2004Do7027 Violation of the Act on the Aggravated Punishment, etc. of Specific Economic Crimes (Malfeasance in office)

by the Supreme Court of Korea

Justices Ahn Dae-hee (Presiding Justice), Kim Young-ran, Kim Hwang-shik (Justice in charge), Lee Hong-hoon

Main Issues

1. In the crime of malfeasance in office, the meaning of "when a property damage is done" and the standard for determining whether property damage occurs or not
2. Whether it constitutes a crime of malfeasance in office, if a company executive acted in a way violating his duties, although an actual understanding of major stockholder had been gained on such act of violating duties (negative)
3. Whether an act of providing collateral with the assets of the acquired company in the merger & acquisition transaction by the so-called LBO (Leveraged Buyout) method constitutes a crime of malfeasance in office (affirmative)
4. The meaning and method of proof as to whether there is an intention to commit the crime of malfeasance in office
5. The case holding that if the defendant failed to secure compensation that is equivalent in its amount to the collateral provided by the acquired company for taking out a loan from a financial institution {so-called LBO (Leveraged Buyout) method} in the acquisition of a company undergoing the reorganization procedure, then such an act constitutes a crime of malfeasance in office
6. In case where a director of a company lends company funds to another person, if he did it while knowing that the other person has already lost his ability to pay off loans so lending him money would cause damage to the company, or if he did it while not taking reasonable measures such as getting sufficient collaterals provided, whether such loans constitute malfeasance in office against the company (affirmative)
7. In the case where the representative director of a company provides the asset of the company as a collateral for a third party and replaces the already established collateral, whether it constitute malfeasance in office against the company

Summary of Decision

1. In the crime of malfeasance in office, "the case where a property damage is made" refers to not only the case where a real damage is done but also the case where a risk of a property damage is caused, and as long as the risk of a damage is caused, even if the damage is restored later, it does not affect the establishment of a crime of malfeasance in office, and the judgment of whether a property damage has been done or not shall be conducted from an economic perspective with the consideration of the total property, so even if a legal judgment is made that such an act of malfeasance in office is null and void, if a risk has been caused that a property damage could occur or an actual damage has been done from an economic perspective, it shall fall under the case where a property damage is done.
2. Since different stock companies and stockholders shall not be regarded as the same person, even a single stockholder or a major stockholder shall establish a crime of malfeasance in office in case where an act of violating his duties is committed thereby causing damages to himself, which is the stock company, and if a company executive violated his duties thereby gaining property profit or letting a third party gain such profit which results in damages to the company, that constitutes a crime of malfeasance in office, and even if an actual understanding of stockholders had been gained on the above act of violating duties, it shall not be deemed that no damage has been done to himself, which is the stock company, or that there was no intention to commit the crime of malfeasance in office.
3. In the case where a person takes out a loan from a financial institution and later provides the asset of the company as collateral {so-called LBO (Leveraged Buyout) method} to raise fund to take over a company, if the primary debt is not repaid, the company that is taken over bears the risk of losing the asset that is provided as collateral. So the collateral provision shall not be permitted with no limit, and it shall be permitted only when a compensation for the risk caused by the above collateral provision is provided. If the asset of the company that is taken over is made to be provided as collateral without any compensation, it is fair to deem that the person that takes over the company or a third party gained property profit that is equivalent of the value of the collateral and that the company that is taken over bears damages to its property. In the case of a stock company that is under a company reorganization procedure due to bankruptcy (which has changed to a restoration procedure with the enactment of the Act on the Restoration of the Debtor and Bankruptcy on April 1, 2006) as well, the potential benefit of the company's stockholders and creditors shall still be protected, so the above conclusion does not affect corporations that are under company reorganization procedures.
4. For the intention of the crime of malfeasance in office to be recognized, the person who deals with other person's work shall have an intention to do property damage, an intention to give himself or a third party property benefit, and is aware that his act violates his duties, so even if the defendant has an intention to work for his own interest, it shall only be deemed to be secondary, and if the intention for benefit or damage turns out to be the main intention, an intention of the crime of malfeasance in office shall be deemed to exist. In the case where the defendant claims that he conducted the act in question for his own interests and denies the criminal intention, the fact that constitutes to be the main element of a crime of malfeasance in office (facts about intention, motive, etc.) shall not be able to be proven in other way than proving indirect facts that have significant relevance to an intention, and what constitutes indirect facts that have significant relevance to an intention shall be based upon normal experience and be through a method of reasonably judging the connection of facts by close observance or analysis.
5. The case holding that if the defendant failed to secure compensation that is equivalent in its amount to the collateral provided by the acquired company for taking out a loan from a financial institution {so-called LBO (Leveraged Buyout) method} in the acquisition of a company undergoing the reorganization procedure, then such an act constitutes a crime of malfeasance in office
6. For a director of a company to lend company fund to another person, if he did it while knowing that the other person has already lost his ability to pay off loans so lending him money would cause damage to the company, or if he did it while not taking reasonable measures such as getting sufficient collaterals provided, such loans constitute malfeasance in office against the company as it is an act of letting the other person gain profit and causing damage to the company.
7. In the case where the representative director of a company provides the asset of the company as a collateral for a third party and replaces the already established collateral, if the value of the newly provided collateral is higher than the value of the existing collateral, it shall be deemed that a property damage has occurred to the company, unless there is a special situation. But in the case where the representative director of a company provides the asset of the company as a collateral for a third party and replaces the already established collateral, if the value of the newly provided collateral is lower than or equal to the value of the existing collateral, it shall not be deemed that a property damage has been caused to the company.

