Distributable Profits and Unrealized Profits

Companies exist by virtue of making profits. A company as independent body corporate has many interested parties. Shareholders, who have limited liabilities, generally want the company to distribute more profits but the creditors want the company to maintain more assets to repay its liabilities. Companies statutes limit the companies to distribute profits in order to protect creditors including involuntary creditors such as a victim of a tort. This article presents a critical analysis and evaluation of the current limits on distributable profits in Korean Commercial Code. Chapter two discusses various statutory limits on dividends. Equity fund approach, insolvency approach and financial ratio approach are analysed. Chapter three focuses on interpreting the current provision of Korean Commercial Code about limits on dividends including unrealized profits. This chapter discusses which balance sheet should be used for calculating distributable profits, what the capital means, and how much legal reserves should be deducted from the earned profits. Chapter three also evaluates the current statutory wording on the unrealized profits and the amendment for unrealized profits and losses generating from derivative products. Shareholders’ rights on distribution need to be limited for creditors protection. However current system does not give shareholders and creditors proper measures to monitor and evaluate that companies calculate right amount of distributable profits in accordance with the Korean Commercial Code. This article suggests that the transparence of scheme has to be established. Disclosure of statement of distributable profits calculation details will be one of the reasonable measures.