[edit] Supreme Court Decision 2001Da38807 delivered on April 12, 2002 [Damages]
【Main Issues】
[1] The legal nature of the decision regarding the transfer of contracts as made by the Financial Supervisory Commission ("FSC") pursuant to Article 14(2) of the old Structural Improvement of the Finance Industry Act
[2] The meaning of "transfer of business" under Article 374(1)(1) of the Commercial Act, which requires a special resolution of the general shareholders' meeting
[3] Whether pursuant to Article 14(2) of the old Structural Improvement of the Finance Industry Act, a special resolution of the general shareholders' meeting is required for the FSC to decide to transfer contracts to which an insolvent financial institution is a party (negative)
[4] Whether a preceding FSC decision to transfer contracts is illegal solely by virtue of procedural defects in the cancellations of the authorization and the approval of banking business as made by the Minister of Finance and Economy pursuant to a FSC request under Articles 14(2) and 14(3) of the old Structural Improvement of the Finance Industry Act, such procedural defects being the omission to conduct a hearing as required under Article 14(2) of said Act (negative)
【Summary of Decision】
[1] The FSC's decision to transfer contracts under Article 14(2) of the old Structural Improvement of the Finance Industry Act (as existed prior to being amended by Act, Law No. 5549 of September 14, 1998) is one way to reorganize insolvent financial institutions and takes the form of a novation of financial contracts in which the transferee steps in the place of the transferor and special portions of the assets and liabilities of an insolvent financial institution are transferred to a third party, together with a payment for the difference between the transferred liabilities and assets. The legal nature of such decision is that of a unilateral administrative disposition and has the legally binding effect of substituting the parties to a contract.
[2] The transfer of business which requires a special resolution of the general meeting of shareholders under Article 374(1)(1) of the Commercial Act refers to a transfer pursuant to a legally binding contract between a corporation and another party of all or a part of the assets organized for a specific business purpose and functioning as an organic whole, which shall not disturb the entirety and nature of said transferred assets.
[3] The transfer of contracts pursuant to a FSC decision under Article 14(2) of the old Structural Improvement of the Finance Industry Act (as existed prior to being amended by Act, Law No. 5549 of September 14, 1998) and the business transfer as set forth in the Commercial Act differ in terms of their respective purpose, legal nature and effect. Therefore, a special resolution at the general shareholders' meeting is not required for a FSC decision to transfer assets of an insolvent financial institution under Article 14(2) of said Act.
[4] The FSC decision to transfer contracts and the cancellation by the Minister of Finance and Economy of the authorization and the approval of the banking business differ in terms of their respective agent, terms, and procedures and constitute separate administrative dispositions. Therefore, even if there is a procedural defect in the cancellation of the authorization and the approval of a banking business as made by the Minister of Finance and Economy, pursuant to a FSC request under Articles 14(2) and 14(3) of the old Structural Improvement of the Finance Industry Act (as existed prior to being amended by Act, Law No. 5549 of September 14, 1998), such procedural defect being the omission to conduct a hearing as set forth in Article 14(2) of said Act, a preceding FSC decision to transfer contracts does not become illegal solely by virtue of such procedural defect.
【Reference Provisions】 [1] Article 14(2) of the old Structural Improvement of the Finance Industry Act (as existed prior to being amended by Act, Law No. 5549 of September 14, 1998) and Article 5-4 of the old Enforcement Decree for the Structural Improvement of the Finance Industry Act (before being amended by Presidential Decree No. 15894 of Sep. 22, 1998) / [2] Articles 374(1)(1) and 434 of the Commercial Act / [3] Article 14(2) paragraph 2 of the old Structural Improvement of the Finance Industry Act (as existed prior to being amended by Act, Law No. 5549 of September 14, 1998), Article 5-4 of the old Enforcement Decree for the Structural Improvement of the Finance Industry Act (before being amended by Presidential Decree No. 15894 of Sep. 22, 1998) and Article 374(1)(1) of the Commercial Act / [4] Articles 14(2), 14(3) and 14-2 of the old Structural Improvement of the Finance Industry Act (amended by Act, Law No. 5549 of September 14, 1998)
Article 14 of the old Structural Improvement of the Finance Industry Act (amended by Act, Law No. 5549 of September 14, 1998) (Administrative Disposition) (1) <omitted>
(2) Where any insolvent financial institution falls under any of the following subparagraph, the Financial Supervisory Commission may take necessary measures such as a decision to transfer contracts or suspension of business for a certain period of six months or less against the insolvent financial institution, and may request the Minister of Finance and Economy to cancel the authorization or the approval of such institution's operation. Provided that the same shall not apply to any insolvent financial institution not falling under subparagraphs 1 and 2.