Reference Provisions

1. Articles 355 (2) and 356 of the Criminal Act
2. Articles 355 (2) and 356 of the Criminal Act
3. Articles 355 (2) and 356 of the Criminal Act
4. Articles 355 (2) and 356 of the Criminal Act
5. Articles 355 (2) and 356 of the Criminal Act
6. Articles 355 (2) and 356 of the Criminal Act
7. Articles 355 (2) and 356 of the Criminal Act

Articles 355 of the Criminal Act (Embezzlement and Breach of Trust)

(1) A person who, having the custody of another's property, embezzles or refuses to return it, shall be punished by imprisonment for not more than five years or by a fine not exceeding fifteen million won. <Amended by Act No. 5057, Dec. 29, 1995>

(2) The preceding paragraph shall apply to a person who, administering another's business, obtains pecuniary advantage or causes a third person to do so from another in violation of ones duty, thereby causing loss to such person.

Articles 356 of the Criminal Act (Occupational Embezzlement, Malfeasance in office)

A person who commits the crime as prescribed in Article 355 in violation of the duties of ones occupation, shall be punished by imprisonment for not more than ten years or by a fine not exceeding thirty million won. <Amended by Act No. 5057, Dec. 29, 1995>

Reference Cases

[1][4] Supreme Court Decision 99Do822 delivered on Nov. 24, 2000(Gong2001Sang, 202), Supreme Court Decision 2001Do4857 delivered on May 14, 2004 [2] Supreme Court Decision 83Do2330 delivered on Dec.13, 1983(Gong1984, 227), Supreme Court Decision 85Do1503 delivered on Oct. 22, 1985(Gong1985, 1588), Supreme Court Decision 99Do822 delivered on Nov.24, 2000(Gong2001Sang, 202) [4] Supreme Court Decision 2002Do4229 delivered on July 22, 2004(Gong2004Ha, 1480), Supreme Court Decision 2002Do5679 delivered on Feb.11, 2003(Gong2003Sang, 851) [6] Supreme Court Decision 99Do4923 delivered on March 14, 2000, 2003Do3516 delivered on Oct. 10, 2003

• Defendant: Defendant (Law firm Youlchon, Attorney Shin Sung-taek, Counsel for Defendant)

• Appellant: Prosecutor

• Judgment of the court below: Seoul High Court Decision 2003No3322 delivered on October 6, 2004

Disposition

The decision of the court below delivered on June 12, 2001 on the establishment of the right of pledge and the decision delivered from July 3, 2001 to July 9, 2001 on the violation of the Act on the Aggravated Punishment of Specific Economic Crimes (Malfeasance in office) shall be dismissed, and the case concerning the above parts shall be returned to the Seoul High Court. The remaining grounds of appeal shall be dismissed.

Reasoning

The Grounds of Appeal are examined as follows.

