Rehabilitation Proceedings | A Supreme Court Judgment Reversing and Remanding a Lower Judgment That Designated a Company in Rehabilitation Lacking Standing as the Party

This is a case in which a company in rehabilitation that had received a decision to commence rehabilitation proceedings filed a suit designating itself rather than its custodian as the plaintiff.

This case raised the question of what measures the court should take when the plaintiff designates a company in rehabilitation that lacks standing as the party.

In the complaint in this case, in which the plaintiff (Company A), a company in rehabilitation undergoing rehabilitation proceedings, sought damages for tort or the return of unjust enrichment against the defendant, the plaintiff was designated as “Company A.”

In commencing rehabilitation proceedings for the plaintiff, the lower court did not appoint a custodian but instead issued a decision treating the plaintiff’s representative director, Non-Party 1, as the plaintiff’s custodian, and this was entered in the plaintiff’s corporate register.

The plaintiff, asserting that it was rescinding the real estate sale contract between the plaintiff and the defendant on the ground of the defendant’s deception, filed a suit with the court of first instance seeking damages for tort or the return of unjust enrichment.

The plaintiff’s litigation representative designated the plaintiff as the “plaintiff company” in the complaint and submitted, as documentary evidence, the plaintiff’s certified copy of all registered matters issued before the commencement of the rehabilitation proceedings.

However, on the power of attorney submitted the day after the suit was filed, the personal seal impression of Non-Party 1 appeared next to the entry “the plaintiff company’s representative director, Non-Party 1” in the principal’s box.

Meanwhile, the above rehabilitation court issued a decision appointing Non-Party 2 as the plaintiff’s custodian. The plaintiff submitted an additional power of attorney to the lower court, on which the principal’s box stated only “the plaintiff company” without any designation of a representative.

Next to it appeared a seal impression reading “the plaintiff company’s statutory custodian, Non-Party 2, seal.”

On the issue of standing in rehabilitation proceedings, the lower court rendered a final judgment dismissing the plaintiff’s appeal, but the Supreme Court’s judgment was different.

Where a plaintiff designates as the party a company in rehabilitation that lacks standing, the court must not rely solely on the designation of the party in the complaint but must determine the party by comprehensively considering the content of the claim and the underlying facts.

Precedent has made clear that, if the party so determined is the custodian, the court must have the designation of the party corrected to the custodian and then proceed to hear and decide the case, whereas if the party so determined is the company in rehabilitation, the suit must be dismissed because that company lacks standing. (See Supreme Court, Decision of August 22, 2013, 2012 Da 68279; Supreme Court, Decision of December 29, 2016, 2014 Hu 713).

Applying the above legal principles, the Supreme Court took the view that the court should have sought clarification from the plaintiff and ascertained whether and when rehabilitation proceedings had been commenced with respect to the plaintiff.

The Supreme Court pointed out that the principal’s box on the power of attorney submitted by the plaintiff at the time of filing this suit bore the seal impression in the individual name of Non-Party 1, who had been the plaintiff’s statutory custodian, and that the principal’s box on the power of attorney additionally submitted at the lower court bore the seal impression in the name of Non-Party 2, the plaintiff’s custodian, without any designation of the plaintiff’s representative.

The Supreme Court held that the court should have sought clarification from the plaintiff and had it ascertain whether and when rehabilitation proceedings had been commenced with respect to the plaintiff, and, where necessary, should have taken measures to determine the party, such as correcting the designation of the party, before hearing and deciding the case.

Nevertheless, the Supreme Court pointed out that the lower court closed argument without seeking the necessary clarification and dismissed the plaintiff’s appeal while designating the plaintiff and appellant as the “plaintiff company.”

The Supreme Court reversed and remanded the lower judgment, holding that “the lower court’s determination misapprehended the legal principles concerning the determination of the party and the court’s duty of clarification where a suit is filed after a decision to commence rehabilitation proceedings, and thus failed to conduct the necessary examination.”

When a custodian is appointed during rehabilitation proceedings, the custodian becomes the party.

The custodian is appointed by the court, is subject to the court’s supervision, and is charged with the duty to perform their functions with the care of a good manager.

Once rehabilitation proceedings are under way, the authority to conduct the company’s business and to manage and dispose of its property is also vested exclusively in the custodian, so the related litigation comes to be handled by the custodian as well.

During rehabilitation proceedings, where the content of other litigation is unrelated to rehabilitation claims and the like, the company in rehabilitation must go through the procedure of changing the party to the custodian.

If the change of party is not made in a timely manner, there is a risk that the suit may be dismissed, so care must be taken with the proper designation of the party in litigation.

Rehabilitation proceedings are a procedure by which a company facing serious financial difficulty seeks to adjust its debts and normalize the business with the assistance of the court.

It is generally best to interpret the relevant statutory provisions accurately and conduct the rehabilitation proceedings with the assistance of an attorney experienced in insolvency law.

The Daeryun Law Firm 🔗Rehabilitation and Bankruptcy Group assists companies with rehabilitation proceedings through a systematic framework centered on attorneys experienced in insolvency law.