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Feb 28, 2008

Debtor's Liability to New Owner after Transfer of Business and Trade Name

A developer recently contacted me concerning a dispute with a supplier of building materials. The developer purchased building materials from a supplier with payment to be forwarded 30-days after receipt of the materials. This is a common practice when a supplier has a long-term relationship with a developer, provides a consistent flow of supplies to a developer, and the developer is solvent.

Here comes the problem. The supplier was sold and the business and trade name was transferred to a new owner. The problem arose when the developer paid the old owner, who the manufacturer believed was still the owner of the supplier, for the building materials.

The developer paid the old owner at the business office of the supply business without noticing any difference in ownership and without being informed by the old owner of the change of circumstances.

As expected, the new owner charged the client for the supplies, since the new owner claims that the old owner, through the sales contracts, transferred all rights including the credits for the shipped supplies to the new owner.

The old owner is nowhere to be found and likely collected from multiple creditors leaving the new owner with credits that were reflected in the sale price of the supply business.

Article 25 of the Korean Commercial Code states that:
(1) A trade name may be transferred on in cases where business is discontinued or it is transferred together with the business.
(2) Transfer of a trade name shall not be effective as to third persons unless it has been registered.

The business trade name was properly transferred and registered by the new owner under Article 25.

However, Article 43 states that:
. . . a performance made to the transferee in respect of any obligation that has arisen from the business of the transferor shall be valid, in cases where the obligor effecting the performance has acted in good faith and without gross negligence.

Therefore, since the old owner did not inform the developer of the transfer, the payment was made at the companies business address - the developer is not liable to to the supplier.

To clarify for the author of another law blog who seemed a little confused - The transferee-old owner was paid by the obligor-developer and acted in good faith and without gross negligence, since the developer paid at the company office and was never informed of the transfer -thus the developer is not liable.

The converse and what the court will look to is the bad faith of the old owner. The deceptive practice of taking the money at the business office of the company will alleviate the burden on the plaintiff to prove good faith. I was trying to state this in my former post, but I assumed a level of understanding that I should have not assumed.

A letter from a law firm explaining the law on the matter would usually settle these types of disputes and often the business relationship can still continue.


Feb 21, 2008

Transfer Pricing Reform In Korea

A U.S. NASDAQ listed company requested information concerning a specific transfer price scheme, amongst other issues, in Korea. The company has recently decided to enter the Korean market after having successfully entered the Japanese and other Asian markets.

For obvious reasons, I can’t answer the question here, but a brief description of recent amendments to the law may be of interest to those that have considered global transfer price issues.

The transfer pricing rules underwent a major change a couple of the years back. In 2006, the Law for the Coordination of International Tax Affairs (LCITA) and a Presidential Enforcement Decree were amended.

The Law and Decree were amended in order to codify the “substance over form” rule, encourage investment overseas by Korean companies, improve the application of the “arm’s length principle,” to discourage treaty shopping, and to clarify the numerous ambiguities that have developed, since the enactment of the original law in January 1, 2006.

The most notable changes are:

1. Substance over Form
The first major change was the codification of the substance over form rule. It seemed that before the change the National Tax Service employed the substance over form rule for the interpretation of international transactions and treaties. This amendment codifies this changed practice.

2. Berry-ratio Method
The amendment recognizes the Berry-ratio method as having the same priority as the transactional-net-margin method and the profit split method..

3. Cost Contribution Arrangement (CCA)
Cost contributions, according to the law, must reflect the expect benefit. The amended law, however, allows adjustments to cost contributions when the CCA is held to be in violation of the arm’s length principle.

4. Rollback of Unilateral APAs.
Rollbacks are now available for unilateral and bilateral advance price agreements for the length of the statutory corporate tax amendment period of three years.

5. Offset of Transfer Prices

Non-arm’s length transfer prices can be offset if the transactions occur in the same taxable years, are performed in the same overseas office, or there is an advance agreement.


Feb 20, 2008

Bank Antipathy To Foreigners

This article appeared in the Korea Times on Feb. 20, 2008.

