Insolvency 2024 Comparisons

As is the case in many jurisdictions, Japan offers in-court insolvency proceedings and out-of-court restructuring processes to business entities. While out-of-court restructuring processes is left to 3. Out-of-Court Restructuring, in-court insolvency/restructuring/liquidation can be classified into two types:

• the liquidating-type insolvency proceedings (similar to US Chapter 7), namely bankruptcy (hasan) and special liquidation (tokubetsu-seisan); and
• the restructuring-type insolvency proceedings (similar to US Chapter 11), namely civil rehabilitation (minji-saisei) and corporate reorganisation (kaisha-kousei).

There is also is a new special conciliation (tokutei-chotei) procedure which is a hybrid between an in-court insolvency proceeding and an out-of-court process in that it is a non-public insolvency/restructuring procedure involving a court as an independent third party but where the court will be involved only if and when an agreement is unlikely to be reached between a debtor and a creditor, in which case the court may issue a necessary order to resolve the case. Such order will have the same effect as a successful conciliation if no parties object within a certain period of time.

On the other hand, available options are limited for partnerships, as civil rehabilitation, corporate reorganisation and special liquidation are not available to them, and bankruptcy would be applied to each of the partners rather than the partnership itself (save for limited liability partnerships to which bankruptcy would be applicable).

Restructuring Proceedings

Restructuring proceedings include civil rehabilitation and corporate reorganisation.

Civil rehabilitation

Civil rehabilitation is a restructuring-type insolvency proceeding under the Civil Rehabilitation Act. The basic form of civil rehabilitation proceeding is a “debtor-in-possession” type, where the debtor’s management will remain in control, albeit with and under the supervision of the competent court. While civil rehabilitation was introduced under the statute modelled at least partially after Chapter 11, there are certain decisive differences between the two. For example:

• civil rehabilitation proceedings bind only unsecured claims, leaving secured creditors free to foreclose and otherwise enforce their security interest on the relevant collateral, and shareholders will retain their rights as shareholders unless and until a rehabilitation plan deprives them of those rights;
• there is no automatic stay (although courts are usually willing to grant umbrella stay on unsecured creditors);
• courts are more open to having, and frankly expecting to have, periodical and frequent ex parte meetings with the debtor’s counsels; and
• creditors will continue to be allowed to enforce set-off rights (albeit with certain restrictions). 

The court has the power to appoint a trustee who would take over the powers and authority to manage the debtor company, at which point the civil rehabilitation proceeding will convert into a “trustee” type proceeding.

Corporate reorganisation

Corporate reorganisation is a restructuring-type insolvency proceeding under the Corporate Reorganisation Act, available only to stock companies (kabushiki kaisha). It is a “trustee” type proceeding, where the competent court will appoint a third-party trustee (or trustees, for larger cases), most typically a practising lawyer who is equipped with knowledge and expertise in the field, upon the commencement of the proceeding. The management of the debtor company will thereafter be deprived of the power and authority to manage the debtor company. As the corporate reorganisation act was modelled after Chapter 11, despite it being a “trustee” type proceeding, there are many similarities with Chapter 11. However, in the same manner as civil rehabilitation, i) there is no automatic stay, and ii) courts are more open to having, and frankly expecting to have, periodical and frequent ex parte meetings with the trustee(s) and their team members. In contrast to civil rehabilitation, secured claims are bound by corporate reorganisation proceeding.

Liquidating Proceedings

Liquidating proceedings include bankruptcy and special liquidation. 

Bankruptcy

A bankruptcy proceeding is a proceeding under the Bankruptcy Code of Japan, which is available to all types of business entities and individuals. It is a liquidating-type proceeding, with the aim to ensure orderly liquidation and dissolution of business entities as well as to secure fairness among creditors. Upon commencement of bankruptcy, the competent court will appoint a third-party trustee, usually a practising attorney who is equipped with knowledge and expertise in the field. Once the trustee is appointed, they will effectively take over all the power and authority over the estate of the bankrupt.

Special liquidation

Special liquidation is a proceeding under the Corporations Act of Japan. It is a liquidating-type insolvency proceeding, available only to the stock companies incorporated under and pursuant to the Act. Upon commencement of the proceeding, the competent court will appoint a liquidator or liquidators to oversee the proceeding. Most typical use of special liquidation will be cases where a parent company shuts down an insolvent subsidiary.

Civil Rehabilitation

A supervisor (kantoku-iin) will be appointed by the competent court to oversee and supervise the management of the debtor company. Supervisors report to the courts, with fiduciary-like duties imposed for the benefit of all unsecured creditors. The debtor itself, too, owes fiduciary-like duties to all unsecured creditors.

In cases of involuntary filings, courts will typically elect to appoint an examiner (chousa-iin) who is tasked to see if the requirements to commence a civil rehabilitation proceeding are satisfied, and if the proceeding is to be commenced, the court will usually elect to appoint a trustee as opposed to allowing the management of the debtor company to be “debtor-in-possession”.

Corporate Reorganisation

At the commencement of the proceeding, one or more trustees will be appointed by the competent court to take over the power and authority to manage the debtor company’s business. They owe fiduciary-like duties to creditors.

However, prior to the commencement, in many corporate reorganisation proceedings, one or more provisional administrators (hozen-kanrinin) are first appointed. Provisional administrators provisionally take over the business of the debtor before the appointment of the trustees. Most common practice is for the same individuals appointed as preservation officers will also be appointed as trustees.

Similarly to civil rehabilitation, in cases of involuntary filings, the competent court will typically elect to appoint an examiner (chousa-iin) who is tasked to see if the requirements to commence a corporate reorganisation proceeding are satisfied.

Bankruptcy

At the commencement of the proceeding, save for few exceptional cases, experienced practising attorneys will be appointed by the competent court as trustees to take over the power and authority of the management of the debtor. Trustees owe fiduciary-like duties to creditors. Also in bankruptcy, in cases of involuntary filings, courts will typically elect to appoint an investigator who is tasked to see if the requirements to commence a bankruptcy proceeding are satisfied.