1. Where an insolvent financial institution fails to execute an order given under Article 11(1) is unable to execute such order
2. Where the merger, etc. of insolvent financial institutions ordered or arranged under Article 11(1) and (2) does not materialize.
3. Where a judgment is made that the execution of operation improvement orders or a merger, etc. of insolvent financial institutions ordered or arranged under Article 11 will be difficult due to a substantial surplus of liabilities over assets, or that an emergency measure is necessary to protect the depositors.
(3) The Minister of Finance and Economy may cancel the authorization or permit business when consulted as stated in subparagraph 2.
Article 14-2 (Hearing) of the old Structural Improvement of the Finance Industry Act (amended by Act, Law No. 5549 of September 14, 1998) Where the Minister of Finance and Economy intends to cancel the authorization or permission on business for any insolvent financial institution pursuant to Article 14 paragraph 3, he shall hold a hearing.
Article 5-4 of the old Enforcement Decree for the Structural Improvement of the Finance Industry Act (before being amended by Presidential Decree No. 15894 of Sep. 22, 1998) (Decision to Transfer Business) (1) In the event that the Financial Supervisory Commission decides to transfer business pursuant to Article 14(2) of the Act, it must hear the opinion of the insolvent financial institution and obtain consent of the transferee financial institution.
(2) In the event that the Financial Supervisory Commission makes a decision set forth in subparagraph 1, it must give notice of such decision to the transferor and transferee financial institutions.
(3) The business transfer made pursuant to Article 14(2) takes effect upon the decision by the Financial Supervisory Commission. In such case, the rights and obligations held by the transferor insolvent financial institution shall be substituted as those of the transferee financial institution.
(4) The insolvent financial institution that receives a notice as set forth in subparagraph 3 must promptly publish a summary of the terms of such notice and the decision to transfer business in more than two central daily newspapers. Provided, that when the head office of the insolvent financial institution is located outside Seoul, such institution must make the foregoing publication in one or more central daily papers and one or more local newspapers circulated in the province where its head office is located.
【Reference Cases】 [2] Supreme Court Decision 94Da39253 (delivered on October 28, 1994, Gong1994Ha, 3124), Supreme Court Decision 96Da54249 (delivered on April 8, 1997, Gong1997Sang, 1391), and Supreme Court Decision 95Da6885 (delivered on March 24, 1998, Gong1998Sang, 1127).
【Plaintiff, Appellant】 Hong Jin-pyo and 5 others (Attorney Lee Yong-hoon, Counsel for plaintiff-appellant)
【Defendant, Appellee】 Republic of Korea (Attorney Lee Hyun-joo, Counsel for defendant-appellee)
【Court of First Instance】Daejeon District Court Judgment 99Gahap 3147 delivered on August 12, 1999
【Court of Second Instance】 Daejeon Hight Court Judgment 99Na5123 delivered on May 24, 2000
【Disposition】 The appeal shall be dismissed. All costs of appeal shall be assessed against the plaintiffs.
【Reasoning】 1. On the first ground for appeal
Article 1 of the old Structural Improvement of the Finance Industry Act (as existed prior to being amended by Act, Law No. 5549 of September 14, 1998) states, "The purpose of this Act is to contribute to the balanced development of the financial industry by supporting the structural improvement of the financial industry such as the merger, conversion or reorganization of financial institutions, promoting sound competition between financial institutions and raising the efficiency of financial business." Articles 2(2) and 2(3) of saidAct defines an insolvent financial institutions as a financial institution which is designated as such by the FSC, etc. for having liabilities in excess of assets and being unlikely to continue normal operations, or for being unable to pay upon the demands of depositors or other creditor financial institutions or unlikely to pay upon the demands of depositors, etc. without an additional capital infusion from outside sources. Article 10(1)of said Act states, "Where a financial institution is deemed to have an unhealthy financial status due to the failure of its capital ratio to meet a certain standard, etc., the head of the Financial Supervisory Commission may issue to such institution a caution or warning, or order an increase or decrease in capital, disposition of held assets, reduction in branch offices or organizational structure, cessation in the purchase of high-risk assets, partial stoppage of operation or other measures necessary to improve operation, or order submission of a plan outlining such measures." Article 11(1) of said Act states, "Where it is deemed necessary for depositor protection or the stability of the credit system, the Financial Supervisory Commission may order an insolvent financial institution to take measures specified in Article 10(1) or to undergo a merger, cease the official activities of the officers or appoint an administrator, transfer the whole or a part of business, be acquired by a third party, or to take other steps as necessary to improve operation.
