Summary of Facts

X Company (plaintiff, koso appellee, jokoku appellant), a manufacture, wholesaler and retailer of electrical appliances, undertook electrical appliances transactions with A, an individual merchandiser dealing in minor wholesale and retail sales of electrical appliances. In 1959, A decided to turn his individual operation into a company with himself at the center and established Y Company (defendant, koso appellant, jokoku appellant) to deal in minor wholesale and retail sales of electrical appliances. He assumed the offices of representative director and president. At the time when Y Company was established, X Company held credit sales obligatory right against A in the amount of ¥2,654,008 and Y Company assumed this debt and X Company continued to conduct business in the same manner as before. In 1965 X Company brought the present action against Y Company claiming for payment of the above amount plus ¥551,832 for subsequent transactions as well as damages caused by the delay in payment.

Although the court of first instance acknowledged the assumption of the debt by Y Company and held that X Company was entitled to receive the entire amount, the original decision /1 held that since the assumption of A's obligation by Y Company required the consent of the board of directors, and that consent was lacking, the assumption of the debt was void, and therefore disallowed that portion of X Company's claim. At that point X Company brought a jokoku appeal, claiming that since the assumption of the debt was a transaction between X Company and Y Company and not a transaction between X Company and A, it is not a transaction to which Commercial Code Art. 265 applies and that even if that Article did apply, from the viewpoint of transaction security guarantees, even a transaction violating that Article would have to be given effect since do to otherwise would be to deny the rights of a bona fide third party. The SupremeCourt in accepting this jokoku appeal, reversed its own previous judgement and awarded X Company the entire amount of its claim.

Gist

1) Because the intent of Commercial Code Art. 265 is to prevent directors planning a profit to themselves where an unpermitted, unprofitable action would occur as to the company in cases of a conflict of interest between the company and its directors as individuals, the term "transaction" as used in that article must also be understood to include not only dealings which involve a direct conflict of interests between a director and the company, but also transactions for where the director has acted, as against creditors, to underwrite a debt in representation of the company but has thereby taken a profit for himself while the company is unprofitable. (Within the above limits. We hereby amend the decision of the third petty bench of this court handed down in the case 1963 (wo) 361 on March 24, 1964 at Vol. 72, p. 619.)

2) When a director violates the above provision by taking action similar to the above without the consent of the board of directors, properly speaking, such action must be said to be void. This is because that article can be interpreted as being the opposite of Civil Code 108. Which does not apply in the case of consent by the board of director, and, where action is taken without getting consent, it is the same as if Civil Code Art. 108 has been violated and the action must be voided as if taken by an unauthorized agent.

As to transactions which produce a conflict of interest between a director and the company, while, as stated above, it is natural that the company's position as to that director is that his action was without board of direct consent and therefore void, regarding transactions between the director purporting to represent the company and third parties, from the viewpoint of securing the transaction and because it is necessary to protect bona fide third parties, it is proper to say that a transaction undertaken without the consent of the board of directors may only be voided where there is proof of malicious intent (meaning knowledge of the situation) on the part of the transacting third party. Further, this decision (by the 14 member bench) included two supplementary decisions, one representing the opinion of five judges that Art. 265 should be confined to direct transactions, and one submitted by a single judge saying that the article should not apply to stock companies like Y Company which are not in the actual condition of a stock company.

/1 Translator's note: The present decision is a reconsideration of the case by the Supreme Court and the phrase "original decision" appears to be the decision of the Supreme Court on first consideration.

(translation by Vicki L. Beyer)

Temple University Japan