Special Liquidation

Once a petition to commence a special liquidation proceeding is filed, and if the relevant court determines that the requirement to commence the proceeding is satisfied, the court will appoint a special liquidator. Special liquidators are not necessarily practising attorneys.

Claims are classified into different classes in different insolvency proceedings.

Secured Creditors

A distinction is made between secured creditors who have a security interest in individual assets and those who only have a general priority over the debtor’s assets. The former has priority in insolvency and restructuring proceedings with respect to the value of the assets in question, and in bankruptcy and civil rehabilitation, the secured creditors can exercise the security interest outside the proceedings to collect their claims, whereas in a corporate reorganisation, individual foreclosure on security interests is prohibited and, in principle, the secured creditors may receive repayments only based on an approved reorganisation plan.

Secured creditors who have a general priority over the debtor’s assets are categorised as claims with general priorities. If the asset value of a security interest is less than the amount of the claim, the secured creditors may participate in the proceedings as unsecured creditors in respect of the deficient amounts.

Unsecured Creditors

Bankruptcy

The hierarchy of payment priorities is as follows (in descending order of priority):

• common benefit claims (zaidan-saiken);
• bankruptcy claims with general priorities;
• general bankruptcy claims;
• subordinated bankruptcy claims; and
• consensually subordinated bankruptcy claims.

Common benefit claims are paid outside bankruptcy at any time by the bankruptcy estate.

Bankruptcy claims with general priorities, typically some labour and tax claims that arose prior to the commencement of bankruptcy, have priority over other general claims to receive distribution.

General bankruptcy claims are paid by distribution on a pro-rata basis.

Subordinated bankruptcy claims, typically interests and damages for default after commencement of the proceedings, are subordinated to general bankruptcy claims in terms of distribution.

Consensually subordinated bankruptcy claims are subordinated to subordinated bankruptcy claims, as agreed between the debtor and a creditor before the commencement.

Civil rehabilitation and corporate reorganisation

The hierarchy of payment priorities is as follows (in descending order of priority):

• common benefit claims (kyoueki-saiken);
• claims with general priorities;
• general claims; and
• consensually subordinated claims.

Common benefit claims are paid outside civil rehabilitation and corporate reorganisation proceedings, at any time.

Claims with general priorities have payment priority over other general claims.

While in corporate reorganisation, claims with general priorities are paid pursuant to the reorganisation plan, these claims are repaid outside the proceedings at any time in a civil rehabilitation.

General claims are paid pursuant to the restructuring plan.

Consensually subordinated claims are fairly and equitably differentiated from other claims in the restructuring plan, taking into account the agreed-upon subordination.

Division of a Class

While the statutes, namely the Civil Rehabilitation Act and the Corporate Reorganisation Act, both grant the competent court a statutory authority and power to divide general unsecured creditors into multiple classes – eg, classifying unsecured creditors into trade creditors class and financial creditors class, rarely if ever is such power exercised in Japan.

In bankruptcy, civil rehabilitation and corporate reorganisation, administrative expenses, a part of employee wages and tax claims, as well as claims that arise during the proceedings for the common benefit of the creditors are categorised as “common benefit claims”, which have payment priority senior to general claims. Administrative expenses would include, for instance, financial advisers’ fees and legal fees incurred post-commencement of such proceedings.

Secured creditor claims have priority over common benefit claims, to the extent of the value of the relevant collateral. Hence, common benefit claims’ priority over secured creditors is limited to the amount uncovered by such value.

New Money

DIP financing claims (arising after a proceeding commences and with approval from the supervisor/court) are treated as common benefit claims. It is also possible to secure them by the assets of the debtor (with the court’s approval). It is not possible to have priority over pre-existing secured creditors’ liens (without their consent), meaning that in Japan, super priority/priming liens in US Chapter 11 are not available.

Typical liens/security interests on each type of asset in Japan would be as follows.

Real Estate

Under most statutes in Japan, land and any fixtures on it comprise real estate (immovable property). Buildings are the most common type of fixture and are subject to a property registration system separate from that of land.

Forms of security interests over real estate are as follows.

• Security interests under statutes, such as:
1. mortgages (teito-ken);
2. umbrella mortgages (which function like a revolving mortgage (ne-teito-ken));
3. pledges (shichi-ken) over immovable property;
4. statutory liens (sakidori-tokken) on immovable property which is granted to a claimant who has a claim arising from the preservation of the immovable property, construction work on the immovable property or the sale of the immovable property;
5. repurchase arrangements (kaimodoshi); and
6. provisionally registered ownership transfers (kari-touki-tanpo).
• Security interests recognised by court precedents (without any statutes providing for these security interests), such as:
1. security interests by way of assignment (joto-tanpo) (security assignments);
2. pre-agreed resale transactions (sai-baibai-no-yoyaku); and
3. retentions of title (shoyuuken-ryuuho).

Mortgages and revolving mortgages are created by agreement between the creditor and the owner of the immovable property, and are perfected by registration in the relevant property registry. However, the agreement creating a revolving mortgage must specify: the scope or type of claims to be secured (usually specified by identifying the transaction type, for example, “lending money transaction”) and the maximum amount to which the revolving lender has preferential rights (that is, open revolving mortgages are not allowed). Unless perfected, mortgages and revolving mortgages would not be effective vis-à-vis third parties.

Movable Property

Any tangible thing or item (butsu), which is not real estate, comprises movable property. Mortgages cannot be created over typical movable property. However, construction machinery, as well as aircraft and registered ships, can be subject to mortgages under certain specific statutes that provide exceptions to the Civil Code. A pool of movable properties is not recognised as a single movable property. This is because the concept of a thing or item under the Civil Code is based on tangibility. Further, a single right cannot be established over a pool of movable properties under the legal doctrine that only grants a single right over a single property (subject to limited exceptions). However, particularly in relation to trading stock (inventory), the Supreme Court has recognised that a pool of movable properties can be subject to a single security interest, if the scope of the subject matter is specified in some way (such as by designating the type, location and quantity of the movable properties in the pool).

