Hana Bank Loses First Trial in 'UK VAT Fund' Investment Return Lawsuit...Appeal Underway

Court: “No Intentional Deception, But False Information Was Provided”

A district court has ruled in the first trial that Hana Bank must return the remaining invested funds to investors in its UK Value Added Tax (VAT) loan bond fund. The reason is that the contract itself can be rescinded, as the investors joined the fund based on incorrect explanations. Hana Bank has appealed the decision.

Seoul Central District Court, Seocho-gu, Seoul. Photo by Yonhap News Agency

According to legal circles on September 26, the Civil Division 29 of the Seoul Central District Court (Presiding Judge Ko Seung-il) ruled in favor of the plaintiffs in the lawsuit for restitution of unjust enrichment filed by ten investors against Hana Bank on December 4 last year. The court ordered Hana Bank to pay each of the plaintiffs amounts ranging from 29.31 million won to 189.91 million won, totaling 900.54 million won, as well as delayed damages. The appeal will be handled by the Civil Division 18-2 of the Seoul High Court (Judges Park Seonjun, Jin Hyunmin, and Wang Jeongok). The next hearing is scheduled for October 23.

The plaintiffs collectively invested a total of 3.8 billion won in four private equity funds related to UK VAT loan bonds through Hana Bank’s private bankers and other channels between May 2018 and August 2019. The fund was structured to provide loans for VAT payments to individuals purchasing commercial real estate in the UK, then recover the principal and interest once the borrowers received VAT refunds from HM Revenue and Customs (HMRC). Two domestic asset management companies set up and operated the funds, and Hana Bank sold a total of 57 billion won worth of these products.

Redemptions on the funds were delayed starting from June 2020. According to the judgment, based on the findings of UK administrators, one fund borrower lent the investment funds—without collateral—to affiliated companies for the acquisition of shares and real estate development projects unrelated to VAT loans, while another fund borrower only established subordinated security interests. The court recognized that foreign fund managers had indeed misappropriated funds, but considered these issues as problems occurring during the fund operation process.

As redemptions became unavailable, Hana Bank decided in May 2021 to make a partial advance payment of 50% of the investment principal to the UK fund investors. Including compensation payments received subsequently, the plaintiffs have already recovered approximately 2.9 billion won out of the original 3.8 billion won invested. In November 2023, they sent certified notices announcing their intent to cancel the contracts citing fraud or mistake, then filed lawsuits to recover the remaining amount as unjust enrichment.

The court did not accept contract cancellation on the grounds of fraud. It stated that the available evidence was insufficient to prove that Hana Bank had the intent to deceive when signing the contracts. Although investigations were conducted into Hana Bank allegedly providing false information to obtain investments, prosecutors cleared the bank, stating there was no evidence of intent to misappropriate investor funds.

However, the court did recognize that Hana Bank provided false information when soliciting investments. The bank had presented the VAT loan bond business as having established pipelines and effective safety measures. The court particularly pointed out that the local UK company borrowing the fund’s money was founded only in January 2017 and remained merely at a scale of developing and testing its platform for a year afterward, being small enough not to require external audits.

The court found that such false information caused the investors’ mistaken beliefs and thus granted contract rescission. The judgment stated, "Taking into account factors such as the likelihood that the plaintiffs would not have invested in these funds had they known the true facts, it is reasonable to view that their mistake concerned an essential part of the contracts."

At trial, Hana Bank argued that the plaintiffs were experienced investors who had been adequately informed about the fund structure and risks of principal loss before subscribing. The bank claimed that the issues raised by the investors were after-the-fact problems arising from poor management by the asset management firms, not from the initial arrangement. The bank also argued that, even if there had been a mistake, it was due to the investors' own gross negligence in pursuing high returns. However, the court rejected these arguments.

The court also dismissed the bank's claim that there were no profits left to return to the investors, since the funds had already been transferred to the asset managers and used according to their instructions. The court pointed out that the agreement was to invest in 'funds for VAT loan bond operations,' but in reality, the money was instead allocated to real estate development projects and other unrelated uses, in breach of the original agreement. The court noted, "Based on the evidence submitted by the defendant, it is insufficient to conclude that the money obtained from the sales proceeds was used or spent according to the instructions or agreement with the plaintiffs."

This content was produced with the assistance of AI translation services.