1. On the Reasons for Appeal concerning the malfeasance in office through an act of providing collateral

A. In the crime of malfeasance in office, "the case where a property damage is made" refers to not only the case where a real damage is done but also the case where a risk of a property damage is caused, and as long as the risk of a damage is caused, even if the damage is restored later, it does not affect the establishment of a crime of malfeasance in office, and the judgment of whether a property damage has been done or not shall be conducted from an economic perspective with the consideration of the total property, so even if a legal judgment is made that such an act of malfeasance in office is null and void, if a risk has been caused that a property damage could occur or an actual damage has been done from an economic perspective, it shall fall under the case where a property damage is done (refer to Supreme Court Decisions 99Do822 delivered on November 24, 2000 and 2001Do4857 delivered on May 14, 2004 et al.).

Also, as different stock companies and stockholders shall not be regarded as the same person, even a single stockholder or a major stockholder shall establish a crime of malfeasance in office in case where an act of violating his duties is committed thereby causing damages to himself, which is the stock company, and if a company executive violated his duties thereby gaining property profit or letting a third party gain such profit which results in damages to the company, that constitutes a crime of malfeasance in office, and even if an actual understanding of stockholders had been gained on the above act of violating duties, it shall not be deemed that no damage has been done to himself, which is the stock company, or that there was no intention to commit the crime of malfeasance in office (refer to the Supreme Court Full Bench Decision 83Do2330 delivered on December 13, 1983, Supreme Court Decision 85Do1503 delivered on October 22, 1985 et al.).

In the case where a person takes out a loan from a financial institution and later provides the asset of the company as collateral {so-called LBO (Leveraged Buyout) method} to raise fund to take over a company, if the primary debt is not repaid, the company that is taken over bears the risk of losing the asset that is provided as collateral. So the collateral provision shall not be permitted with no limit, and it shall be permitted only when a compensation for the risk caused by the above collateral provision is provided. If the asset of the company that is taken over is made to be provided as collateral without any compensation, it is fair to deem that the person that takes over the company or a third party gained property profit that is equivalent of the value of the collateral and that the company that is taken over bears damages to its property. In the case of a stock company that is under a company reorganization procedure due to bankruptcy (which has changed to a restoration procedure with the enactment of the Act on the Restoration of the Debtor and Bankruptcy on April 1, 2006) as well, the potential benefit of the company's stockholders and creditors shall still be protected, so the above conclusion does not affect corporations that are under company reorganization procedures.

For the intention of the crime of malfeasance in office to be recognized, the person who deals with other person's work shall have an intention to do property damage, an intention to give himself or a third party property benefit, and is aware that his act violates his duties, so even if the defendant has an intention to work for his own interest, it shall only be deemed to be secondary, and if the intention for benefit or damage turns out to be the main intention, an intention of the crime of malfeasance in office shall be deemed to exist (refer to Supreme Court Decisions 99Do822 delivered on November 24, 2000 and 2001Do4857 delivered on May 14, 2004 et al.). In the case where the defendant claims that he conducted the act in question for his own interests and denies the criminal intention, the fact that constitutes to be the main element of a crime of malfeasance in office (facts about intention, motive, etc.) shall not be able to be proven in other way than proving indirect facts that have significant relevance to an intention, and what constitutes indirect facts that have significant relevance to an intention shall be based upon normal experience and be through a method of reasonably judging the connection of facts by close observance or analysis (refer to Supreme Court Decisions 2002Do4229 delivered on July 22, 2004 and 2002Do5679 delivered on February 11, 2003 et al.).

B. According to the evidence that the court below and the first court legitimately selected, the following facts are recognized.

The defendant, to take over Shinhan Co. Ltd., which was under a company reorganization procedure (hereinafter referred to as "Shinhan"), established a paper company on May 23, 2001 and named it S and K World Korea (hereinafter referred to as "S and K") and as the representative director, took out a loan of 35 billion Korean won on June 4, 2001 from Tong Yang-Hyundai Investment Bank (hereinafter referred to as "Tong Yang-Hyundai"), and for collateral, established the right of pledge on the 5.2 million new shares of Shinhan that would be acquired by S and K (5,000 won face value per share), and agreed to establish a collateral security for Tong Yang-Hyundai on the real estate in this case owned by Shinhan after S and K takes over Shinhan. Pursuant to the above agreement, S and K established the right of pledge for Tong Yang-Hyundai on the 5.2 million new shares of Shinhan that was acquired with the above loan, and the defendant, after he was appointed representative director of Shinhan on June 7, 2001, established a series of collateral security on the real estate in this case from July 3, 2001 and July 9, 2001 and got the above new shares returned from Tong Yang-Hyundai.

