in the grounds for appeal, even if a loan decided upon by a director of a joint stock company that is a financial institution ultimately becomes difficult or impossible to recover, such fact by itself is not sufficient for a conclusion that the representative director or director who decided upon the loan has breached his fiduciary duty or duty of good faith
Although a bank, which is a financial institution, is operated in the form of a joint stock company, it is different from other joint stock companies, of which the sole objective is the pursuit of profit, in that it is in the position of serving the public role of contributing to stabilization of the financial market and development of the national economy by protecting assets of depositors, maintaining credit order, and maintaining efficiency in intermediating monetary transactions. Accordingly, directors of a bank who carry out such duties are discharging not simply the fiduciary duty generally imposed on the directors of joint stock companies, but the fiduciary duty that befits such public aspect of a bank.
Thus, in determining whether a director of a financial institution has neglected his obligations in breach of such fiduciary duty, it should be determined whether there was a fault in his decision as a reasonable loan officer to extend the loan, which cannot be overlooked, from the standpoint of the public role of financial institutions, generally taking into account various factors such as the terms, substance, amount and repayment plan of the loan, availability and substance of collateral. and the assets, management status and growth potential of the borrower.
Upon review of the evidence in the records in light of the above legal principles, the court below was justified in determining that since the defendants neglected their duties as CEO or directors of the bank, they are liable to compensate the plaintiffs' joint intervenor for damages arising out of such negligence, based on a comprehensive examination of all circumstances including the events leading to the defendants' decision to extend the loans in this case, the amounts of such loans, the overall situation of Hanbo Steel at the time when the loans were extended, whether Hanbo Steel provided any collateral for the loans, and the negative evaluation results on the financial condition and profitability of Hanbo Steel. The court below's decision was not affected by any misunderstanding of fact due to violation of the rules of evidence, incomplete deliberation, or misunderstanding of the legal principles on a director's duty of care and responsibility toward the company, or illegality.
Further, the decision of the court below was not improper due to lack of reasoning, as it states in its Reasoning that although the defendant 2 knew or at least could have known the above circumstances surrounding Hanbo Steel, he approved the resolution to extend loans to Hanbo Steel at the standing committee meeting on loans without any objection, and thereby neglecting his duties as director as explained above.
Accordingly, this part of the argument in defendants' grounds for appeal is also unacceptable.
5. Argument of misunderstanding legal principles as to the liability under Article 399, Paragraph 2 of the Commercial Code
The evidence in the records established that the board of directors that resolved to extend the loans in question was not the formal board of directors consisting of all directors of the plaintiffs' joint intervenor as specified in the Commercial Code, but was a standing committee consisting of standing directors including the president, executive director and managing director, which was formed to handle matters delegated by the board of directors in accordance with the provisions of the articles of incorporation of the plaintiffs' joint intervenor. The grounds for appeal correctly pointed out this fact.
However, a review of the reasoning of the court below in its entirety shows that the court below's recognition of liability of the defendants, as directors who assented to the resolution in accordance with Article 399, Paragraph 2 of the Commercial Code, was not on the grounds that they assented to the resolution of the said standing committee. Rather, as explained above, what the court below determined was that even though the defendants knew or at least could have known that the resolution to provide loans to Hanbo Steel was unreasonable or improper, they assented to such resolution without raising any objection at the meeting of the standing committee relating to the credit extension, thereby neglecting their fiduciary duties and duties of good faith as directors. As such, it is our understanding that the discussion on the fact of the defendants' assent to the resolution of the standing committee was to show the specific acts in neglect of duty in order to support the finding of liability under Article 399, Paragraph 1 of the Commercial Code.
Accordingly, this part of the arguments of the defendants 4 and 1, premised on assumption that the court below's recognition of liability with respect to the above the defendants is based on Article 399, Paragraph 2 of the Commercial Code, is also unacceptable.
6. Conclusion
Accordingly, the appeals shall be dismissed, and all costs of appeal are assessed against the defendants. It is hereby decided as per Disposition. This decision is delivered with the assent of all Justices who reviewed the appeal.
Justices Kang Shin-wook (Presiding Justice)
Cho Moo-jeh (Justice in charge)
Yoo Ji-dam
Son Ji-yol
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