The nation’s largest conglomerate has been driven into a corner due to a series of negative events, including allegations that it created illegal slush funds, its involvement in the Taean oil spill and a recent court ruling ordering Samsung to repay the debts owed by its automotive unit.

When the Seoul Central District Court delivered the ruling regarding its now-defunct affiliate, Samsung Motors, on Thursday, there was a distinct atmosphere of disappointment at Samsung Group. The court acknowledged the validity of the “agreement,” which was the biggest issue in the case, and ruled in favor of the creditors in the largest civil lawsuit in the nation’s history. Officially, Samsung has announced that it will decide whether to appeal after review of the ruling; internally, it thinks that it has been completely defeated by its creditors. One Samsung Group executive expressed his disappointment about the court’s decision, saying that Samsung would now be branded as a company with overdue debts, when the group is already in a predicament due to the ongoing investigation being conducted into allegations that it maintained slush funds to bribe public officials and the aftershock following the nation’s largest oil spill on the western coast.

In its ruling, the court stated that Samsung should honor the agreement it reached with its creditors in 1999, when it disposed of its automotive unit. The court disregarded Samsung’s claim that the agreement was made under coercion and could therefore be disregarded. The biggest issue in the lawsuit has been whether or not the agreement should be honored.

The court’s ruling also clarifies the legal responsibility of Samsung Chairman Lee Kun-hee with regard to Samsung Motors’ insolvency. When the affiliate applied for bankruptcy in 1999, Lee contributed his own shares of Samsung Life Insurance as collateral for the debt, and a deal was signed. Samsung insists that Lee contributed the stocks out of moral responsibility and denied that Lee should be held legally responsible.

Kim Sang-jo, executive director of Solidarity for Economic Reform, an activist group focusing on chaebol reform, said, “The ruling is meaningful in that it has clearly assigned legal responsibility to a chaebol director for his lack of judgement in managing the company and losses incurred by mismanagement.” Chaebol are South Korea’s large, family-owned conglomerates.

According to the ruling, Samsung subsidiaries must repay a minimum of 2.3 trillion won to its creditors. The original agreement stated that the subsidiaries share the debt among themselves, depending on the assets of each. Because of this, some observers note that the Samsung chairman, who as the leader of the corporation is the person primarily responsible for the debt default, has in effect been exonerated. The court did not demand any additional responsibility of Lee other than ordering him to remit 4 million of his own shares in Samsung Life Insurance. But the amount of stock Lee must remit falls short of the amount of the principal and overdue interest on the overdue debt. The Samsung affiliates will have to make up the difference in the amount, thereby releasing Lee from responsibility for the failure of Samsung Motors.

Park Geun-yong, an executive of the the People’s Solidarity for Participatory Democracy, a civic group that monitors corporations, said, “When the agreement was signed, Samsung’s corporate restructuring office forced Samsung subsidiaries to make payment guarantees so that Chairman Lee would be exempt from responsibility,” adding that Lee should take responsibility for the principal shortage and overdue interest by contributing his personal property to cover the amount now due, a total of 2.3 trillion won.

It is not clear how and when Samsung affiliates will pay the debt, and the court did not set a deadline. Considering the price of Samsung Life shares, the principal could be preserved by selling the stocks contributed by Lee. As of now, it is highly possible that Samsung subsidiaries will repurchase the stocks depending on the size of their assets and repay the overdue interest. In this case, however, the listed companies will now face massive lawsuits from small shareholders.

The problem could be resolved if shares of Samsung Life were listed, but this will not be easy. In this case, Samsung Everland, Samsung Life’s largest shareholder, would become the financial holding company and Samsung Life would sell shares in other subsidiaries, including Samsung Electronics, owned by the company. It will be impossible for Samsung to maintain its governance structure through cross-shareholding, and then the plan to transfer management rights to Lee Jae-yong, Chairman Lee Kun-hee’s only son, will be shattered. Samsung Group is in no rush to list shares of Samsung Life, however, because it would be difficult for it to list the company as it tries to maintain the group’s control over both the manufacturing and financial industries.

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