[edit] Supreme Court Decision 99Da40067 delivered on October 27, 2000 [Delivery of Share Certificates]

【Main Issue】

A case which ruled that: where a securities company notifies a client who has entered into a margin transaction agreement, on occurrence of a deficiency in the collateral and the scheduled date for the liquidation to cover such deficiency, the client may deposit the requested additional amount for each date within 4 business days from the date of such request in accordance with the Regulations on Credit Extension by Securities Companies, and the securities company may not execute the liquidation transaction so long as the 4-day grace period has not lapsed on grounds that the client did comply with the requirement to deposit the additional collateral; if the due date for payment designated by the securities company in relation to its request for additional collateral is unreasonable, the right of the securities company to execute the liquidation transaction vests only upon lapse of the reasonable period (4 business days from the date of the request); if a change in the price of the collateral stock occurs between the date of the request and the date of the liquidation transaction, the number of stocks that the securities company may liquidate should be determined by taking into account the collateral ratio as of the close of market on the trading day immediately preceding the liquidation date, and by reflecting the change in the stock price.

【Summary of Decision】

Where a securities company notifies a client who has entered into a margin transaction agreement, on occurrence of a deficiency in the collateral and the scheduled date for the liquidation to cover such deficiency, the client may deposit the requested additional amount for each date within 4 business days from the date of such request in accordance with the Regulations on Credit Extension by Securities Companies, and the securities company may not execute the liquidation transaction so long as the 4-day grace period has not lapsed on grounds that the client did comply with the requirement to deposit the additional collateral. If the due date for payment designated by the securities company in relation to its request for additional collateral is unreasonable, the right of the securities company to execute the liquidation transaction vests only upon lapse of the reasonable period (4 business days from the date of the request), and if a change in the price of the collateral stock occurs between the date of the request and the date of the liquidation transaction, the number of stocks that the securities company may liquidate should be determined by taking into account the collateral ratio as of the close of market on the trading day immediately preceding the liquidation date, and by reflecting the change in the stock price.

【Reference Provisions】 Article 49 of the former Securities and Exchange Act (amended by Act No. 5498 of January 8, 1998), Article 17 of the Regulations on the Credit Extension by Securities Companies

Article 49 of the former Securities and Exchange Act (amended by Act No. 5498 of January 8, 1998) (Credit Extension) (1) Any securities company may extend credit to a customer in connection with securities, by lending money or securities.

(2) The method and particulars of the credit extension referred to in Paragraph (1) shall be prescribed by a Decree of the Prime Minister.

(3) In connection with the credit extension referred to in Paragraph (1), the Financial Supervisory Commission shall provide for regulations on the maximum amount, the ratio of collaterals and method of receiving collaterals, etc.

(4) If a securities company sells such securities as underwritten thereby, the securities company shall not lend funds or extend any other credit with respect to the purchase of such securities, until three months have elapsed from the date of underwriting such securities.

Article 17 of the Regulations on Credit Extension by Securities Companies (Margin Issues) (1) Any securities eligible for margin transaction shall be the stocks listed on the Korea Stock Exchange. However, a securities company shall extend neither margin transaction loan nor stock loan for margin transaction with its own shares.

(2) The Financial Supervisory Commission may suspend new trading of the margin issues under paragraph (1) in the case of rapid fluctuation in margin transactions or other cases where it is deemed necessary.

(3) Any securities company shall suspend any new margin transaction when margin issues fall under any of the following subparagraphs

1. Where the company concerned has been designated as an item subject to audit by Korea Stock Exchange

2. Where the Korea Stock Exchange has taken the measures of deposit prior to placing order, or of deposit prior to receipt and delivery

3. Where the company concerned has been designated as a matter of subject to supervision by Korea Stock Exchange.

【Plaintiff, Appellant】 Kim Ok-ran (Attorneys Lim Dong-jin and 4 others, Counsel for plaintiff-appellant)

【Defendant, Appellee】 Shinyoung Securities Co., Ltd. (Attorney Choi Woo-seok, Counsel for defendant-appellee)

【The Judgment of the Court Below】 Seoul District Court Judgment 98Na75157 delivered on June 11, 1999

【Disposition】 The judgment of the court below shall be reversed and the case shall be remanded to the Appellate Division of Seoul District Court.

【Reasoning】 The grounds for appeal are examined as follows.

1. The court below, quoting the reasoning in the first instance decision, adopted the following facts: (a) The defendant notified the plaintiff, who purchased stocks with the margin loan extended under the stock management and entrustment agreement and margin transaction account agreement with the defendant, via certified mail dated December 23, 1997, that the amount of deficiency in collateral according to the agreed margin collateral ratio of 130% was 210,548 won (collateral ratio of 129%), and that the scheduled date for liquidation to cover that deficiency was January 5, 1998. (b) The plaintiff deposited 1,830,000 won in additional collateral on January 3, 1998 with the defendant, following receipt of such notice, but that only resulted in reduction in the collateral ratio as of that date to 92.5%, and the plaintiff's collateral ratio as of January 5, 1998, which was the scheduled date of the liquidation transaction as notified, was further reduced to 89.7%. (c) Defendant, through its employee Kim Ki-hyun, repeatedly requested the plaintiff to deposit additional collateral by telephone even after the notice dated December 23, 1997 and, on January 3, 1998, notified the plaintiff, again by telephone, that unless plaintiff deposits an additional collateral 9.47 million in cash, the margin loan could only be repaid by disposing all the stocks owned by the plaintiff. (d) When the plaintiff failed to deposit the collateral corresponding to a collateral maintenance ratio of 130% by January 5, 1998, the defendant disposed of all the stocks owned by the plaintiff on January 6 and 7, 1998 without authorization, and applied the proceeds toward the principal and interest of the margin loan. The court below then concluded that the defendant's disposal of the stocks owned by the plaintiff without authorization, and application of the proceeds thereof toward the principal and interest of the margin loan, was justified considering that: the plaintiff was obligated to continuously maintain the collateral ratio of 130% with respect to the margin loan pursuant to the margin transaction account agreement with the defendant; even though the defendant advised the plaintiff that the amount of deficiency in the collateral was 210,548 won as of the notice date, in its notice of December 23, 1997 requesting deposit of additional collateral, it was not sufficient for the plaintiff to deposit only that amount, but rather plaintiff should have deposited the amount of deficiency by comparing the amount of outstanding principal of and interest on the margin loan against the assessed value of the stocks owned by the plaintiff and the amount of deposit, as of January 5, 1998 which was the deadline for such deposit as designated by defendant; and that the collateral ratio as of January 3, 1995 was only 92.5% despite the deposit by the plaintiff of 1.83 million won on that date, which was prior to the deadline for deposit, and the plaintiff did not deposit any additional collateral by January 5, 1998 to maintain the collateral ratio of 130%.