By Sean Hayes

President-elect Lee Myung-bak's plan to make Korea a more hospitable place for foreigners is a welcome development for many of us long-term residents of Korea; however, the plan will fail unless private enterprises follow suit and realize that foreigners play an integral part in the Korean economy.

I have been writing legal Q&A column for this and other papers for over five years. I receive more complaints and questions about the banking sector than any other area combined. The complaints are real and the questions are because of the banks seeming incapability of understanding and explaining bank rules and government regulations.

Since I came to Korea more than 10 years ago, I have seen little development in the consumer banking sector and my bank, Kookmin Bank, has even deteriorated.

Bank employees are ill informed, incapable of performing even the most rudimentary transactions in an efficient manner and are too often willing to blame most of their missteps on the government. Senior management is unwilling to provide even the most basic services to foreigners in a convenient and consistent fashion.

For example, many foreigners, including myself are plagued with the problem of not being able to use our Korean ATM cards in foreign countries even though the card states, in Korean, that the card can be used in foreign nations. I was hit by this new bank rule a few years back when I went to the Philippines to present a speech. I brought my bankcard, a few hundred thousand Korean won, and the understanding that since I used the same card in the Philippines in the past that the Kookmin card would work.

Too my surprise, the card didn't work, the airport banks wouldn't exchange Korean money, and Philippine taxi drivers are so kind that they even take passengers without money. Luckily, the hotel was generous enough to overcharge my credit card and give me a cash refund for the overcharged amount and a former student was kind enough to send me money by Western Union. Obviously, this caused a good deal of embarrassment and a great deal of anxiety.

When I returned to Korea I confronted the bank manager at my local bank. He, in a not so kind manner, explained that this was a new Korean government regulation. I informed him that he was full of hot air. Korea has no regulation prohibiting foreigners from using international ATM cards, but the nation does prohibit foreigners from withdrawing more than $10,000 per exit from the country. Kookmin and other banks just feel its easier to block foreigners from using cards, than to create a system that prohibits foreigners from withdrawing more than $10,000 per exit from the country.

I was also a little alarmed by my bank a few weeks ago when I went to the bank to transfer funds overseas. I was given a form, in Korean, that stated that I must inform the bank of my reason for transferring the money. The form has multiple boxes and I was forced to pick one if I wanted to send money. I was also informed that I could only send money from this specific branch. I was lucky enough to be able to read and understand the form, but many foreigners would not have been.

I asked the bank to translate the form and get the form back to me, but three weeks later I never heard a word from the bank. I assume, as usual, Kookmin Bank employees are still pointing to a box and simply telling foreigners to check here, sign here, and initial here without foreigners even knowing what they are signing.

The Korean bank industry and other service industries will never improve until they realize that foreigners are a needed component for the future development of the local economy. This realization should be pushed on private industries by the new administration.


Feb 18, 2008

Korean Corporate Forms under the Korean Commerical Code

There are four basic corporate entities under the Korean Commercial Code.

1. Chusik Hoesa (Joint Stock Company)
Only form of corporate entity that is allowed to publicly issue shares. An article will be posted on the specifics of forming a Chusik Hoesa in the next couple of weeks and a link will appear HERE when the article is completed.

2. Yuhan Hoesa (Limited Liability Company)
A closely held company that is prohibited from having more than 50 shareholders. In recent years a few foreign companies have chosen the Yuhan Hoesa, however, most foreign companies are advised and will form a Chusik Hoesa. A few companies, recently, have chosen this form because of possible U.S. tax benefits. I will explain the tax benefits in a follow-up article. A link will appear HERE when the article is completed.

3. Hapja Hoesa (Limited Partnership)
One or more partners may have unlimited liability and one or more partner may maintain limited liability. The entity is responsible for corporate taxes.

4. Hapmyung Hoesa (Partnership)
Must be formed by two or more partners and each partner maintains unlimited liability. The entity is responsible for corporate taxes.


Feb 16, 2008

Report on Korea-US FTA by Peterson Institute

The Peterson Institute, the most influential nonpartisan think tank dedicated to international economics, published an excellent work assessing the Korea-U.S Free Trade Agreement. All interested in Kor-US FTA should read this report.