In light of the legislative intent of the relevant provisions of the old Structural Improvement of the Finance Industry Act and the Enforcement Decree thereof and the findings of fact correctly made by the court below, we hold that the FSC's decision to transfer contracts under Article 14(2) of the old Structural Improvement of the Finance Industry Act (as existed prior to being amended by Act, Law No. 5549 of September 14, 1998) is one way to reorganize insolvent financial institutions and takes the form of a novation of financial contracts in which the transferee steps in the place of the transferor and special portions of the assets and liabilities of an insolvent financial institution are transferred to a third party, together with a payment for the difference between the transferred liabilities and assets and that the legal nature of such decision is that of an unilateral administrative disposition and has the legally binding effect of substituting the parties to a contract.
On the other hand, we hold that the transfer of business which requires a special resolution of the general meeting of shareholders under Article 374(1)(1) of the Commercial Act refers to a transfer pursuant to a legally binding contract between a corporation and another party of all or a part of the assets organized for a specific business purpose and functioning as an organic whole, which shall not disturb the entirety and nature of said transferred assets. (See Supreme Court Decision 94Da39253 delivered on October 28, 1994, Supreme Court Decision 96Da54249 delivered on April 8, 1997 and Supreme Court Decision 95Da6885 delivered on March 24, 1998.)
It follows that, the transfer of contracts pursuant to a FSC decision under Article 14(2) of the old Structural Improvement of the Finance Industry Act (as existed prior to being amended by Act, Law No. 5549 of September 14, 1998) and the business transfer as set forth in the Commercial Act differ in terms of their respective purpose, legal nature and effect. Therefore, a special resolution at the general shareholders' meeting is not required for a FSC decision to transfer the assets of an insolvent financial institution under Article 14(2) of said Act.
When the Structural Improvement of the Finance Industry Act was amended on September 14, 1998 pursuant to Act, Law No. 5549, it added Article 14(6), which states, "Notwithstanding the related provisions of the law or the corporate charter, the decision to transfer contracts pursuant to paragraph (2) does not require a resolution of the board of directors or the general meeting of shareholders of the insolvent financial institution which is transferring the contracts." However, such provision is merely a declaratory statement that clearly supports the above-discussed legal principle that Article 374(1) of the Commercial Act does not apply to the FSC's decision to transfer contracts. Therefore, the fact that such provision was added subsequent to the FSC's decision to transfer the contracts of Choongcheong Bank does not call for a different interpretation.
Therefore, the judgment of the court below was correct and did not suffer from a misinterpretation of law as to the method and procedure for the decision to transfer contracts or illegality thereof, or a violation of Article 126 of the Constitution or Article 374 of the Commercial Act.
In sum, we reject the first ground for appeal based on the foregoing.
2. On the second ground for appeal
A. The plaintiffs claim that because the Minister of Finance and Economy did not hold a hearing as set forth in Article 14(2) of the old Structural Improvement of the Finance Industry Act while canceling the authorization and the approval of Choongcheong Bank's business, such cancellation was illegal and that, because of the foregoing, the FSC's present decision to transfer contracts was also illegal. In response, the court below rejected such claim on the grounds that even if there was such a default as alleged by the plaintiffs in the procedure taken by the Minister of Finance and Economy in canceling the authorization and the approval of Choongcheong Bank's business, such default alone did not make the preceding FSC decision to transfer contracts illegal.
B. The plaintiffs allege that the present decision to transfer contracts and the cancellation by the Minister of Finance and Economy of the authorization and the approval of a banking business together form a unitary disposition or represent the two sides of a coin, and therefore, if there was a procedural defect in one of the decisions, the other decision is also illegal.
However, Article 14(2) of the old Structural Improvement of the Finance Industry Act specifies that, where the insolvent financial institutions fall under one of the items therein, the FSC may take necessary measures such as the transfer of contracts in addition to requesting the Minister of Finance and Economy to cancel the authorization and the approval of business. Item (3) of said Article also specifies that, upon an FSC request made under item (2), the Minister of Finance and Economy may cancel the authorization and the approval of business. Furthermore, Article 14(2) states that where the Minister of Finance and Economy intends to cancel the authorization and the approval of the business of an insolvent financial institution, it must hold a hearing. Taken together, the FSC decision to transfer contracts and the cancellation by the Minister of Finance and Economy of the authorization and the approval of the banking business differ in terms of their respective agent, terms and procedures and constitute separate administrative dispositions. Therefore, even if there is a procedural defect in the cancellations of the authorization and the approval of a banking business as made by the Minister of Finance and Economy pursuant to a FSC request under Articles 14(2) and 14(3) of the old Structural Improvement of the Finance Industry Act (as existed prior to being amended by Act, Law No. 5549 of September 14, 1998), such procedural defect being the omission to conduct a hearing as set forth in Article 14(2) of said Act, a preceding FSC decision to transfer contracts does not become illegal solely by virtue of such procedural defect.
