Background
The representative director of a company (our client) signed a large loan note on the company's behalf, and the counterparty sued the company for payment of the agreed sum (the borrowed amount). Changchun represented the company (the defendant) in contesting whether liability arose.
The Issue — Is the Company Bound by Its Representative Director's Transaction?
The central issues were ① whether large-scale borrowing by the representative director without a board resolution binds the company (unauthorized representation); ② whether it was an abuse of representative authority, exercised for the benefit of the director or a third party rather than the company; ③ whether it was a fictitious declaration by collusion, creating only the appearance of a transaction with no actual intent to lend; and ④ whether the commercial limitation period had run.
What Changchun Argued
Changchun (attorney Donghwan Shin) constructed and argued these four defenses in layers. The crux, however, was that for such defenses to succeed the company must prove that "the counterparty knew, or through gross negligence did not know, that there was no board resolution" (Supreme Court en banc 2015Da45451, among others).
For a company to escape liability for its representative director's transactions, it must clear the high threshold of the counterparty's bad faith or gross negligence. In large transactions, putting internal procedures such as board resolutions in place is what protects the company. (Outcomes may differ depending on the facts of each matter.)