2. However, the determination of the court below cannot be accepted due to the following reasons. First of all, according to the records, there is no evidence indicating an agreement that so long as the defendant notifies the plaintiff of the deficiency of collateral and the scheduled date of liquidation transaction, the plaintiff would calculate the amount of deficiency as of the scheduled date of the liquidation transaction on its own and to deposit such amount by that date.

On the contrary, the margin transaction account agreement between the plaintiff and defendant (Plaintiff's Exhibit 3) provides that the plaintiff and defendant are to comply with the relevant laws and related measures (Article 1), and that in case where the plaintiff is requested by the plaintiff to deposit additional collateral but does not make the deposit by the due date, the defendant is entitled to arbitrarily dispose of the securities provided by the plaintiff as collateral without any notice and apply the proceeds toward settlement of the outstanding balance of the margin transaction or repayment of debt (Article 7). Further, according to Article 17, Paragraphs 1, 2 and 4 of the Regulations on Credit Extension by Securities Companies (Defendant's Exhibit 3; this regulation was promulgated by the Securities Supervisory Commission pursuant to Article 49 of the Securities and Exchange Act), which was incorporated into the margin transaction account agreement pursuant to the terms thereof, a securities company may request the customer to deposit additional collateral, by means of certified mail or other means evidencing such request, in case where the aggregate value of the collateral falls short of 130% of the margin transaction loan, and if the additional collateral is not deposited within 4 days (excluding the date of request and holidays under the Regulations on Holidays of Public Offices) following the date of request, it may dispose of the collateral on the following day and apply the proceeds toward satisfaction of its claim. Meanwhile, the fact that defendant notified the plaintiff that deficiency has occurred in the collateral as of December 23, 1997 in the amount of 210,548 won, and requested the plaintiff to deposit such amount by cash or securities, can be recognized based on the notice by defendant to the plaintiff (Plaintiff's Exhibit 4). Further, it is clear from the records that December 24, 1997, December 26, 1997, January 3, 1998 and January 5, 1998 were business days, and that the dates between such dates were not business days.

Based on these facts, it should be deemed that the plaintiff had fulfilled its obligation to deposit additional collateral by depositing 210,548 won by January 3, 1998 as requested by the defendant in its notice of December 23, 1997. Further, even if additional deficiency in the collateral to be deposited by plaintiff occurred as a result of continuous depreciation of stock price after December 23, 1997, and the defendant notified the same to the plaintiff by telephone during the period between December 24, 1997 and January 3, 1998, the plaintiff was required only to deposit the additional collateral requested by the defendant as of each such date within 4 business days from the date of each request. Accordingly, the defendant was not entitled to dispose of the securities provided by the plaintiff as collateral, through liquidation transaction, so long as the 4-day grace period had not elapsed, even though the plaintiff had not performed its duty to deposit the additional collateral.

Thus, if the plaintiff had deposited 1,830,000 won, which exceeded the 210,548 won requested by the defendant, on January 3, 1998, which was prior to the deadline for deposit, the plaintiff should be deemed to have fulfilled the obligation to deposit the additional collateral, and accordingly the defendant could not arbitrarily dispose of the stocks owned by the plaintiff as through a liquidation transaction.

Meanwhile, if the due date for deposit as designated by the defendant, in its request for deposit of additional collateral, is unreasonable, then the defendant's right of liquidation should be deemed to vest only upon lapse of a reasonable period, i.e. 4 business days from the date of request. Further, if there occurred a change in the price of the collateral stock between the date of the request and the date of the liquidation transaction, the number of stocks that the defendant may liquidate should be determined by taking into account the collateral ratio as of the close of market on the trading day immediately preceding the liquidation date, and by reflecting the change in the stock price.

Accordingly, in the court below's conclusion that the requirements for the liquidation transaction were satisfied, based only on the reason stated in its decision, there existed reversible errors as to the agreement on the procedures for liquidation transaction under the margin transaction account agreement and deadline for deposit, as well as the relevant laws, or failure to conduct a complete review, and such errors have clearly affected the conclusion of the judgment. Thus, the grounds for appeal pointing this out are valid.

Accordingly, the judgment of the court below shall be reversed and the case shall be remanded to the court below. This decision is delivered with the assent of all Justices who reviewed the appeal.

Justices Lee Kyu-hong (Presiding Justice)

Song Jin-hun (Judge in charge)

Yoon Jae-sik

Son Ji-yol

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