Common forms of security interests over movable property are as below, with pledges and security assignments being the more common forms.

• Security interests under the Civil Code, such as:
1. pledges over movables;
2. statutory liens on movables; and
3. repurchase arrangements.
• Security interests recognised by court precedents, such as:
1. security assignments;
2. pre-agreed resale transactions; and
3. retentions of title.

Pledges over movable property are created and granted by:

• an agreement (not necessarily in writing) between the creditor and the owner of the movable property; and
• delivery (which includes actual delivery, summary delivery and transfer of possession by instruction, but excludes constructive delivery) of the subject matter to the creditor.

Pledges over movable property are perfected by continuous possession of the subject matter of the pledge.

Security assignments for movables are created and granted by a granting contract (not necessarily in writing). They are normally perfected by delivery, but can also be perfected by registration, if the assignor (grantor of the security assignment) is a corporation according to a certain statute specifically addressing additional measures for perfections. In contrast with pledges, delivery of the subject matter can take the form of constructive delivery, as confirmed by the Supreme Court.

The Supreme Court has also decided that a creditor can perfect its security assignment over a pool of movable properties as soon as the assignor (usually the debtor) acquires possession of new or additional movable properties that are specified as part of the pool. This is possible if the assignor and the assignee (that is, the creditor) agree that the creditor is deemed to have acquired possession of the new or additional movable properties, by constructive delivery from the assignor to the creditor, when the assignor acquires possession of the movable properties.

Equity Shares, Intangible Property, Intellectual Property and Accounts

A pledge (shichi ken) or umbrella pledge (ne shichi ken), and security assignment (joto tampo ken) or umbrella security assignment (ne joto tampo ken) are the norm.

Rights of Secured Creditors

With any type of security interest, secured creditors are entitled to foreclose and enforce their security interests. However, secured creditors could face a practical burden with the statutory requirement for court involvement with respect to foreclosure of most of those security interests. Pledges and security assignments, however, are enforceable/foreclosable without court involvement, which is one of the reasons behind them being commonly used forms of security. Court involvement can be viewed as problematic for several reasons; most notable issues are: (i) timing issue, as it would take longer time to conclude the enforcement/foreclosure, and (ii) pricing issue, as it is believed that court-run auction results in lesser proceeds compared to privately run auctions.

Unsecured creditors have rights to obtain an attachment order from a court with respect to the relevant debtor’s assets or seize such assets with a court order. However, unsecured creditors will need to obtain a court judgment unless unsecured creditors have a notarised document evidencing the claim and allowing such document to function in lieu of a court judgment. Also, if unsecured creditors owe monetary obligations against the relevant debtor, then unsecured creditors are allowed to set-off their obligations against its claims, if both the obligations and the claims are due and payable.

There are a variety of processes, from pure consensual, negotiation-based workouts among mostly financial creditors, to more formal, rules-based out-of-court workouts, the most popular in recent days (especially for larger-sized debtors) being the Turnaround Alternative Dispute Resolution process sponsored by the Japanese Association of Turnaround Professionals. Despite the title being an alternative dispute resolution, it is a process through which debtors may adjust or restructure debts owed to participating creditors with the consensus of those participating creditors (which typically would be limited to financial creditors).

The major rules-based out-of-court workouts are:

• the Guidelines for Out-of-Court Workouts (Shiteki-seiri Guidelines);
• the Guidelines for Restructuring of Small and Medium Enterprises (Chusho-kigyo no Jigyo-saisei-tou ni-kansuru Guidelines);
• Turnaround ADR (Jigyo-saisei ADR); and
• SME Vitalisation Councils (Chusho-kigyo Kasseika Kyogikai).

Rules-based out-of-court restructuring processes are, in most cases, based on a statute allowing specific entities to set a rule for a process offered to debtors through which a debt adjustment or restructuring can be achieved on a consensus basis with the participating creditors. They do not, however, involve any court supervision or approval of the resultant workout plan, thus they are pure out-of-court processes, nor are the rules part of the statutes. They are in such sense rules-based but not statutory process.

In out-of-court workouts, unanimous consent from all participating financial creditors (ie, trade creditors are not included, unless they are made part of the process, which is a rarity) is required to achieve restructuring.

There is no requirement for mandatory out-of-court workouts before the commencement of in-court insolvency proceedings.

Since the process and timeline of a rules-based out-of-court workout differs depending on which procedure is adopted, the following will explain the process and timeline of a Turnaround ADR (TADR), which is the most commonly used procedure.

Filing of Application and Standstill Notice

The debtor files an application with the TADR operator authorised by the Minister of Justice, and the debtor prepares an outline of its proposed business revitalisation plan (the “TADR Plan”). First, the application is pre-assessed.

The key points are:

• the potential to provide greater repayment than that in bankruptcy;
• the feasibility of the proposed TADR Plan; and
• the likelihood of obtaining unanimous consent from participating financial creditors.

Upon the pre-assessment and its passing, a TADR will commence by sending a standstill notice to the creditors under the joint names of the TADR operator and the debtor. The standstill notice requests that the creditors refrain from collecting claims, taking collateral and/or guarantees, foreclosing on collateral, or filing petitions to commence any in-court insolvency proceedings.

Creditors’ Meetings

Creditors’ meetings are expected to be held three times in TADR.

Duties on Creditors

There are no specific rules regarding duties of the creditors during a TADR or other out-of-court workouts. As a general principle of the civil law, the principle of acting in good faith may apply to the creditors, and general tort doctrines can give rise to certain tortuous misstatements or fraud.

