[Invest&Law] Company Established Just Before Rehabilitation Application... Court Rules "Joint Responsibility for Existing Company's Debt"

Legal Dispute After Rehabilitation Filing Without Investor Consent
Court: "Newly Established Company Is a Tool for Debt Evasion"

A court ruling has determined that if a newly established company right before filing for corporate rehabilitation is essentially just a means to evade debt, it must repay the existing company's debts as well. The court held that even if the two companies have different names and CEOs, the actual assets, personnel, and business continuity must be taken into account.

According to the legal community on the 18th, the Civil Division 31 of the Seoul Central District Court (Presiding Judge Kim Sang-woo) recently ruled in a lawsuit filed by venture capital (VC) firm A against food-related startup B, its CEO, and the newly established company C, ordering "the defendants to jointly compensate approximately 670 million won."

In 2020, A established a fund for startup investments with government seed fund support and acquired 300,000 redeemable convertible preferred shares (RCPS) of B, which produced and sold baby snacks, for about 1 billion won. RCPS are shares that investors can convert into common stock or redeem principal under certain conditions. The following year, A also purchased convertible bonds (CB) worth 500 million won from B.

The issue arose when B filed for corporate rehabilitation in May 2022 despite A’s opposition. The investment contract included a clause requiring B to obtain A’s prior consent for significant structural changes such as filing for rehabilitation or bankruptcy, which B violated.

Subsequently, A demanded stock purchase rights and bond repayment based on the contract breach, but B did not comply. A claimed about 1.758 billion won including investment principal, penalties, and interest. The claim targeted not only B and its CEO but also the newly formed company C. C was established two weeks before B’s rehabilitation filing, and A argued that "C was created to evade B’s debts."

The first trial partially accepted A’s claim, ruling that B must repay approximately 670 million won. The court particularly noted that B and C were effectively one company and ordered C to repay the debt jointly.

Investigations revealed that C’s business purpose of "feed production and sales" was identical to a new business B added in 2021. B had also signed a distribution contract with C, entrusting product sales to C. Some B employees moved to C, and intellectual property rights such as design rights were transferred without significant compensation. The two companies even shared the same address. The court stated, "The establishment of C was an abuse of the corporate system to achieve the illegal purpose of evading B’s debts."

Meanwhile, C has appealed the first trial ruling.