Separately from the above, the defendant, as representative director of S and K, took out a loan of 32 billion Korean won on June 5, 2001 from KorAm Bank, provided a total of 62 billion won worth of collateral to KorAm Bank, and agreed to withdraw 32 billion won out of about 33.3 billion won of the deposit held by Shinhan and deposit the amount to KorAm Bank after the company reorganization procedure ends, to establish the right of pledge on the above deposit and get the above bonds in return. Pursuant to the above agreement, the defendant, after he was appointed representative director of Shinhan, established the right of pledge on the deposit of 32 billion Korean won on around June 12, 2001 for KorAm Bank and cancelled the above collateral.

As seen above, the defendant provided the assets of Shinhan as collaterals for the loans that he took out from the financial institutions in order to take over the shares of Shinhan through a paper company S and K, but did not provide compensation that is equivalent to the collateral provision or take measures of preventing the shares and bonds acquired by S and K from being arbitrarily disposed of at least until the above loan would be paid off.

C. According to the above legal reasoning and the above facts, the defendant's above acts of providing collaterals caused most of the major assets of Shinhan to be provided as the responsible assets for S and K to pay off the above loans resulting in bearing the risk of being disposed of if the above loans are not paid off, so the defendant shall be deemed to have caused property damages to Shinhan in violation of his duties by letting the defendant or a third party gain property gains.

D. The court below judged that the defendant shall not be deemed to have an intention to cause damages to Shinhan only because he provided the assets of Shinhan to the above financial institutions as collaterals, because he used all of the monetary resources borrowed from the above financial institutions to pay off the debt of Shinhan and did not gain any personal interest from it, which rather resulted in contributing to the improvement of the financial structure of Shinhan, and the defendant shall be deemed to have led to provide the collateral in this case to raise fund to acquire Shinhan, which was under the company reorganization procedure, with the intention to promote the benefit of Shinhan, under his own reasonable calculation that his effort could sufficiently normalize the management, and the defendant made effort into normalizing the management after acquiring Shinhan.

But even though the defendant used the monetary resources borrowed from the above financial institutions to pay off the debt of Shinhan, the above loans were taken out basically to raise fund to acquire the shares or the managing right of Shinhan through the paper company S and K, so the direct benefit from the above loans do not belong to Shinhan, and the act was rather conducted for the interest of S and K, and the defendant's act of not providing fair compensation for the loans and providing the assets of Shinhan for the above financial institutions as collaterals shall be deemed as acts conducted for personal gains in order for S and K to acquire the status of a stockholder of Shinhan or to take over the managerial right. In other words, in this case, the defendant is recognized to have the intention of malfeasance in office to cause damages to Shinhan for the benefit of himself or S and K, and the situation where the defendant made effort to normalize the management of Shinhan after providing the above collaterals shall not be the reason to deny the intention concerning the collateral provision that was conducted illegitimately.

The court below also judged, that on the real estate in this case, before the collateral provision for Tong Yang-Hyundai, a collateral security of about 25.4 billion Korean won and a key money right of about 30 billion Korean won had already been established, and S and K's takeover of Shinhan terminated all of the above registrations as well as finished the company reorganization procedure of Shinhan, which expanded Shinhan's capability to pay off the debt, which further reduced the risk of losing the collateral real estate in this case, and the defendant actually paid off 25 billion Korean won out of the above loan debt to Tong Yang-Hyundai, which cancelled the 6 cases of collateral security on the real estate in this case, and as the management of Shinhan had been normalized, the above financial institutions did not have to retrieve the loans and extended the deadline of the payoff, which shows that the risk of the disposal of the collateral has significantly been reduced, so it is hard to deem that the above collateral provision had caused the risk of property damage. But even though the above registrations were terminated because S and K paid off the related debt with the fund that included the money to acquire the new shares, as the stock company and the stockholder shall not be deemed to be the same person as seen above, the money paid to Shinhan to acquire new shares shall be deemed to be owned by Shinhan, and according to the fact that the registrations got terminated as they were, it is estimated that the rest of the loan excluding the money to acquire the above new shares were paid off with the fund owned by Shinhan the debtor as well. Therefore, as the value of the collateral after the above registrations were terminated shall all belong to Shinhan, the situation where the above new share acquisition amount was paid by S and K or the defendant or S and K contributed to the formation of the above fund that was used to pay off the loans is not enough to deem that a fair compensation was provided that the defendant or S and K could use the above collateral value, and as seen above, the collateral provision in this case caused Shinhan to be in danger of letting most of its major assets be disposed of as the responsible property for the above loans, and even though the effort made by the defendant after providing the collateral in this case to normalize the management of Shinhan significantly reduced the risk of the above assets to be disposed of, it does not constitute the reason to deny the establishment of the danger or damage to the company through the provision of the collateral in this case.