New Money

When the debtor borrows funds necessary to continue business from third parties during the period between the commencement and the end of the TADR (“Pre-DIP financing”), the Pre-DIP financing can have repayment priority over the other creditors in the TADR, but only if all the creditors agree; the same goes for super-priority liens and thus is not a norm. In the event the TADR ends in failure and has to be transferred to in-court insolvency proceedings, the court is allowed, under a statutory provision, to “consider” granting repayment priority to the Pre-DIP financing. A capital injection into the debtor by new sponsors can be set out in the TADR Plan.

Typical TADR Case

A typical TADR case would take three to four months. The debtor, in general, needs to conduct financial and business due diligence, evaluation of the assets based on the evaluation standard of the TADR and provide necessary information to the creditors so that they can make informed decisions. Organising a creditor steering committee is a rarity during the TADR; rather, the mediators consisting of third-party professionals would lead the process. In the TADR Plan with a debt waiver by the creditors, the amounts to be waived are normally calculated on a pro-rata basis based on the non-secured amount of each creditor’s claim; thus, contractual priority, security/lien priority, priority rights, and the relative positions of competing creditor classes would not be affected unless by unanimous consent of all relevant creditors. Equity holders are usually not a part of the process, and thus would remain unaffected.

Developments

The government has been considering presenting a bill to introduce a new out-of-court workout scheme to facilitate business restructuring by allowing in-class cram-down in combination with court approval, but it had not yet been proposed to the Diet as of the end of August 2024.

All out-of-court procedures noted above are consensual, thus are binding on only those creditors (and the debtor(s)) who participated in the procedure, and the restructuring reached as a conclusion of those procedures cannot be invoked against another creditor or any other stakeholder.

In contrast, pure consensual out-of-court workouts that involve syndicated loans or bonds could bind dissenting creditors. For lenders, there typically are contractual provisions permitting a majority or super-majority of lenders to bind dissenting lenders to changed credit agreement terms. For bondholders, there was an amendment to a statute to permit such majority voting in the bondholders’ meeting with the court’s authorisation pursuant to the Companies Act.

Also, there is no mandatory or forced stay/standstill under out-of-court workouts, so secured creditors would continue to have the ability to enforce/foreclose outside the process, unless the secured creditor itself agrees to be bound by a stay/standstill.

Civil rehabilitation and corporate reorganisation can be initiated by both the debtors themselves (ie, voluntary proceedings) and by creditors (ie, involuntary proceedings). Stakeholders other than creditors have standing to initiate some of these proceedings, but not all.

Respective requirements/criteria for commencement of these proceedings are as follows.

Civil Rehabilitation

A creditor may file a petition to commence a civil rehabilitation by providing evidence to show the existence of the creditor’s claim, and facts establishing that there is a “threat” of insolvency.

Corporate Reorganisation

This can be initiated as follows:

• a creditor who holds claims that account for one-tenth or more of the amounts of the stated capital of the debtor; and/or
• a shareholder who holds one-tenth or more of the voting rights of all shareholders of the debtor,

may file a petition to commence a corporate reorganisation by providing evidence to show the existence of:

• the creditor’s claim or shareholder’s voting rights; and
• facts establishing that there is a “threat” of insolvency.

Neither a corporate reorganisation nor civil rehabilitation proceeding has procedures set out for a group of entities; while both corporate reorganisation and civil rehabilitation allow procedural consolidation, each debtor entity will have to be dealt with separately.

General Overview

As described above, civil rehabilitation and corporate reorganisation both have similar characteristics to those of US Chapter 11. In Japanese statutory reorganisation processes, the debtor typically takes the initiative to formulate a restructuring/reorganisation plan (the “Plan”) under the court’s supervision. The main processes to effectuate a Plan are:

• determining estates and claims;
• submission of a Plan;
• voting on the submitted Plan by the creditors’ meeting; and
• the court’s confirmation of the Plan.

Unjustifiable Purpose

“Threat” of insolvency is required to commence proceedings under either civil rehabilitation or corporate reorganisation; as a result, any petition that does not purport to address a restructuring of an insolvent company would not be justified (ie, would be denied).

Also, where a petition is filed for other unjustifiable purposes or it is not filed in good faith, the court must dismiss with prejudice on the merits.

Determining Estates and Claims, Etc

Determining estates

The debtor would be responsible to investigate and evaluate its assets and property at the time the proceedings commence (the “Estate”) and submit a report to the court.

Determination of claims

As a default rule, creditors’ claims are calculated and recognised based on:

• the claim register and submission of proofs of claims by each relevant creditor; and
• approval or objection by the debtor.

Not all contingent claims would be entitled to receive repayments or holders thereof be enabled to vote, but conditional claims would receive repayments when the relevant condition is met. However, the debtor shall be discharged from all its liabilities for all rehabilitation claims (in a civil rehabilitation)/reorganisation claims and secured reorganisation claims (in a corporate reorganisation) and, when an order to confirm a Plan (“Plan Confirmation Order”) by the court becomes final and binding, such discharge would extend to any and all contingent claims which are not registered by creditors (save for few exceptions and certain tax claims), unless approved and a part of the Plan.

Submission of Plan

General timeline

There is no statutory deadline for a debtor to submit a Plan but, for example, the Tokyo District Court generally sets a deadline (via a court order) for the submission of a Plan, which is typically three months after the petition in a civil rehabilitation and 11 months in a corporate reorganisation. As there is no concept of an exclusivity period, any creditor may also prepare and propose a Plan to the court within the period specified by the court. The deadline can also be extended by a separate court order and, in practice, especially in large and complicated cases, debtors often are granted such extension where, for example, the status of a sponsor bid would justify an extension.

Components of the Plan

The fundamental components, in terms of legal rights of stakeholders, of a Plan are:

• treatment of claims (classification of claims and modifications of claims, discharge, etc);
• repayments (form of repayment, timing, etc); and
• treatment of existing shares (and issuance of new shares), etc.

