Series Index
Part 1 | Unpaid Corporate Transactions: Liability Behind the Veil
Part 2 | Trade Name Continuity and the Liability of a Successor
Part 3 | Directors’ Liability for Damages
By Hong Seung-kwon
Principal Attorney, PAN Law Firm (skh@law-pan.com)
As is widely understood, a corporation and the directors who operate it are legally separate. Accordingly, corporate debts belong to the corporation itself, while a director’s liability is generally limited to internal responsibility toward the company.
There are exceptions, however. If a director causes damage to a third party intentionally or through gross negligence in the course of performing their duties, liability to that third party may be recognized. For this reason, even where a transaction is formally between a corporation and an individual, the director operating the corporation may, in substance, become responsible for the transaction.
Consider the following example. Tenant A entered into a lease agreement with a corporate landlord and paid a substantial deposit. However, the property had a material issue that should have been disclosed. The representative director signed the lease on behalf of the company but failed to inform A of that issue. As a result, A was unable to recover the deposit even after the lease ended.
In this case, the court found that the representative director’s failure to disclose such information when entering into the lease constituted intentional misconduct or gross negligence causing damage to a third party. The court held that the director was liable, jointly with the company, to compensate A for the resulting loss.
Such liability is not recognized merely because of a failed business judgment or a company’s default. Intentional misconduct or gross negligence in the course of duty is required. However, as in the case above, failure to verify a basic and essential element underlying the transaction may itself be regarded as gross negligence.
It should also be noted that even a person not registered as a representative director may be held liable as a de facto director if they substantially operate the company, regardless of formal title.
In practice, small companies often have a nominal representative and a separate person who actually runs the business. If the person who substantially operates the company were allowed to avoid liability simply because they lacked a formal title, transaction safety could be undermined. Holding someone who acted as an apparent representative and participated in the transaction liable based on substance can help close that gap.
Therefore, when an individual enters into a contract with a corporation, reviewing the contract carefully is of course the first step. In addition, it is important to clearly identify who is appearing as the counterparty in the transaction. Conversations held in person should be recorded where lawful, and text messages or KakaoTalk exchanges should not be deleted. Such materials may later become important evidence in establishing the other party’s liability if damage occurs.
For company representatives or actual operators, it is important to remember that liability may arise even if they are not the formal party to the contract or are not formally registered as the representative. In particular, failing to verify important legal requirements that form the basis of a transaction may be viewed as gross negligence.
About the Author
Hong Seung-kwon is the managing attorney of Pan Law Office. His practice covers a broad range of issues, including civil and criminal litigation as well as emerging legal challenges in the digital era. He has continued to analyze how technological innovation, property rights, and regulatory policy changes affect legal and market structures.
