1. The Client’s Crisis

The clients’ father founded a family business and managed it for many years. After his passing, the company filed a lawsuit against the heirs—the clients (the spouse and children)—seeking repayment of an advance payment account in proportion to their inheritance shares, claiming that "while he was alive, their father personally used about KRW 1 billion of company funds."

The company submitted as evidence an advance payment ledger prepared by an accounting firm and a notice of the National Tax Service’s tax audit results, arguing that the amount had been confirmed as the father’s debt. This was a large-scale lawsuit, with more than KRW 200 million claimed from just one client and amounts in the hundreds of millions of won claimed from each of the others. Before the grief of losing their father had even faded, the clients were faced with the crisis of having to bear a large debt they felt was unjustly imposed on them.

2. Key Issues

The key issues to be disputed in this case were broadly threefold. First, the question was whether civil repayment obligations arise immediately merely because an amount is recorded as an "advance payment" in the accounting books. The company argued that the book entry itself proved the debt, but it had to be made clear that accounting treatment and civil legal relationships are separate matters. Second, there was the issue of whether the fact that the National Tax Service recognized the amount as the father’s debt during its tax audit would be decisive evidence in a civil trial as well. The court had to be persuaded that the standards for tax determinations and civil determinations are different. Third, because the company had previously filed similar lawsuits against other heirs during the father’s lifetime, only for most of those claims to be rejected, it was necessary to show that this claim likewise lacked credibility in the same context.

3. Strategy

Attorney Kim Deok-hwan thoroughly probed the structural weakness of the company’s claim, which relied solely on the accounting records and the tax audit results.

First, he clarified the legal nature of the advance payment. Citing case law that merely processing an amount as an "advance payment" in the accounting books does not automatically create a civil repayment obligation for an executive, he made clear that the burden of proving that the advance payment actually belonged to the executive personally, and was not an expense for the company, rests with the company seeking repayment.

Second, he pointed out the limitations of the tax audit findings. He argued that the National Tax Service’s audit result was merely based on reported accounting materials from the perspective of taxation and could not serve as absolute proof establishing the actual civil legal relationship. In particular, he noted that it could not be ruled out that the heirs may have reported the amount as their father’s debt, regardless of the underlying substance, in order to reduce inheritance tax.

Third, by invoking the prior record in which the company’s claims were mostly dismissed in embezzlement and damages lawsuits it had brought against another heir during the father’s lifetime, he highlighted that this claim also lacked credibility.

4. Outcome and Recovery

The court actively accepted Attorney Kim Deok-hwan’s arguments. It held that "the mere fact that the amount was recorded as an advance payment account in the accounting books does not immediately mean there is a right to claim repayment, and the tax audit results alone are insufficient to establish the father’s advance payment debt," and dismissed in full the approximately KRW 1 billion claim against the three clients.

This case is an example of preventing a family business from later trying to shift a large debt onto the heirs over the common issue of advance payments. By establishing the legal principle that accounting figures and tax determinations do not necessarily align with civil debts, the clients’ property rights were protected from what would otherwise have been an unjust inheritance of a massive debt.

Cases involving both inheritance and civil disputes are more common than one might think. If you are wondering how to respond in a similar situation, the outcome may vary depending on the specific facts of the case, so we recommend consulting a professional.

Attorney in Charge: Attorney Kim Deok-hwan

For confidentiality, this case has been partially anonymized within a scope that does not impair the substance of the case.

You can also find this successful case on the official blog of Law Firm Jonjae.

Click the 'Reference Link' button below