Supreme Court: "New Company Established to Avoid Personal Debt Repayment... Must Jointly Bear Debt"

Supreme Court in Seocho-dong, Seoul. Photo by Honam Moon munonam@

[Asia Economy Reporter Kim Daehyun] If a debtor closes an existing sole proprietorship to avoid repaying personal debts and establishes a new corporation under a family member's name, the creditor can hold the new company responsible for fulfilling the debt, according to a Supreme Court ruling.

On the 10th, the Supreme Court's 2nd Division (Presiding Justice Ahn Cheolsang) confirmed the lower court's ruling in favor of plaintiff A in a lawsuit demanding the delivery of movable property against Corporation D.

In 2012, Mr. B signed a contract to purchase factory land and buildings from Mr. A for about 1.5 billion won. However, he failed to pay 150 million won for the real estate purchase price and factory building construction costs, and both parties signed a memorandum stating that if payment was not made by the end of the same year, the real estate would be transferred back.

Subsequently, Mr. B transferred all assets of his existing sole proprietorship to newly established Corporation D, which had the same 'business purpose,' 'physical facilities,' and 'personnel composition.' While Corporation D assumed Mr. B's assets and liabilities, it excluded the debt owed to Mr. A. Additionally, Mr. B acquired 50% of Corporation D's shares, with the remainder held by family members.

Mr. A claimed that "Corporation D is a family company established to evade debt," arguing that the new company should repay his debt. On the other hand, Corporation D denied any obligation to repay the debt.

The first trial court dismissed Mr. A's claim, noting that "Corporation D was established about three years after the memorandum between Mr. A and Mr. B," and that "Mr. B is a sole proprietor, whereas Corporation D is a corporation with a different legal nature."

The appellate court ruled in favor of Mr. A. The court stated, "Mr. B's act of establishing Corporation D was an abuse of corporate personality to evade debt," and "Corporation D must jointly bear the debt to Mr. A and is therefore obligated to deliver the real estate."

The Supreme Court also agreed with this judgment. The court said, "It is against justice and equity to deny Mr. A's claim on the grounds that Corporation D is a separate legal entity from its shareholders," and "Mr. A can demand debt fulfillment from Corporation D as well." It added, "The lower court did not err in its application of the law regarding the denial of corporate personality."

This content was produced with the assistance of AI translation services.