Deals & Cases

Administrative Disputes

Whether the liquidation of an insolvent accounting firm constitutes breach of duty of care by directors

Shin & Kim recently secured a victory on behalf of its client, a director of an accounting firm, after the court of first instance dropped the claims against such director. Shin & Kim had represented the director (the “Defendant”) in a claim for damages raised by certain financial institutions (the “Plaintiffs”) seeking to collect the damage amounts from each of the individual directors of the accounting firm. In the original action, the Plaintiffs sought redress for the accounting firm’s improper audit of a company in the amount of the outstanding loans to the company. However, the Plaintiffs were unable to collect the damage amounts won against the accounting firm after the firm liquidated following merger with another accounting firm.

In their original action, the Plaintiffs asserted that the accounting firm encouraged its clients to terminate their existing audit agreements with the firm, and execute new audit agreement with the accounting firm that it was taking steps to merge with. As such, the Plaintiffs alleged that the accounting firm was able to quickly liquidate, after which the directors of the liquidated firm were allowed to join the newly-merged entity; this made it difficult for the Plaintiffs to collect the damages.

In raising its defense, Shin & Kim highlighted that no individual director was involved in the decision-making at the accounting firm, in addition to touching upon controversial legal issues relating to the nature of corporations, including the doctrine of piercing the corporate veil. The court of first instance agreed with Shin & Kim’s assertion and ruled in favor of the Defendant.

This case may provide good precedent with respect to the accountability of directors in similar cases arising from the liquidation of corporations that mainly resort to the professionalism of their employees in conducting business, such as accounting firms.

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