Company A, a construction firm specializing in power distribution installation, joined as a subcontractor in December 2021 for the Okjeong Knowledge Industry Center project in Yangju, Gyeonggi Province. The main contractor took out a real estate project financing (PF) loan and invested a total of 97.0 billion won in the project. The amount awarded to Company A was 13.4 billion won. By project value alone, Company A accounted for only one seventh of the overall job.

When the contract was signed, they did not realize the ‘joint guarantee’ would become such a ‘trap’. Company A agreed to a ‘joint guarantee’ under which it would repay 97.0 billion won of the contractor debt if the contractor failed to meet the completion deadline. This was illegal under the Financial Consumer Protection Act, which took effect in March 2021, but at the time Company A did not know it was illegal. An official at Company A said, “Back then, we were desperate to win even one more job.”

After the ‘Legoland’ crisis in 2022, bond yields surged and the real estate market deteriorated rapidly, and the contractor failed to meet the guaranteed completion deadline. In September 2023, the joint guarantee repayment obligation for Company A materialized.

Company A spent an additional 3.3 billion won of its own funds to complete the work, but the 97.0 billion won debt of the contractor was shifted onto Company A because the contractor missed the completion deadline. On top of this, the trust company imposed on Company A a joint guarantee for an additional 30.0 billion won it injected (trust account loan). What began as a bid to earn 13.4 billion won came back as 127.0 billion won of debt, about ten times as much.

Company B, a mechanical equipment construction firm, is in a similar position. In August 2022, Company B joined as a subcontractor for a residential-style lodging facility project in the Siwha district of Siheung, Gyeonggi Province. The contractor invested 120.0 billion won raised through a PF loan, and the subcontract amount for Company B was 9.0 billion won. Company B likewise provided a joint guarantee to shoulder the contractor debt of 120.0 billion won if the contractor collapsed. The contractor failed to meet the completion deadline, and Company B became responsible for repaying 120.0 billion won. Adding the 25.0 billion won put in by the trust company, Company B now faces repayment of a total of 145.0 billion won.

Although the orders won by Companies A and B total just 22.4 billion won, the money they must repay amounts to more than twelve times that, at 272.0 billion won.

The financial authorities have belatedly deemed these joint guarantees violations of the law and moved to sanction the financial companies. Even if fines are finalized, which would also be the first such sanction, the problem is that the joint guarantee debts the subcontractors must repay remain in place.

As of the 28th, based on Kyunghyang Shinmun reporting, the Sanctions Review Committee of the Financial Supervisory Service is considering imposing total fines of around 30.0 billion won on financial companies, including three Meritz Financial affiliates (securities, non-life, and capital), that placed joint guarantees on the real estate PF loans to Companies A and B. Two deliberations have been completed, leaving only the final written session. If the committee decides to impose fines, the agenda item will be submitted to the Financial Services Commission.

Under Article 20 of the Financial Consumer Protection Act and Article 15 of its Enforcement Decree, financial companies must not use a superior position to demand joint guarantees when extending loans. For PF loans, there is an exception that allows joint guarantees from developers and main contractors, but it is not permitted for subcontractors or other parties. Since the act took effect in March 2021, this is the first time the financial authorities have pursued sanctions against financial companies under this provision.

However, even if sanctions are finalized, the current act contains no clause that nullifies the relevant contracts, which is contentious. In other words, even if the government sanctions the parties on the grounds that the contracts themselves are illegal, responsibility for ‘claims·obligations’ does not disappear.

With sanctions imminent, the first-priority lending group of the three Meritz Financial firms has released the joint guarantees imposed on the two subcontractors (treated as if they had never existed). This appears to be because they expect a reduction in fines and, as senior creditors, consider principal recovery possible.

Second- and third-priority lender groups are not moving to grant releases. It is interpreted that, given the limited principal they can recover, it is more advantageous to exercise their claims even if they are fined.

For the subcontractors, unless the second- and third-priority lending groups voluntarily withdraw, the only alternative is litigation. They have no choice but to bring civil suits to prove these contracts are void based on Civil Code Article 103 (acts against public policy). In the process, there is a possibility that the second- and third-priority lending groups will establish maximum mortgages and carry out provisional attachments. In such a case, subcontractors will find it difficult to obtain loans such as working capital and effectively impossible to win new orders.

Accordingly, there are calls to fix the fact that, even if the financial authorities later put other financial firms involved in joint guarantees on the sanctions list, the civil joint guarantee debts of subcontractors do not disappear.

Lee Jeong-hee, a professor in the Department of Economics at Chung-Ang University, said, “Authorities tend to focus on sanctions, telling the parties to resolve relief through civil actions, but for victimized subcontractors, recovery is urgent” and added, “If an act is legally judged illegal, the law needs to be revised so that the damage amounts can be returned immediately, enabling relief.”