Modifications of Creditors’ Rights

The debtor can set clauses to modify creditors’ rights in the Plan, such as reducing the amounts of claims, releasing claims, DES (Debt Equity Swap), extending the term for claims, etc. As a general rule, this modification of rights shall be equal between creditors. However, this shall not apply where any creditors who will suffer detriment have given consent or where equity will not be undermined even if the plan otherwise provides for small claims, etc, or any other difference in the treatment of creditors.

Class of Creditors

Civil rehabilitation

As a general rule, there is only one class which can vote: holders of “rehabilitation claims” who submitted “proofs of claims”.

Corporate reorganisation

Classes are separated for each type of creditor – secured claims, other general priority claims, general unsecured claims, consensually subordinated claims and shares – or the creditors who hold the types of rights specified by the court.

Voting

Civil rehabilitation

The threshold to approve the Plan is:

• the majority of voting right-holders (in terms of headcount); and
• the majority in terms of claim amounts – ie, of the holders of claims that account for not less than half of the total amount of claims (basically, which equate to voting rights).

Corporate reorganisation

The threshold depends on each class and how the claims will be modified. In the general unsecured claim class, approval by the holders of claims that account for more than half of the total amount of claims (basically, which equate to voting rights) are required. In the secured claim class, (i) for a Plan which extends the terms of secured claims, approval by the holders of claims that account for not less than two-thirds of the total amount of claims (basically, which equate to voting rights) or (ii) for a Plan which reduces and releases debts for secured claims or provides measures that may affect the rights of secured creditors other than extensions of terms, approval by the holders of claims that account for not less than three-quarters of the total amount of claims (basically, which equate to voting rights) are required.

Claims of Dissenting Creditors

Cram-down is available, but only in limited cases. As a general rule, if the Plan is not approved by a certain class, that Plan will not be confirmed. However, the court may issue a Plan Confirmation Order by modifying the proposed Plan and specifying a clause to protect the rights of those whose consent has not been obtained, in the interests of those holders, when at least one class has consented to the proposed Plan. The contents of a clause to protect rights depends on the class to be protected. A clause to protect a certain class can be included in the Plan in advance. In this case, creditors who belong to that class (as long as fully protected) cannot vote on the Plan.

Plan Confirmation Order

Following a creditors’ meeting that met the threshold requirement, the court makes a decision about whether or not to confirm a Plan. When legal requirements (such as the feasibility test, or the best interests of creditors test) are met, the court should issue a Plan Confirmation Order. A Plan shall be effective in the interests of and against the debtor, all creditors (unsecured creditors in civil rehabilitation, unsecured and secured creditors in corporate reorganisation) and shareholders, etc, regardless of whether each specific creditor voted or not. However, note that in civil rehabilitation, secured creditors are, as a general rule, outside the proceedings, so they would not be bound.

Challenge

An immediate appeal may be filed against a Plan Confirmation Order (or an order not to confirm) by creditors, or the debtor, etc.

In civil rehabilitation, a rehabilitation plan will need to be voted, approved and confirmed, whereas in corporate reorganisation, a Plan will need to be voted, approved and confirmed. In either case, confirmation of a Plan should be confirmed by the court; and a Plan should meet the feasibility test (whether the Plan is likely to be executed) and the best interests of creditors test (whether the Plan meets the common interests of creditors) in a civil rehabilitation or the fair and equitable test (whether the content of the Plan is fair and equitable) in a corporate reorganisation, to be confirmed by the court.

In Japan, a restructuring or reorganisation agreement other than the Plan is not executed among the debtor, creditors and other parties, in general. The approved and confirmed Plan will bind the debtor and creditors.

Neither of these statutory proceedings releases non-debtor parties from liabilities. A Plan will not affect any rights held by creditors against the debtor’s guarantor or any other person who owes debts jointly with the debtor, and any security provided by persons other than the debtor in the interests of creditors.

If it has become obvious that the Plan is unlikely to be implemented, the court shall issue an order discontinuing the proceedings. The discontinuation of the proceedings may cause bankruptcy to commence. However, a discontinuation of the proceedings after the Plan has been confirmed will not affect any effects arising from the implementation of the Plan. For example, discharges from claims, changes of creditors’ or shareholders’ rights, or the issuance of new shares, etc, which were implemented based on the Plan will remain in effect. In general, however, in a statutory reorganisation proceeding, it is rare to include any obligations imposed on creditors as a part of the Plan.

Civil Rehabilitation

The norm is that the debtor, even after a proceeding is commenced, will continue to have the rights to carry out its business or administer or dispose of its property (the statute provides for an exception where the competent court could appoint a trustee to take over those rights), in which case the debtor’s incumbent managers generally continue its operation; provided that the court and the supervisor appointed by the court will supervise the debtor. The debtor shall have the obligation, vis-à-vis creditors, to exercise the above rights and conduct rehabilitation proceedings in a manner “fair and sincere” to all creditors.

Corporate Reorganisation

Once the proceedings are commenced, the rights and authority to manage the debtor’s business and to administer and dispose of the debtor’s assets will be vested exclusively in one or more trustees appointed by the court. Prior to the appointment of the trustee (ie, prior to the commencement), the court and a provisional administrator or the examiner appointed by the court will supervise the debtor. Normally, the provisional administrator will be appointed as a trustee. The trustee will be overseen by the court, and will need to obtain approvals from the court to conduct corporate actions and transactions, other than those that fall within the debtor’s ordinary course of business. As with a civil rehabilitation, the trustee, on behalf of the debtor, can borrow money even during the proceedings, but the approval of the court may be required. A trustee owes a duty of care and duty to provide information, is restricted from transacting with the debtor on their own behalf and owes non-compete obligations. However, there are some cases where an incumbent management is appointed by the court as a trustee, and such person continues to manage the business. In such case, the court appoints a third party as an examiner or a supervisor who oversees the debtor.

