Following last week’s “Part 13 | Illegal Lending Victims: What You Owe—and What You Don’t”, this three-part series will examine key legal issues arising in transactions between individuals and corporations.
Series Index
Part 1 | Unpaid Corporate Transactions: Liability Behind the Veil
By Hong Seung-kwon
Principal Attorney, PAN Law Firm (skh@law-pan.com)
When You Do Not Get Paid in a Transaction With a Corporation
In business, the counterparty is often not an individual but a company or legal entity. Yet it is not uncommon for a person to sign a contract with a company, deliver goods or provide services, and then discover, when payment is due, that the company has no money left. Why does this happen, and what can be done about it?
The law recognizes two kinds of subjects that can hold rights and bear obligations. One is a living person, or a “natural person.” The other is a “juridical person,” or legal entity. A corporation is a legal construct to which the law gives the capacity to hold rights and assume obligations as though it were a person. Stock companies and similar incorporated entities fall into that category.
Because natural persons and legal entities are treated separately, a company’s debts are, in principle, paid only out of the company’s own assets. Those who established or run the company, including its representative director, are generally not required to repay those debts with their personal funds. The principle of limited liability, under which shareholders bear losses only up to the amount they invested, also stems from this distinction. That separation of liability allows people to invest in companies and expand businesses with confidence. For those dealing with a company, however, it can also become a trap.
As long as the company has sufficient funds, there is no real problem. But when the time comes to collect payment, if the company’s bank account is empty or its assets have already been moved elsewhere, there may in practice be no meaningful target left for recovery. Even a court judgment is of little use if the company has no assets.
The problem becomes more serious when the person actually controlling the company intentionally siphons off corporate assets, or uses an empty shell company for transactions and then continues the business through a newly established entity. In such cases, the counterparty bears the loss, while the corporate form is misused as a tool for evading responsibility.
Because such situations are plainly unfair, the law allows liability, under certain conditions, to be imposed not only on the company itself but also on another company or on individuals such as the company’s representative. There are three main approaches.
First, liability may be imposed on a company that acquires the business and continues to use the trade name. In some cases, one company transfers its entire business to another, and the transferee continues using the former company’s name either exactly or in a similar form. Under Korean commercial law, the new company may also be held responsible for the old company’s debts. From the counterparty’s perspective, the signboard remains the same, and business may continue without any awareness that ownership has changed. The rationale is that if the new company creates that confusion, fairness requires it to bear responsibility as well.
Second, liability may be imposed directly on the representative director as an individual. If a representative director, in the course of performing duties, intentionally or through gross negligence breaches those duties and causes damage to another person, that director may be personally liable for damages. Since a company’s actions are in reality often directed by its representative, there are cases in which a party that dealt with the company may also pursue liability against the representative director personally.
Third, the corporate veil may be pierced. Where a company is a company in form only, but in substance no different from an individual’s personal business, or where the corporate form is abused as a means of avoiding debts, the law may exceptionally disregard the company’s separate existence and impose liability directly on the person or parent company behind it. This is known as “piercing the corporate veil.” Because it cuts against the foundation of the corporate system, it is recognized only under strict conditions. Even so, it functions as a last-resort measure to protect creditors.
As a general matter, it is not easy to impose on another individual liability that properly belongs to a corporation. For that reason, this series aims to explain more clearly the kinds of situations in which such issues arise, using concrete examples. If the remedies provided by law are properly understood and used, it may be possible, at least in part, to avoid giving up money that is rightfully owed simply because the company has no funds left.
About the Author
Hong Seung-kwon is the managing attorney of Pan Law Office in South Korea. His practice covers not only civil and criminal litigation but also emerging legal issues in the digital age. He regularly writes on how technology, property rights, and regulatory policy are reshaping law and markets.