Therefore, the judgment of the court below was correct and the court below did not err in misinterpreting the law as to Article 14(2) of the old Structural Improvement of the Finance Industry Act.
C. The plaintiffs also allege that since the failure of the Minister of Finance and Economy to conduct a hearing prior to the cancellation of the authorization and the approval of Choongcheong Bank's banking business constituted an instance of illegality, the defendant is liable for damages arising from such illegality and that the court below's decision contrary thereto was against the law.
However, according to the records, the plaintiffs sought indemnification only for damages arising from the illegality arising from the intentional or negligent act of the FSC or the public employees of the FSC with respect to the present decision to transfer the contracts of Choongcheong Bank, and not for damages arising from the illegality in the omission of the Minister of Finance and Economy to hold a hearing during the procedure relating to the cancellation of the authorization and the approval of Choongcheong Bank's banking business. Therefore, even though the court below did not decide on the issue raised by the plaintiffs, we do not find that such court acted against law by failing to carry out an adequate factual investigation or omitting a judgment or by misinterpreting law as to Article 14-2 of the old Structural Improvement of the Finance Industry Act.
In sum, the second ground for appeal with respect to the foregoing is groundless.
3. On the third ground for appeal
The plaintiffs alleged that, even if Hana Bank, the acquiring bank, did not assume the obligation to guarantee employment, the defendant should have confirmed such employment guarantee as to the officers and employees of the five insolvent financial institutions that were retired and therefore should indemnify the plaintiffs for the corresponding losses. The court below rejected such allegation on the grounds that the facts did not support an agreement to guarantee the employment, as alleged otherwise by the plaintiffs.
Having reviewed the evidence on the records, we find no error with the court below's decision not to recognize an agreement as to the employment guarantee of the officers and employees of the retired banks, and there were no reversible errors as to the misinterpretation of facts against the rules of evidence or misinterpretation of law as to the agreement of employment guarantee.
The precedent cited in the grounds for appeal concerns different issues and it is improper to apply it to the present case.
In sum, the third ground of appeal with respect to the foregoing is groundless.
4. On the forth ground for appeal
Based on the reasoning adopted at the trial of the first instance, the court below found the following facts: the head of the FSC ordered 12 banks to submit plans to normalize operations; the banks accordingly submitted such plans and the FSC caused the management review committee to review such plans; as for the standard of review, the management review committee examined whether assuming that the practicable portions of the operation normalization plans are carried out, the banks would be able to meet the Bank for International Settlements (BIS) ratio of 8% by the end of June, 2000, and if the banks were likely to fail to meet such standard by a substantial margin and the needed additional capital infusion would be beyond a reasonable level, the committee would reject such plans and report such conclusions to the FSC; based on such reviews, the FSC rejected the operation normalization plans of 5 banks, including Choongcheong Bank, on the ground that they would fall substantially under the BIS ratio or their chances of realizing an operation normalization were slim; and in the case of Choongcheong Bank, it had excess liabilities of 170.9 billion won as of March 31, 1998 and, even after a capital increase, the estimated BIS level the bank would be able to achieve as of the end of June, 2000 would be (-)2.55%. In light of the foregoing and on the grounds that, based on the review of the management review committee, its total liabilities substantially exceeded its total assets and, based on the likelihood that it will fail to meet the required BIS ratio by a substantial margin, the bank threatened the future of a healthy credit market or the rights of the depositors, the court below found no illegal abuse of discretion or a transgression beyond the scope of its discretion in the FSC's decision to reject the operation normalization plan submitted by Choongcheong Bank.
Upon review of the foregoing in light of the records, we hold that the fact findings of the court below was proper and there was no reversible error as to inadequate factual investigation or fact finding against the rules of evidence.
In sum, the fourth ground for appeal with respect to the foregoing is groundless.
5. Conclusion
Accordingly, all appeals shall be dismissed, and all costs of appeals shall be assessed against the plaintiffs. This decision is delivered with the assent of all Justices who reviewed the appeal.
It is so ordered per Disposition.
Justices Kang Shin-wook (Presiding Justice)
Cho Moo-jeh (Justice in charge)
Yoo Ji-dam
Son Ji-yol
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