Restrictions on a Company’s Use of Its Assets

The norm is that the debtor will be permitted to use its assets for its business during a formal restructuring proceeding within the ordinary course of business. However, in some cases, for example, where common benefit claims which exceed the bar amount set by the court will be incurred by the continuance of the business operations (ie, usage of its assets), the court may require the debtor/trustee to seek approval of the court.

Directors (as a DIP in a typical civil rehabilitation) or a trustee (in a corporate reorganisation) operates its business and executes the sale of assets. However, approval from the supervisor/examiner or the court is required to sell its assets. There are some exceptions: for example, if the sale is within the ordinary course of business, such approval is not required.

To transfer its business to a third party not based on a Plan, the debtor/trustee needs to obtain the court’s approval. 

However, the approval itself does not clear claims or liens, and an agreement with a claim holder/security interest holder will be separately required for such purpose. There is no credit bid system in Japan. The creditor may be a stalking horse, but it is treated the same as other candidates.

Existing Contracts/Agreements

If an existing contract is an “executory contract”, a bilateral contract under which the main obligations have not been completely performed by both the debtor and a creditor at the time the court procedures for insolvency commence, in the said proceedings, a trustee/debtor may terminate such executory contract. When the trustee/debtor determines that continuing the executory contract is advantageous or necessary even after the procedure commences, they may continue the contract. In such case, they may request that the counterparty perform its obligation, and the trustee/debtor shall perform their counter-obligation as administrative expenses. By contrast, the counterparty may not terminate the executory contract and is bound by it; in other words, an executory contract may not be terminated by the counterparty. However, the counterparty may specify a reasonable period and make a demand that the debtor/trustee provide a definite answer within a set period with regard to whether the debtor/trustee will terminate the executory contract or not.

In addition, even if a contract contains a clause which gives the counterparty the right to terminate the contract when the debtor files a petition to commence court procedures for insolvency/restructuring (hereinafter referred to as the “Ipso Facto Clause”), such clause is generally considered to be invalid in Japan in accordance with a Supreme Court ruling. However, an acceleration clause forfeiting the debtor’s benefit of time if the debtor files a petition to commence court procedure for insolvency is considered to be valid.

Types of Statutory Officers

In a civil rehabilitation, the debtor continues its business and the process under supervision by a supervisor appointed by the court. However, in exceptional cases where the court finds it particularly necessary to rehabilitate the debtor’s business, it may appoint a trustee, rather than allow the debtor to continue to have the rights and authority to operate.

In a corporate reorganisation, the main statutory officers involved are the trustee, the provisional administrator and an examiner appointed by the court. In normal practice, the trustee consists of a legal trustee appointed from among practicing attorneys and a business trustee appointed from the debtor or new sponsor (if already selected).

Roles, Rights and Responsibilities of Statutory Officers

A supervisor, in a civil rehabilitation, receives reports from the debtor on the execution of business and the proceedings, and gives its consent to the debtor’s important activities that are similar to matters approved by the trustee in a corporate reorganisation. The supervisor is also responsible for ensuring that the court and the creditors make appropriate decisions by reporting its findings and providing an opinion to the court. The roles, rights and responsibilities of a trustee in a civil rehabilitation, if appointed, are almost the same as the trustee in a corporate reorganisation.

In a corporate reorganisation, the provisional administrator administers the business and the assets of the debtor until commencement, as well as investigating whether to commence the proceedings. The duties and powers of the trustee in a corporate reorganisation are basically the same as those in a bankruptcy (takes over all responsibilities, power and authority to run the debtor company, subject to the supervision of the court), and the examiner’s roles, rights and responsibilities, where the court appoints incumbent management as a trustee in corporate reorganisation, are almost the same as the supervisor in a civil rehabilitation.

Advisers

At the commencement of each proceeding, the court appoints statutory officers described above. They can contract accountants, financial advisers, etc, if and to the extent necessary.

Roles of Creditors

Class of creditors

In civil rehabilitation, general unsecured creditors and secured creditors are treated differently with regard to exercising rights, but there is only one class with regard to the vote. A secured creditor (betsujyo-kensha) can exercise its “rights of separate satisfaction” which effectively means a secured creditor can foreclose on its collateral or otherwise enforce its rights even during the civil rehabilitation proceeding, but with regard to voting, such creditor may exercise its right as a general unsecured creditor only for the part of its claim not covered by its collateral (ie, a part of the claim for which discharge will not be achieved via a foreclosure on the collateral).

Conversely, in a corporate reorganisation, general unsecured creditors and secured creditors are both prohibited from exercising rights during the proceeding, but they are put into separate classes for purposes of creditors’ voting.

Creditors’ Committee

The court may give approval to the participation of a committee consisting of creditors in the proceedings, when such a creditors’ committee meets the requirements: such as the majority of creditors consent to the committee’s participation, and it is found that a creditors’ committee would properly represent the interests of creditors as a whole. However, formulation of a creditors’ committee is a rarity in Japan as there are very few cases. If actually formulated, the creditors’ committee will be authorised to state its opinions to the court, the debtor or a supervisor/examiner and will have certain monitoring rights.

Information Available to Creditors

Creditors can receive certain information during the proceedings, such as:

• a report by the debtor (or trustee) regarding: i) the debtor’s property, etc, at the time the proceedings commence; and/or ii) the liabilities of the debtor’s directors/officers;
• the Plan; or
• a report by the supervisor/examiner required by the court, regarding the commencement of the proceedings or the Plan, etc.

In addition, creditors can examine and inspect documents submitted to the court by the debtor and peer creditors.

Rights of Set-Off

A creditor can set off its pre-petition obligation with a pre-petition claim against the debtor. However, a creditor can set off only until the expiration of the claims filing period, and when the time that the obligations of both parties become due and suitable for set-off has arrived before the expiration of the claim filing period. As long as these conditions are met, set-off will not be suspended or stayed in the absence of a consensual agreement.

Stay

Unlike US Chapter 11, there is no “automatic stay” in Japan.