The summary of the report notes:
The Korea-United States Free Trade Agreement (KORUS FTA) opens up substantial new opportunities for bilateral trade and investment in goods and services and promotes important foreign policy interests of both countries.
The FTA quickly removes most tariff barriers to auto trade and substantially reduces tax and regulatory burdens that impede sales of US cars in Korea; improves access to the Korean market for a wide range of US farm products; and opens up the Korean services market in key areas such as financial services, insurance, express delivery, and legal and accounting services. onetheless the ratification of the KORUS FTA has been controversial.
In the United States attention has focused on both the auto sector, which accounts for almost one-quarter of bilateral trade and a large share of the US trade deficit with Korea, and Korean restrictions on US beef imports due to bovine spongiform encephalopathy (BSE) concerns. Several automakers and auto unions have opposed the deal, and the Democratic leadership in the US House of Representatives has demanded that the auto provisions be recast.
In the US Senate, the resolution of the beef problem-which is now being addressed by Korean regulators-is a prerequisite to passage of implementing legislation. No clear timetable exists for the congressional vote and action may be deferred until 2008.
The Bush administration will have to respond constructively to Democratic concerns about the FTA before the deal can be ratified and should consider new federal programs to help promote the competitiveness of US automakers. Doing so should attract a substantial minority of Democrats in the House, along with the majority of Republicans, to support the FTA.
The stakes-in terms of both US economic and security interests in East Asia-are too great, and the costs too high, to reject the pact or defer a decision.

The complete report can be found HERE.


Feb 14, 2008

Deceptive Practices Under Korean Commercial Code

This article appeared in the Korea Times on Feb. 15, 2008.

Deceptive Practices Under Commercial Code

Dear Professor Sean Hayes:

I lent my name to an ex-friend so he could open up a bar in Seoul. My friend is a non-Korean and I am Korean. I met this man when I was an exchange student. He thought it would be easier for him to open the business under my name. However, the business failed and now he owes a sizable amount of money to food, spirits, beer and other vendors. A food vendor has already sued me and I expect to be sued by others. My ex-friend is nowhere to be found and it seems that when he knew he was going to go under he ordered a large amount of products from multiple vendors and skipped town. Am I responsible for the debt? What can I do? Potentially Broke in Seoul.

Dear Potentially Broke:

Article 23 of the Korean Commercial Code considers allowing one to use another name to open a business as a practice considered to be engaged in for an unfair business practice.

Thus, Article 24 of the Korean Commercial Act provides protection for those that have been deceived by the Act. Article 24 states that: "A person, who has allowed another person to carry on business using his name or trade name, shall be liable jointly and severally with such other person to effect performance in respect of any obligation arising from a transaction in favor of a third person who has effected such transaction in the belief that such other person was the proprietor of the business."

Thus, the creditors of the business have a right to make a claim against you for unpaid debts.

However, the Supreme Court (91 Da 18309 ) ruled that the Article 24 was intended to impose liability on name lenders only in order to protect innocent third parties who effected the transaction because of the deception.

The Supreme Court (2000 Da 10512), however, noted that it is the burden of the lender of the name to affirmatively prove that the creditor knew that the name was lent or the creditor was reckless in not knowing that the name was lent.

Thus, if you can prove that the creditors actually knew or were reckless in not knowing that you lent your name, then you will not be held responsible to pay the debt. However, if you fail to prove the aforementioned then the creditors will likely prevail in the suit.


Feb 12, 2008

Lawyer Cap Unconstitutional

This article, written by Sean Hayes, appeared in the Korea Times on February 13, 2008

By Sean Hayes

Any numerical limitation on the number of law schools, law students or Korean Judicial Exam passers is unconstitutional under Article 15 of the Korean Constitution.

Most of the world's constitutional democracies don't impose numerical caps on the number of law schools, law students, and bar passers. Korean people are smart enough to realize that these numerical limitations are only tools to protect the livelihood of lawyers, and increasingly lawyers are being perceived by the public as greedy, dispassionate about clients' needs, and unwilling or incapable of handling unique and sophisticated legal matters.

