Breach of Trust

Breach of trust or malfeasance in office (배임죄/背任罪) is defined as a crime of a person who is in charge of managing the other person's business by damaging the affected person in breach of his/her duty, gaining proprietary profit, or benefiting a third party.

When a business decision of the corporate management brings about the loss to the corporation, it might be examined above all whether it constitutes a crime of breach of trust on business under Article 356 of the Criminal Act. The Criminal Act has general provisions of breach of trust and there are special provisions of special breach of duty in the Commercial Act and levelled-up punishment provisions in the Additional Punishment Law of Specific Economic Crimes. Disguised subscription of paid-in capital is an example.

Acknowledging criminal liability of the corporate management on account of breach of trust, however, should be prudent, for fear that imposing penalty may lead to shrinking the normal business decision or business operation of the corporation. Thus, this paper will examine whether business judgment or the specific action of the management constitute a crime as duty of trust and punishable, and will examine the limit of such punishment. After current substance and system of existing provisions are examined, the propriety and legislative improvements will be suggested.

Key words
breach of trust, criminal liability, punishment, Business Judgment Rule, illegality

Legal Nature of Breach of Trust
Breach of trust which protects the property of victim is the crime on profit, different from the crime on simple property-taking, against the damage to whole property of victim caused by the action of wrong-doer. The current Criminal Act requires damage to a person as an element of breach of trust, so it is proper to see it as a crime that requires infringement, although there are some view and cases that regards it as a crime constituted by the occurrence of danger. In an economic sense, damage to property does not necessarily deduced from the actual damage to the property but even the likelihood of damage diminishes the property value in market, which is the damage to property.

The essential subject matter of breach of trust is deliberate infringement of a person's property abusing the trustfulness between the internal relationship with the other person. However, breach of trust does not protect the "fiduciary relationship" itself but requires abuse of fiduciary relationship cause damage to the property of victim and the third party wrong-doer gain profit from it. So breach of trust is limited in punishment in that wrong-doer's action of breaching the duty alone cannot be punishable.

Subject: One-Person Company at Issue
Duty of Trust is infringed by the other person who are in charge of person's business management. The one who are in charge of person's business management needs approval of the fiduciary relationship to deal with the business management in the internal relationship with the other person, and the power of attorney to management is not necessarily required in the external relationship with the third party. The business management affairs in breach of trust should be of "a person," and in a one-person corporation where a representative director is a stockholder at the same time, the issue is whether his or her action is a person's action for the corporation.

The Supreme Court distinguishes the status of a representative director from that of a stockholder even in the one-person corporation. The corporation properties should be regarded as other person's properties. Accordingly, even a one-person stockholder has a duty to act for the interest of the corporation.

Judicial viewpoint
Action of breach of trust means every action contrary to the fiduciary relationship, violating the regulations by law, contract, or good faith duty, given the concrete circumstances such as subject matter or nature of management affairs. Current issue is so-called "business judgment."

Considering the characteristics and complexity of corporate management, the director is not liable under "Risky transaction (Risikogeschäft)" or "Business judgment rule" if director's action on reasonable ground with the managerial experience causing the result of loss to the corporation. However, when a director is committed to set aside "secret money" for any unidentified purpose but allegedly conducive to the corporation, he or she cannot escape from the breach of trust in the name of BJR if the action is detriment to the corporation.

Review
To avoid excessive regulation on the business management or corporation by criminal punishment, it is not appropriate to judge whether the business judgment falls within the breach of trust with the obscure expression in the Korean Supreme Court decision that "breach of trust is not denied not only with the reason of business judgment." The concrete standard should be suggested by classifying the actions beyond the self-controlling business judgment.

Damage and Likelihood of Damage
For the manager's action based on the business judgment to be punished, breach of trust requires not only the action violating the duty but also the proprietary damage to a person who has given trust. Proprietary damage means the loss of properties or the value of the properties which the Criminal Act recognizes and protects as properties. Views conflict on whether to recognize the damage or on the scope of damage.

