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
Part 4 | The Person Behind the Company Name
By Hong Seung-kwon
Principal Attorney, PAN Law Firm (skh@law-pan.com)
Establishing a company does not require as much capital as many people assume. In Korea, a stock company can be incorporated with a capital of just 1 million won, and registration can be completed online within a few days. This accessibility makes the corporate system easy to use, but it also means that companies are sometimes misused as a screen to shield someone from responsibility.
Consider the following case. A enters into a large contract with a company, but when payment becomes due, the company has no assets left. Upon closer examination, the company is found to be sharing office space with another company, has only one employee—the president—and its corporate bank account has effectively been operated like the president’s personal account.
Or consider another situation. A company burdened with substantial debt suddenly shuts down, only for almost the same business to reopen a few days later under a new company name. The employees and business partners remain largely the same, and the president is either the same person or a family member. Only the company name, office address, and registration have changed.
A company has a separate legal personality, meaning it is legally distinct from other companies and individuals. But the law cannot continue to protect that separateness when it is abused. This is where the doctrine of piercing the corporate veil comes in.
Piercing the corporate veil refers to a legal doctrine under which, in exceptional cases, the court disregards the formal existence of a company and holds the person or another company behind it directly liable. This applies where a company formally has separate legal personality but, in substance, does not operate in a manner consistent with that status, or where its legal personality has been abused for purposes contrary to the corporate system. Because this doctrine cuts against a fundamental principle of company law, it is recognized only under strict requirements.
Those requirements can broadly be divided into two categories.
The first is where the company’s legal personality has effectively become a mere shell. This refers to a situation in which the company exists in name only and lacks real substance. If the company’s assets and the president’s personal assets are commingled, its decisions are controlled by someone behind the company, formal procedures such as shareholders’ meetings or board meetings are rarely observed, and the company’s capital is insufficient for its ordinary business operations, the company may in substance be no different from that person’s private business. In such circumstances, liability may be imposed on the person behind the company.
The second is where the company’s legal personality has not necessarily become a mere shell, but has been abused as a means of evading debt. If the circumstances indicate that the company was established or used to achieve the unlawful purpose of avoiding obligations owed by the person behind it, a creditor may seek performance of the debt directly from that person as well.
In practice, however, cases in which the corporate veil is pierced are not common. The basic principle of company law is that a corporation is a separate legal person distinct from its shareholders, directors, and officers. Therefore, the mere fact that a company has no money, or that the president effectively controls the company, is not enough to disregard its legal personality. Whether the requirements described above are met must be examined carefully, and the analysis can differ significantly depending on the facts of each case. Professional legal review is therefore essential.
Across the previous three parts of this series, we have examined how a creditor may respond when a company fails to pay its debts. These include holding a successor company liable when it continues to use the same trade name, pursuing personal liability against directors who substantially handled the company’s affairs, and, finally, seeking to deny the company’s separate legal personality itself.
None of these remedies is easily recognized. Still, when a creditor is left with little recourse after dealing with a corporation, they are legal avenues worth actively considering.
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.
