Where a company outwardly has the form of a corporation but merely borrows that form and is in substance entirely the individual business of the person behind it, or where it is recklessly used as a means of evading the application of law to that person, it is not permitted, even if the act is outwardly the company's, to deny the liability of the person behind it by insisting that the company and that person are separate entities so that the legal effects belong only to the company; this is an abuse of corporate personality that violates the principle of good faith and is gravely contrary to justice and equity. Therefore liability for the company's acts can be imposed not only on the company but also on the person behind it. To find that a company is merely the individual business of the person behind it, in principle, as of the time of the legal act or factual act in question, the company must have become a sham to the point that it exists in name only and is in substance no more than an individual business, judged by whether the property and business of the company and that person were so commingled as to be hard to distinguish, whether the decision-making procedures prescribed by law or the articles, such as shareholders' or board meetings, were not followed, the degree of undercapitalization, and the scale of the business and number of employees.

Also, even if the corporate personality has not become a sham to that extent, where the person behind the company abuses its corporate personality, liability for the company's acts can be imposed on both the company and that person; in this case it is required that, as of the time of the abusive act such as evading debts, the person behind the company held a controlling position allowing them to use the company at will and used that position to abuse the corporate system, and whether that person abused the corporate system must be judged individually by considering all circumstances, including the degree to which the corporate personality had become a sham and the other party's perception and reliance.

The lower court's judgment that the plaintiff could also hold the defendant, the person behind Company 2, liable for the fabric payment debt arising from Company 2's transactions misunderstood the law on sham and abuse of corporate personality, and this error clearly affected the judgment.

Therefore, without examining the remaining grounds of appeal, the lower court's judgment is reversed and the case is remanded to the lower court for further proceedings, as decided unanimously by the participating Justices.

The principle of good faith: Article 2 of the Civil Act provides that 'rights shall be exercised and duties performed in accordance with good faith.' This is a fundamental principle of civil law that both parties to rights and duties must act in good faith when exercising rights or performing duties. It is also called the good faith principle for short. It means acting with regard to the other party's legitimate interests, not betraying the other party's trust, and not departing from equity.

Note: Supreme Court Decision 2007Da90982 of September 11, 2008 reversed and remanded the lower court ruling (Daegu High Court Decision 2006Na7366 of November 16, 2007) that had held the defendant personally liable. The Supreme Court held that the defendant's control of the company was not enough, that closing an unprofitable company, settling its debts and setting up a new one is not in itself unlawful, and that given the degree of commingling, neither a sham nor abuse of corporate personality could be found. Note that parts of the facts and issues in the paper's main body restate the lower court's findings, and the author's own opinion differs from the Supreme Court's conclusion.