Pre-commencement

The court may issue a temporary restraining order that prohibits the disposition by the debtor of its property. By this order, the debtor is prohibited from making payments or disposing of collateral. To prohibit a compulsory execution, or to stay a foreclosure on a security interest, the debtor needs to obtain a separate “pre-commencement stay order”.

Post-commencement

Payment of a pre-petition obligation is prohibited in general. In a civil rehabilitation, since a security holder can exercise its right outside the proceedings, the debtor needs to obtain a “post-commencement stay order” to prohibit such action by a security holder. In a corporate reorganisation, a security holder is prohibited from exercising its security interest against secured property by virtue of statute as a result of the commencement of the reorganisation proceeding.

Once a civil rehabilitation or a corporate reorganisation commence, existing pre-judgment attachments are automatically suspended or extinguished. Between the petition for commencement of these proceedings and the order to commence, pre-judgment attachments are not automatically suspended, so a separate court order must be obtained to prohibit or suspend pre-judgment attachments.

Rights and Remedies of Secured Creditors

As noted above, secured creditors would still enjoy legal rights to enforce and foreclose on collateral in civil rehabilitation proceedings, whereas in corporate reorganisation, secured creditors, too, will be bound by the proceedings and therefore will not be able to enforce or foreclose outside the corporate reorganisation. However, even in civil rehabilitation, they may separately be subject to a court’s discretionary stay order in certain circumstances.

When secured creditors are allowed to enforce/foreclose outside the insolvency proceedings, they would remain subject to contractual intercreditor covenants.

In a corporate reorganisation where secured creditors are bound by the proceedings, secured creditors would be in a class separate from unsecured creditors, and, therefore, would be able to veto the approval of the reorganisation plan, thus effectively blocking the conclusion of proceedings. Such ability would practically mean that they have practical rights to disrupt the proceedings in the process up to the creditors’ vote as well. As for civil rehabilitation, secured creditors would only have indirect powers to influence the proceedings in their decision whether or not to enforce/foreclose their rights. While there is no automatic stay in Japan, secured creditors would be stayed from enforcement and foreclosure actions in corporate reorganisation, as a result of a discretionary but comprehensive day-one stay order by a court, but in civil rehabilitation proceedings, they typically would not be (until and unless a separate discretionary stay order is granted by the court).

Rights and Remedies for Unsecured Creditors

An unsecured creditor who is opposed to a civil rehabilitation proceeding may, as a party having a “legal interest” in the case, immediately appeal against the commencement order. In addition, the creditors who prefer a corporate reorganisation may file a petition for a corporate reorganisation as a counter measure to civil rehabilitation. After the proceedings are commenced appropriately, unsecured creditors have the right to participate in the proceeding by filing their claims and to vote on whether to give consent to a Plan, and be repaid pursuant to the approved Plan.

Unsecured Trade Creditors

There is no Japanese equivalent of a critical vendor regime and, in general, unsecured creditors’ claims can only be repaid on a pro-rata basis, regardless of whether or not they are trade claims. However, in a civil rehabilitation or corporate reorganisation, unsecured pre-petition claims that are required to be repaid for the continuation of the debtor’s business are allowed to be repaid with the court’s permission. It is practically expected that the court would give permission if the conditions below are met:

• the trade claim is a small amount;
• the continuation of the trade is essential for the continuation of the debtor’s business activities;
• there is a high possibility that the other party to the trade will refuse to continue the trade if the debtor does not repay the trade claim, and it is difficult to find an alternative trade partner; and
• if the debtor repays such trade claim, the trade creditor commits to continue the trade on the same terms.

Trading of Claims Against a Company

A creditor can trade its claims against the debtor. No disclosures and approvals by the court are required, but a successor needs to submit a notice to the court to be recognised. Civil law governs the transfer of claims and perfection thereof.

Existing Equity Owners

Existing equity owners can receive a distribution from the debtor only when all creditors superior to the equity owners are paid in full. In practice, and because the statutes require a “threat” of insolvency to commence proceedings, the debtor acquires existing shares with no consideration and these existing shares will be cancelled based on the Plan. New shares will be issued to a sponsor in exchange for new money.

Overview

As noted above, insolvent companies may be liquidated voluntarily or involuntarily by bankruptcy (hasan) or special liquidation (tokubetsu-seisan).

The pros and cons of special liquidation are as follows.

Pros

The pros are:

• special liquidation does not require the same rigorous procedure as bankruptcy proceedings, so the process proceeds relatively quickly;
• a liquidator can be selected by the debtor; and
• compared to bankruptcy, special liquidation is generally viewed as allowing the debtor to avoid being labelled negatively.

Cons

The cons of special liquidation are:

• it is available only to stock companies; and
• it cannot proceed without the consent of two thirds or more of the creditors (based on the total amount of claims).

Due to the cons, special liquidation is normally used when there are only a handful of co-operative creditors, or when the parent company liquidates a subsidiary with the parent holding the majority of the claims.

Differences Between Bankruptcy and Special Liquidation

The differences between bankruptcy and special liquidation are as follows.

• In both cases, the proceedings are commenced by filing a petition with the court. With respect to the requirements to commence, in bankruptcy the debtor must be insolvent, whereas in special liquidation it is sufficient that the debtor is suspected of being insolvent.
• In both cases, creditors’ claims are recognised by the debtor by filing claims.
• In both cases, the schedule of the procedures including the creditors’ meetings are decided by the court at the time of commencement. An inventory of assets and income and expenditure statements will be provided to creditors at the creditors’ meeting.
• In bankruptcy, the debtor is prohibited from repaying the bankruptcy claims after commencement in general. In special liquidation, the debtor cannot repay the claims during the period the claims are being filed, but after that period the debtor can repay the claims on a pro-rata basis. Also, in both cases, commencement causes foreclosures or litigation against the debtor to cease. Furthermore, in both cases, after commencement, set-off by pre-commencement claims is prohibited in general. While the trustee is granted a right of avoidance, the liquidator does not have such a power.
• At commencement, while the trustee is appointed by the court in bankruptcy, the liquidator who is designated by the debtor is appointed by the court. The trustee has the power to terminate a contract that has not been performed by both parties, but the liquidator has no such power.
• In bankruptcy, distribution from the formed bankruptcy estate is made to the creditors on a pro-rata basis, whereas, in special liquidation, repayments are made pursuant to the approved agreement or individual settlement agreement with each creditor.

