[Legal Spotlight]➁ Disposing of Inventory Just Before Bankruptcy...How Far Does Management Liability Extend?

Attorney Choi Seong-mun of Daeryun LLC: "Disposing of inventory just before bankruptcy carries risks of avoidance power and damages claims"
"Systematic response through early legal advice is more important than after-the-fact reaction"

It has been pointed out that a company's arbitrary disposal of inventory assets when driven into management difficulties can lead to future legal disputes and personal liability for management.

Attorney Choi Seong-mun of Daeryun LLC, based in Tongyeong-Geoje, noted on the 29th, "When a company is placed in a marginal situation, there are many cases where it rushes to dispose of inventory assets to secure immediate funds, but this can lead to fatal legal risks for management as individuals."

Based on his past experience as a bankruptcy trustee, Attorney Choi explained, "In corporate bankruptcy practice, disposing of inventory is not a simple matter of asset liquidation," adding, "The moment bankruptcy proceedings begin, company assets fall under the control of the bankruptcy trustee, and arbitrary disposal by management is also strictly restricted."

Under Articles 382 and 384 of the current Debtor Rehabilitation and Bankruptcy Act, the assets held by the debtor company at the time of the bankruptcy declaration belong to the bankruptcy estate, and the authority to manage and dispose of them is vested in the bankruptcy trustee appointed by the court.

The problem lies in asset disposal actions that occur before the bankruptcy declaration. He explained that in the field of practice, cases repeatedly occur such as gratuitously transferring inventory to a specific company just before bankruptcy, disposing of it at a price significantly below market value, moving it to a warehouse under a third party's name to evade compulsory execution, or making payment in kind to only a specific business partner.

Attorney Choi said, "Such acts are highly likely to be subject to the exercise of 'avoidance power' under the Debtor Rehabilitation Act," adding, "The bankruptcy trustee can seek restoration to the original state through litigation, and ultimately the transaction itself may be nullified."

In particular, Article 391 of the Debtor Rehabilitation Act provides that the trustee may seek cancellation of asset disposal actions that harm creditors. Representative examples include gratuitous transfers, cut-rate sales, and biased repayments just before bankruptcy.

The possibility of personal liability for management was also cited as a major risk. Attorney Choi said, "Management that led inappropriate asset disposal may become subject to an 'inquiry and determination trial on the right to claim damages against directors, etc.,'" adding, "Since this is a procedure that proceeds more swiftly than ordinary civil litigation, it is difficult to rule out the possibility of expansion into liability issues regarding management's personal assets."

He also mentioned the issue of damage to trademark rights and brand value. If large quantities of inventory are distributed without authorization, this could lead to damages claims from trademark holders.

Attorney Choi said, "In the process of disposing of inventory, intellectual property issues such as whether trademark labels have been removed and the distribution channels must be reviewed together," adding, "An approach at the level of simply converting inventory into cash makes it difficult to respond."

Above all, the greatest burden is the burden of proof. This is because, if an avoidance power lawsuit or damages claim is raised, management must directly prove that the disposal was a normal business judgment without intent to harm creditors.

Attorney Choi emphasized, "Proving this with objective materials in a chaotic bankruptcy situation is not an easy task," adding, "As trustee investigation procedures have recently been trending stricter, it is important to design a systematic response direction through legal review from the early stage rather than relying solely on after-the-fact reaction."

Reporter Jeong Ye-jin yejin0311@inews24.com

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