E. Nevertheless, the court below declared innocence for the reason that it is hard to accept the above facts, which is in violation of law by misunderstanding the legal reasoning of malfeasance in office or misunderstanding the evidence selection rule, which obviously affected the decision. The part in the Reasons for Appeal that points the above out is reasonable.

2. On the Reasons of Appeal concerning malfeasance in office through an act of borrowing

For a director of a company to lend company fund to another person, if he did it while knowing that the other person has already lost his ability to pay off loans so lending him money would cause damage to the company, or if he did it while not taking reasonable measures such as getting sufficient collaterals provided, such loans constitute malfeasance in office against the company as it is an act of letting the other person gain profit and causing damage to the company (refer to Supreme Court Decision 99Do4923 delivered on March 14, 2000 et al.).

According to the record, the court below recognized the fact, and judged that the collateral provided by S and K against the above loan debt was actually functioning as collaterals as the termination of Shinhan's company reorganization procedure and management normalization helped it hold significant values, and had sufficient capability to be used as collaterals against the above loans, so the fact that the defendant made Shinhan lend money to S and K as above is not enough to deem that the defendant had the intention to cause damage to Shinhan, and the defendant's above act is hard to be recognized as the cause of the risk of damage to the Shinhan properties, so dismissed the decision of the first court that declared guilty, and sustained innocence through the evidence selected, which is fair, and is not in violation of law through misunderstanding legal reasoning that affected the decision or misunderstanding the fact through the violation of the law of evidence selection as argued in the Reasons for Appeal. The Reasons for Appeal concerning this part shall not be accepted.

3. On the Reasons for Appeal concerning malfeasance in office through an act of replacing collateral

In the case where the representative director of a company provides the asset of the company as a collateral for a third party and replaces the already established collateral, if the value of the newly provided collateral is higher than the value of the existing collateral, it shall be deemed that a property damage has occurred to the company, unless there is a special situation. But in the case where the representative director of a company provides the asset of the company as a collateral for a third party and replaces the already established collateral, if the value of the newly provided collateral is lower than or equal to the value of the existing collateral, it shall not be deemed that a property damage has been caused to the company.

According to the record, the court below recognized the fact, and judged that the defendant's act of providing the 5 billion won deposit to Tong Yang-Hyundai as a collateral is nothing more than replacing the collateral because it was done to cancel the collateral against the Won Ju Rental Apartment building among the collateral real estate in this case that had already been provided as collaterals, and it is hard to deem that the defendant had the intention of malfeasance in office against Shinhan, and it is also hard to deem that Shinhan had an additional concern over a property damage due to the above provision of collateral, and there is no evidence to prove otherwise, and dismissed the appeal of the prosecutor and sustained innocence, which is fair, and is not in violation of law through misunderstanding legal reasoning that affected the decision or misunderstanding of facts due to insufficient deliberation as argued in the Reasons for Appeal. The Reasons for Appeal concerning this part shall not be accepted.

4. Conclusion

Wherefore, the decision of the court below delivered on June 12, 2001 on the establishment of the right of pledge and the decision delivered from July 3, 2001 to July 9, 2001 on the violation of the Act on the Aggravated Punishment, etc. of Specific Economic Crimes (Malfeasance in office) shall be dismissed, and the case concerning the above parts shall be remanded back to the Seoul High Court. The remaining grounds of appeal shall be dismissed. The decision is delivered with the assent of all Justices who reviewed the appeal.

Source

• Supreme Court Decision 2004Do7027 Delivered on November 9, 2006, Supreme Court Library of Korea