The Korean Bar, therefore, for the good of the nation and legal system should voluntarily give up its insistence on protecting lawyers at the expense of their nation, law, legal system and the Korean people and should insist that colleges of law create real professional graduate law schools with rigorous programs, professors capable of not only lecturing but teaching in the Socratic Method, and schools with faculties that comprise licensed and experienced lawyers.

If the Korean Bar is unwilling, the Constitutional Court, as it has so many times over the past two decades must stand-up for the rights of the people and the nation and declare these caps unconstitutional under Article 15 of the Korean Constitution.

Article 15 of the Constitution guarantees the freedom of occupation. If the clause has any meaning at all, it means that all applicants with good moral character and that are competent to practice law must be allowed to enter the profession.

Any law or regulation that does not focus on moral character and competency, as noted by the deceased Professor and Supreme Court litigator George Ethridge, is simply ``undemocratic and tends to create by law a favored class of professional aristocracy to consist alone of those who have the good luck to be born well off financially, or who have rich friends who will let them have the means to take up these long years of study.''

The Constitutional Court, therefore, as the U.S. Supreme Court did in Schware v. Board of Bar Examiners of New Mexico, should allow the government to ``require high standards of qualification, such as good moral character or proficiency in its law, before it admits an applicant to the bar,'' but must demand that all professional licensing laws and regulations have ``a rational connection with the applicant's fitness or capacity to practice law.''

Thus, the Constitutional Court should declare, the present 1000 lawyer yearly limit unconstitutional, since it has no ``rational connection with the applicant's fitness or capacity to practice law.'' If, for example, in one year 2000 applicants are fit and have the capacity to practice law only 1000 are allowed to pass the examination. This quota has no relation to the individual competency or character of the applicant and is simply a ``gate keeping'' tool to protect this ``professional aristocracy.'' Under the new plan the judicial exam pass cap is increased, and the barrier to entry simple becomes the number of students allowed to enter law school and the number of law schools, thus, the same unconstitutional illogic is espoused.

Hopefully, the Court, for the nation, its institutional integrity, and the sanctity of the Korean Constitution and Korean Constitutional Law will do the obviously correct thing and declare, if the cap on the number of law schools, law students, and judicial exam passers is challenged - unconstitutional.

The Constitutional Court, comprised of a group of justices and researchers that are overwhelmingly licensed lawyers, would be perceived as a true bastion for democracy and the rule of law if it declares, against their own and their colleagues interest these caps unconstitutional.

The determination of the case will be a clear sign of the willingness and ability of the justices of the Court to be isolate themselves from pressure from the Korean Bar, the ordinary judicial system, and their colleagues and will show to the people that the Court is a truly the ``guardian of the constitution.''


Feb 9, 2008

Managers Can Advocate for Corporation without Hiring of Korean Licensed Attorneys

An issue has recently circulated concerning the legality of company managers acting in a legal role for a company without being a Korean licensed attorney.

A manager of a company, who does not have a license to practice law in Korea, can act in a legal role for a company and even perform litigation for a company.

Many companies have individuals educated in law, but that don’t have licenses to practice law. These individuals negotiate settlements, file attachments, and even litigate for their companies. These individuals are not violating the Attorney Act, the Criminal Code, or other acts or regulations if they are bona fide managers that are not being paid a fee based on performance in the case or the number of cases handled.

Article 11(1) of the Commercial Act allows bona fide managers to perform duties normally reserved for the licensed attorneys. "A manager may perform all judicial and extra-judicial acts relating to his business on behalf of the proprietor of the business."

However, a district court noted, "Allowing a manager the right of an attorney is recognized, since the law recognizes that a manager has a right of inclusive representations related to business as a chief assistance of an owner.” However, if an individual is employed just to complete a “a company's credit relationships and perform litigations concerning it, the person does not have the right of the attorney because he does not have any substance as a manager and works just for the convenience of the litigations.” (서울지법 1986. 1. 20. 선고 85가단5402 판결) (Seoul District Court 1986. 1. 20. 85KaDan5402)