Constitutional Court Rules "Penalty Provisions for Violating Maximum Interest Rate under Interest Rate Restriction Act Are Constitutional" ... First Ruling

The Constitutional Court has ruled that criminal punishment for receiving interest exceeding the maximum interest rate under the Interest Restriction Act cannot be regarded as an infringement of freedom of contract.

While enforcing compliance with the maximum interest rate through criminal penalties in private transactions restricts the freedom of contract derived from the general freedom of action, the public interest aimed to be achieved through this is far more significant, and thus it does not violate the principle of proportionality.

Constitutional Court Grand Bench./Photo by Hyunmin Kim kimhyun81@

Enacted in 1962 with the purpose of stabilizing the national economic life and realizing economic justice, the Interest Restriction Act was abolished in 1998 by the "Act on the Abolition of the Interest Restriction Act" but was revived again in 2007.

The constitutional complaint filed this time concerns Article 8, Paragraph 1 of the Interest Restriction Act, which punishes a person who receives interest exceeding the maximum interest rate stipulated in Article 2, Paragraph 1 of the same Act with "imprisonment for up to one year or a fine of up to 10 million won."

Currently, Article 2, Paragraph 1 of the Interest Restriction Act stipulates that the maximum interest rate on monetary loan contracts shall be set by Presidential Decree within the limit of not exceeding 25% per annum, and the Presidential Decree sets the maximum interest rate limit at 20% per annum.

Before the amendment, the Interest Restriction Act allowed the maximum interest rate to be set by Presidential Decree within 30% per annum, and the Presidential Decree set the maximum interest rate limit at 24% per annum; however, the current Interest Restriction Act, effective since July 2014, lowered the maximum interest rate.

Previously, in 2001, the Constitutional Court upheld the constitutionality of the amendment to the Interest Restriction Act that raised the maximum interest rate ceiling from 20% to 40% per annum, thereby relaxing regulations, as well as the Act on the Abolition of the Interest Restriction Act (enforced in 1998). In 2007, a constitutional complaint was filed against the provisions of the Interest Restriction Act limiting the interest ceiling and the Presidential Decree, but it was dismissed on the grounds that the complainant was not directly restricted in fundamental rights by those provisions and thus lacked standing. This is the first time the Constitutional Court has ruled on the constitutionality of the penal provisions under the Interest Restriction Act.

According to the legal community on the 2nd, the Constitutional Court unanimously ruled constitutional in a case where Mr. Go, who was convicted in the first trial for receiving interest exceeding the maximum interest rate under the Interest Restriction Act, filed a constitutional complaint claiming that Article 8, Paragraph 1 of the Interest Restriction Act infringes on personal freedom.

Mr. Go lent 180 million won to Mr. Lee on December 31, 2018, receiving an advance interest of 30 million won, and agreed to receive 9 million won in interest monthly if repayment was not made by the end of March 2019.

Mr. Go was indicted for receiving a total of 63 million won in interest approximately eight times from Mr. Lee between April 2, 2019, and November 6, 2019, exceeding the then maximum interest rate of 24% per annum, and was sentenced guilty by the Gwangju District Court on November 12, 2020.

Mr. Go requested the court to refer Article 8, Paragraph 1 of the Interest Restriction Act for a constitutional review during the appeal trial, but the court dismissed his appeal and the request for constitutional review on January 11, 2022. Subsequently, Mr. Go directly filed a constitutional complaint with the Constitutional Court.

In his constitutional complaint, Mr. Go argued, "Article 8, Paragraph 3 of the Interest Restriction Act stipulates that 'the portion exceeding the maximum interest rate shall be null and void,' which sufficiently protects the debtor; however, imposing criminal punishment violates the principle of proportionality and restricts personal freedom."

He also claimed, "Punishing uniformly without considering whether the debtor suffered damage even if interest is received exceeding the maximum interest rate even once lacks appropriateness and minimal infringement."

However, the Constitutional Court, with a unanimous opinion of all justices, upheld the constitutionality of Article 8, Paragraph 1, the penal provision of the Interest Restriction Act.

First, the Court recognized that the fundamental right restricted by the provision punishing those who receive interest exceeding the maximum interest rate with imprisonment or fines is the freedom of contract derived from the general freedom of action.

The bench stated, "The petitioner claims that the provision infringes on personal freedom, but this is no different from the claim that the provision punishing violations of the interest rate ceiling infringes on freedom of contract, so it will not be separately judged."

The Constitutional Court then examined each element of the principle of proportionality, which is the standard for determining infringement of fundamental rights: legitimacy of purpose, appropriateness of means, minimal infringement, and balance of interests.

The Court stated, "The provision under review is recognized as having legitimacy in its legislative purpose, which is to establish a minimum social safety net to protect the national economic life by setting an appropriate maximum limit on interest, and to enhance its effectiveness. The punishment provision for violating the interest rate ceiling is also an appropriate means contributing to achieving the legislative purpose by ensuring compliance with the contractual maximum interest rate on monetary loans."

Regarding the principle of minimal infringement, the Court noted that although the Interest Restriction Act nullifies the portion exceeding the maximum interest rate, the entire agreed interest is not invalidated, so the deterrent effect of criminal punishment on violations of the interest rate ceiling cannot be considered high. It also pointed out that in difficult situations where high-interest private loans are unavoidable, limiting only the civil effect of excess interest payments may result in the inability to recover excess interest through civil litigation enforcement procedures. Furthermore, the penal provision prescribes imprisonment and fines as types of statutory punishment, with no lower limit but only an upper limit, allowing courts to suspend sentences or grant probation. Based on these points, the Court concluded that criminal punishment for violating the maximum interest rate ceiling to ensure the effectiveness of the Interest Restriction Act falls within the legislature's discretion.

Finally, the Court stated, "The public interest sought by the provision under review is to contribute to the stability of the national economic life and the realization of economic justice by setting an appropriate maximum limit on interest. This public interest is far more significant than the disadvantages suffered by those punished for violating it, so the provision does not violate the balance of interests." It concluded, "Therefore, the provision under review does not violate the principle of proportionality."

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