Judicial viewpoint
The Supreme Court takes a consistent position that the damage in breach of trust includes not only actual damage but also likelihood of damage. Main reason stated by the court is that whether there is proprietary damage in breach of trust should be judged in not legal but economic point of view with regard to the whole property condition of a person. Thus even if an action violating the duty is void in terms of law, it is damage to property which constitutes breach of trust if, in an economic sense, an action violating the duty brings about actual damage or the likelihood of the actual damage to properties.

Academic viewpoints
Examining the academic viewpoints on proprietary damage, judging whether there is proprietary damage in breach of trust, as same as the case of fraud, is based on the principles of objective and separate calculation on diminution of property value. Principle of economic calculation on damage is common and prevailing but whether the concept of damage includes the likelihood of damage is an issue in dispute. There is a view on breach of trust that "when damage is caused" means actual occurrence of proprietary damage, while another view includes the likelihood of damage in the scope of "when damage is caused".

Danger "equivalent to" Damage
Whether the concept of proprietary damage includes the likelihood of damage, or the danger to cause proprietary damage, is doubtful in fact if focused from the concept itself, but there is no reason to separate the likelihood of damage from actual damage, for it is certain that danger to cause damage in the future diminishes the property value according to the method of economic calculation on damages. But the concept of danger "equivalent to" damage should be applied restrictively because it might antedate the time of completion of the crime of breach of trust considerably earlier.

Judicial viewpoint
The Supreme Court ruled that breach of trust in the conduct of business requires wrongdoers not only recognize subjectively that the action is in breach of duty, but also recognize that proprietary damage to a person will occur or concern to cause damage will exist by this action.

Review
Recognition of damage is needed because it is an objective element of breach of trust crime. Willful negligence is enough in recognition of damage, but in recognizing the action is breach of duty, it is proper that conclusive intention purpose is necessary.

Defense against Illegality
Another question about the breach of trust is whether an individual director is exempted from criminal liability if board of directors or general meeting of stockholders make a resolution on business judgment of a representative director or others. The Supreme Court ruled that consent of controlling shareholders to the action of breach of duty does not negate the damage or mens rea to breach of trust, and the resolution of the board of directors or the stockholders meeting does not justify the action of breach of trust. It is because a representative director has a duty to deny the implementation of such a resolution if he or she knows the resolution is detriment to the creditors or stockholders of the corporation in general.

In terms of the so-called business judgment rule, the Department of Justice has formulated criteria to decide whether a director's activities amount to breach of trust or not in LBO transactions.

Debate on Breach of Trust
Interestingly, there took place a debate on whether misappropriation charge should not apply to big business as argued by Prof. Jun-son Choi.

Conclusion
Breach of trust has requisites to acquire proprietary profit of the wrong-doer or a third party by the action, so damage to a person without the fact of profit gain does not construe a crime of breach of trust. But it is not true. A proprietory crime should be assessed on the basis of property loss of a victim rather than profit gain of the culprit.

Article 622 of the Commercial Act provides special breach of trust further to Article 356 of the Criminal Law. As a result, a promoter, executive officer, director, member of audit committee, auditor or a certain range of persons of the corporation constitute the special breach of trust prescribed in the Commercial Act if he or she takes proprietary profit or make a third party to gain profit by the action in violation of his or her duty, which leads to damage to the corporation.

By the way, the Additional Punishment Law of Specific Economic Crimes excludes the special breach of trust under the Commercial Act. So when a director or executive officer obtained the profit of more than 500 million won, he will be indicted by the general breach of trust under the Criminal Act as well as the Additional Punishment Law of Specific Economic Crimes, not by the special breach of trust under the Commercial Act, which seems to be useless.

In such a case where a representative director violates the law in collusion with a few controlling shareholders, its adverse effects will undermine not only the shareholders or creditors, but the nation's economy in the long run. Therefore, more careful revision of related provisions of law is necessary in addition to strict punishment of the corporate actions in violation of the law.