[Q&A] Third-Party Sales: Payment Terms & Liability
2024. 8. 2
Question: Our client wants us to sell products to a third party designated by them, meaning that our company will sell products to the third party designated by the client, who will then further sell the products to the client. At the same time, the client wishes the payment terms between us and the designated third party to be payment after delivery, and has expressed willingness to assume joint and several liability for the third party's payment by issuing a letter of security. What should our company pay attention to in this regard?
Answer: According to the "Company Law" and related judicial interpretations regarding securities, a company providing securities for others should follow its Articles of Association and obtain resolutions from the shareholders/shareholders' meeting/board of directors. However, in the following situations (except for listed companies), such resolutions may not be necessary:
- The company provides a security for its wholly-owned subsidiary to conduct business activities; or
- The security contract is signed with the consent of shareholders who individually or collectively hold more than two-thirds of the voting rights on the security matter.
Based on the aforementioned legal provisions, when the situation described in the question arises, the company must first confirm whether there is a capital relationship between the client and the designated third party that falls under the aforementioned exceptions:
- If there is a capital relationship as described in exception 1, meaning the client is a non-listed company, and the designated third party is a wholly-owned subsidiary of the client, then the client's security for the designated third party does not require a resolution from the client's board of directors or shareholders' meeting.
- If there is a capital relationship as described in exception 2, meaning the client is a non-listed company, and the designated third party holds more than two-thirds of the voting rights on the security matter, it is recommended that the company require the designated third party to sign and agree to the letter of security issued by the client in its capacity as a shareholder, or require the client to provide a resolution from the shareholders/shareholders' meeting/board of directors in accordance with its articles of association regarding the assumption of joint and several liability.
- If there is no capital relationship under any of the exceptions, it is recommended that the company require the client to provide a resolution from the shareholders/shareholders' meeting/board of directors in accordance with its articles of association regarding the assumption of joint and several liability.
If the client's security does not meet the statutory conditions (i.e., a resolution from the shareholders/shareholders' meeting/board of directors is required but not actually obtained), there is a risk for the company, as in the event of litigation, the client's security might be deemed invalid.
In the case of an invalid security, if the designated third party fails to make the payment, whether the company can demand full joint and several liability from the client depends on whether the company was at fault. Considering that the requirement for external securities to be approved by the shareholders/shareholders' meeting/board of directors is explicitly stipulated, if the company did not verify this aspect beforehand, it is difficult to claim that the company was completely faultless. Therefore, the company's claim for joint and several liability from the client is likely not to be fully supported.