[Legal Story] Now Is the Right Time to Amend the Breach of Trust Offense

Concerns Rise Over Expanded Punishment After Commercial Act Amendment
Ruling and Opposition Parties Propose Bills to Ease Penalties
Optimal Moment for Reform as Political Circles Unite

Seokjin Choi Lawnbiz Specialist

Following the passage of the Commercial Act amendment in the National Assembly, the business community has focused its attention on the "duty of loyalty for directors" provision. This is because the law now explicitly states that directors owe a duty of loyalty not only to the company but also to shareholders, raising concerns that the scope of criminal liability for breach of trust in corporate management will expand.

Legal experts point out that with this amendment, the courts' previous stance of not recognizing directors as "agents" of shareholders may change. As a result, cases such as "split-off listings" could now be recognized as criminal breaches of trust, unlike before. In effect, one of the safeguards that previously limited the broad application of the breach of trust offense-often criticized in both business and legal circles as a "catch-all crime"-has been removed.

In this context, it is a welcome development that both ruling and opposition parties have simultaneously proposed legislative amendments to the Criminal Act that would codify the "business judgment rule," which has been applied through case law to breach of trust cases, thereby narrowing the scope of criminal liability.

The biggest problem with the current breach of trust offense is the lack of clarity in its legal requirements. The abstract and ambiguous nature of key elements such as "agent of another's affairs" and "acts in violation of duty" makes it difficult even for legal professionals to determine whether the offense has been committed. As a result, for a long time, people have had no choice but to rely on Supreme Court precedents to judge whether a case constitutes a breach of trust.

Corporate leaders who have fallen out of favor with the administration or prosecutors could at any time become suspects accused of breach of trust. The phrase "walking on the prison wall" aptly describes the heavy burden this offense places on corporate management. Breach of trust is also one of the charges with the highest acquittal rates.

The potentially unlimited scope of punishment is another issue. Under current law, a breach of trust can be punished even if no actual loss has occurred, as long as there is a risk of loss. Foreign corporate executives often express confusion about Korea's breach of trust offense. While Germany and Japan have provisions for breach of trust, Germany minimized punishment by adopting the "business judgment rule" 20 years ago, and Japan has restricted the scope by requiring not only intent but also "the purpose of causing harm to the principal." The United Kingdom and the United States do not have direct criminal provisions for breach of trust.

Another problem is the overlap and excessive severity of the punishment clauses. Breach of trust provisions are scattered across the Criminal Act, the Commercial Act, and the Act on the Aggravated Punishment of Specific Economic Crimes. If a breach of trust becomes an issue in corporate management, the offense is treated as "occupational breach of trust" and punished more severely. If the amount of gain from the breach exceeds 500 million won, further aggravated punishment is imposed under the specific economic crimes law. The threshold for aggravated punishment was raised from 100 million won to 500 million won in 1990 and has remained unchanged for 35 years. For breach of trust committed by a company director or auditor, the special breach of trust provision in the Commercial Act should apply according to the "principle of priority of special law." However, in practice, investigators often apply the occupational breach of trust clause from the Criminal Act as a workaround to impose aggravated punishment under the specific economic crimes law.

Some concerns from those who argue that abolishing the breach of trust offense entirely would leave no way to punish the abuses of conglomerate leaders are understandable. However, the fundamental limitation of the breach of trust offense is that it criminalizes "betrayal," an ethical issue that should be resolved through civil law. Malicious acts by corporate leaders or executives can be punished under other property crimes such as embezzlement or fraud.

Even Lee Bokhyun, the former head of the Financial Supervisory Service who investigated and prosecuted Samsung Electronics Chairman Lee Jae-yong for occupational breach of trust, has repeatedly stated that "the breach of trust offense makes everything in the world subject to criminal punishment," emphasizing the need for its abolition. President Lee Jaemyung has also directly called for institutional reform, pointing out that the abuse of the breach of trust offense stifles corporate activity. With both ruling and opposition parties now speaking with one voice on amending the breach of trust offense, now is the right time for reform.