The union members of Stock Company A accused the management of Company A of the violation (misappropriation) of the Act on the Aggravated Punishment, etc. of Specific Economic Crimes to the prosecution on the grounds that (i) Company A collateralized a hotel owned by Company A in the amount of KRW 1 trillion so that Company B, mother company of Company A (“Mother Company”), could borrow KRW 750 billion from a bank and (ii) Company A incurred losses equivalent to the same amount by making an unsecured loan of KRW 51.6 billion to the Mother Company.
In defense of Company A’s management, DR & AJU emphasized the management’s real intention was that rather than urgently selling the hotel at a cheap price, selling of the hotel at a reasonable price after allowing the Mother Company to find a solution to financial difficulty by getting a loan with the hotel as a security would be more beneficial and helpful to Company A and would reduce losses. Further, with regard to the unsecured loan to the Mother Company, DR & AJU pointed out that considering that the Mother Company could have gotten a dividend of KRW 50 billion but it did not, it clearly indicates there was no intention of misappropriation by Company A. Further, it is reasonable to deem the existence of undistributed dividends as a mean to recover credits.
As a result, all charges against Company A were dismissed, as well as the plaintiff’s prosecution appeal. There will always be fierce legal battles when determining whether the management’s act constitutes misappropriation against a company or not, especially under the circumstances which the insolvency of a company is evident and the management provided loan or security to its affiliates. Further, the courts tend to narrow the types of credit recovery measures into only provision of security.
DR & AJU made thorough investigation and analysis on equity structure among the affiliates and the circumstance which the company was under at that time and proved that the management acted in good faith for the benefit of Company A and any undistributed dividends could be a decent means to recover credits. With such effort of DR & AJU, it was able to deter prosecution at the stage of investigation. This case established an important precedent, considering the fact that it is rare for the courts to dismiss the charges of misappropriation based on the managerial decision.