CONTENTS
- 1. A Case in Which Whether the Crime of Fraud Was Established in Connection with the Omission of Income in Rehabilitation Proceedings Was at Issue
- - The Lower Court's Determination on Whether the Crime of Fraud Was Established in the Rehabilitation Proceedings
- 2. The Supreme Court's Determination on Whether the Crime of Fraud Was Established in the Rehabilitation Proceedings
- 3. Rehabilitation Proceedings, Daeryun's Strategy
1. A Case in Which Whether the Crime of Fraud Was Established in Connection with the Omission of Income in Rehabilitation Proceedings Was at Issue
This case concerned whether the crime of fraud was established in connection with the omission of income in rehabilitation proceedings.
The defendant was a veterinarian who worked at an animal hospital and received a monthly salary of 4.4 million won.
However, although he received additional allowances each month into an account held under his wife's name for working extra hours, he did not record these additional allowances in the summary table of the rehabilitation plan or in the monthly reports submitted to the court during the rehabilitation proceedings.
As a result, the court recognized the defendant's income as only 4.4 million won and approved the rehabilitation plan, and the defendant had several hundred million won in debt reduced.
The prosecution treated this as ‘an act of deceiving the court to obtain a discharge of debt’ and indicted him for the crime of fraud.
▶Course of the Rehabilitation Proceedings
-October 2017: Commencement of rehabilitation proceedings
-First report of the investigation commissioner: Future income estimated based on 4.4 million won per month
-February 2018: Additional allowances not reflected when the summary table of the rehabilitation plan (amended) and the monthly reports were submitted
-February 2018: Approval of the rehabilitation plan and decision to conclude the proceedings
Issue: Did the omission of the additional allowances in the rehabilitation proceeding documents constitute deceit of the court and thus amount to the crime of fraud?
The Lower Court's Determination on Whether the Crime of Fraud Was Established in the Rehabilitation Proceedings
The lower court found the defendant guilty of the crime of fraud.
It held that, although the defendant had clearly received the additional allowances, he reported only 4.4 million won per month, and that this constituted an act of deceit directed at the court.
A rehabilitation plan is calculated based on the debtor's income, and when the additional allowances are included, the total income and the amount available for repayment change substantially.
Accordingly, the court determined that the crime of fraud was established, stating that the defendant “obtained the decision approving the rehabilitation plan on the basis of false statements.”
▶Legal Principles Relating to the Lower Court's Determination
-Under the Criminal Act, the crime of fraud is established only where a person deceives another and thereby obtains a pecuniary benefit
-Under the Debtor Rehabilitation and Bankruptcy Act, a decision approving a rehabilitation plan produces the effect of a discharge of debt, so where approval is obtained by deceit, the crime of fraud may be established
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2. The Supreme Court's Determination on Whether the Crime of Fraud Was Established in the Rehabilitation Proceedings
The Supreme Court's determination on whether the crime of fraud was established in the rehabilitation proceedings differed from that of the lower court.
The Supreme Court reversed the lower court's determination, held that the crime of fraud was difficult to recognize, and remanded the case.
The Supreme Court set out the following standard.
▶The mere fact that a report of income differs from the truth does not by itself constitute the crime of fraud.
▶The crime of fraud is established only where that false report has a direct and material effect on whether the rehabilitation plan is approved or on the calculation of the repayment rate.
In other words, the causal link between the act of deceit and the decision approving the rehabilitation plan must be clear.
The Supreme Court cited the following grounds.
-The defendant may have considered the additional allowances to be temporary or irregular, and it is difficult to conclude that there was an intentional concealment.
-Although he did not reflect the additional allowances, he did not separately submit false materials.
-Even if the additional allowances had been reflected, the repayment rate under the rehabilitation plan satisfied the statutory standard (the principle of guaranteeing the liquidation value), so it is difficult to find that the approval decision would have been different.
(In fact, the repayment rate under the rehabilitation plan (32.24%) was higher than the liquidation-value distribution rate (29.9%), and even adding the additional allowances of approximately 3.4 million won would not produce a significant difference.)
-The additional allowances arising after approval are, rather, no more than circumstances occurring after the conclusion of the rehabilitation proceedings.
Accordingly, the court determined that it was difficult to find that “the defendant's conduct deceived the court and determined the decision approving the rehabilitation plan.”
▶Legal Principles Determined by the Supreme Court
Requirements for establishing the crime of fraud in rehabilitation proceedings:
① The debtor must engage in an act of deceit, such as a false report
② Such act must have a substantial and material effect on whether the rehabilitation plan is approved or on the calculation of the repayment rate
A mere omission of income is not sufficient, and it must be proven that the act affected the approval decision.
3. Rehabilitation Proceedings, Daeryun's Strategy
This judgment is an important precedent that set out a standard for when a debtor's omission of income or mistake in rehabilitation proceedings may lead to the crime of fraud.
It confirmed that an ordinary omission in the records or a mistake alone does not constitute the crime of fraud.
It also served as a reminder that whether that false entry had a material effect on the decision approving the rehabilitation plan is the key factor in the determination.
Accordingly, this was a case that made clear that, even where a debtor's statements in rehabilitation proceedings are inaccurate, it is difficult to connect them to criminal punishment if they do not bring about a substantial change in the approval decision.
It shows the limits of criminal liability in insolvency proceedings, and it may be seen to suggest the importance of reporting financial information when a company or an individual undertakes rehabilitation proceedings, as well as the possibility of a defense on legal grounds.
Rehabilitation proceedings involve complex steps, including the submission of income and asset materials, the preparation of a rehabilitation plan, responding to the creditors' meeting, the management of monthly reports, and the calculation of the repayment rate and the liquidation value.
During this process, even a small omission in the records or a mistake may lead to objections from creditors or a court order to supplement the filing, and in some cases it may give rise to a criminal issue, as in this case.
For this reason, rehabilitation proceedings require professional legal review and management from the outset.
At Daeryun Law Firm LLP, cases are overseen by attorneys whose backgrounds include service as a court-appointed bankruptcy trustee, registration as an insolvency attorney with the Korean Bar Association, and the handling of individual rehabilitation cases for company representatives.
In addition, the firm collaborates in real time with its affiliated certified public accountants, tax accountants, and labor attorneys to comprehensively address all legal, tax, and labor issues that may arise in the course of corporate restructuring.
The firm provides the following tailored legal services in connection with rehabilitation proceedings.
-Advisory on individual and corporate rehabilitation proceedings: Support throughout the entire process, from preparing the application to obtaining court approval
-Preparation and amendment of the rehabilitation plan: Review of whether the repayment rate and the principle of guaranteeing the liquidation value are satisfied
-Management of financial information and risk review: Prevention of criminal risks that may arise in the course of reporting income and assets
-Creditor negotiations and handling of meetings: Establishment of strategies for securing creditor consent
-Post-management: Prevention of disputes and legal defense in the course of carrying out the rehabilitation plan
As this precedent shows, in rehabilitation proceedings, accurate legal analysis and practical responses are both important.
Drawing on its experience with a range of insolvency cases, Daeryun helps design tailored approaches for debtors and helps prevent unnecessary legal risks.