Respective requirements/criteria for commencement of these proceedings are as follows.

Bankruptcy

A creditor may file a petition to commence a bankruptcy proceeding by providing evidence to show the existence of the creditor’s claim, and facts constituting grounds to commence bankruptcy for the debtor. Bankruptcy is available to all types of debtors, including individuals (but not partnerships, save for limited liability partnerships).

Special liquidation

A creditor, a liquidator, a company auditor or a shareholder may file a petition to commence a special liquidation by providing evidence to show the existence of circumstances prejudicial to the implementation of the liquidation or a suspicion that the debtor is insolvent. Special liquidation is available only with respect to stock companies incorporated under the Corporations Act.

Requirement/criteria for commencement

The grounds to commence bankruptcy are facts showing that the debtor is unable to pay its debts or is insolvent.  With respect to a special liquidation, a suspicion of insolvency is required.

Obligation to commence formal insolvency proceedings

The current law does not require a company or its directors/officers to file for an insolvency proceeding, even when the grounds to commence insolvency proceedings are met/satisfied.

Upon and once bankruptcy commences:

• a payment of a pre-petition obligation is prohibited in general;
• existing pre-judgment attachments are automatically suspended or extinguished;
• a trustee (hasan-kanzai-nin) in a bankruptcy, or a special liquidator (tokubetsu seisan nin) in a special liquidation is appointed by the court;
• the incumbent officers and directors lose their power and authority to carry out the debtor’s business and such rights are vested in the trustee or the special liquidator; and
• in both bankruptcy and special liquidation, because they are liquidating-type (entailing a discontinuance of the business), unless the competent court grants a special order to the contrary, the debtor will no longer continue to operate the business.

Roles of Trustee/Special Liquidator

A trustee in a bankruptcy is a person or entity who has the right to manage and dispose of the property belonging to the bankruptcy estate. It owes a duty of care in its management towards all creditors. Specifically, the trustee has a duty to properly maintain and increase the bankruptcy estate for the benefit of the creditors. In addition, the trustee, as the successor of the debtor’s rights and obligations, has a duty to properly organise and co-ordinate legal relations with interested parties. The trustee reports to the court and has to obtain approval from the court with respect to certain activities, such as disposition of high-value assets, buyback of secured assets or filing of lawsuits.

Since the trustee owes a duty of care to all the creditors directly, if the trustee breaches its duty of care and causes damage to a creditor, the creditor may make a direct claim against the trustee for the damage who would personally be liable.

Existing Officers/Directors

In general, officers and directors owe a duty of care and a duty of loyalty to the company under the Companies Act, and if a breach of these duties is the cause of the company’s financial predicament, they may be personally liable to the company for damages. Further, commencement of bankruptcy or special liquidation does not automatically relieve directors and officers from all their duties: while officers and directors (including those who have already resigned) do not owe any obligation directly to the creditors, they would still owe a duty to provide information to the trustee.

Distressed Disposals

The trustee (in a bankruptcy) or liquidator (in a special liquidation) have authority to dispose of the debtor’s assets. Certain dispositions (eg, where the value is over JPY1 million) must be approved by the court. There is no general rule regarding granting “free and clear” title to a purchaser of the assets, thus it depends on the negotiations between the trustee or liquidator and the purchaser.

Existing Agreements

Essentially, the same applies as in the cases of restructuring-type insolvency proceedings (see 4.4 The Position of the Debtor in Restructuring, Rehabilitation and Reorganisation for the definition).

Completion of Procedures

As these are liquidation procedures, the end result is to dissolve the debtor company. Therefore, once the trustee/liquidator completes liquidation of all assets and distributions of the estate to creditors, the debtor company will be dissolved. If it happens that the assets were greater than the liabilities, then bankruptcy/special liquidation proceeding would be terminated and the remaining assets would revert back to the debtor company (and eventually be distributed to equity holders).

Length of Process

For both bankruptcy and special liquidation, the length of the process may vary from case to case, but the shortest would take three to four months where the longest could take more than a year.

Rights of Secured Creditors

Unlike in corporate reorganisations, secured creditors would still enjoy legal rights to enforce and foreclose on collateral in bankruptcy and special liquidation. However, similar to civil rehabilitation proceedings, they may separately be subject to a court’s discretionary stay order in certain circumstances.

When secured creditors are allowed to enforce/foreclose outside the insolvency proceedings, they would remain subject to contractual intercreditor covenants.

On the other hand, secured creditors would only have indirect powers to influence the outcome of bankruptcy or special liquidation proceedings in that they have no voting right and only have the right to decide whether or not to exercise and enforce/foreclose on their rights as secured creditors. 

Rights and Remedies for Unsecured Creditors

An unsecured creditor who is opposed to bankruptcy may, as a party having a “legal interest” in the case, immediately appeal against the commencement order. In addition, the creditors who prefer “restructuring type proceedings” may file a petition for civil rehabilitation or corporate reorganisation as a counter measure to bankruptcy. After the proceedings are commenced appropriately, unsecured creditors have the right to participate in the proceeding by filing their claims, and receive a distribution on a pro-rata basis if a bankruptcy estate is formed (in bankruptcy).

Rights of Set-Off

A creditor can set off its pre-petition obligation with a pre-petition claim against the debtor. However, a creditor can set off only until the expiration of the claims filing period, and when the time that the obligations of both parties become due and suitable for set-off has arrived before the expiration of the claim filing period. As long as these conditions are met, set-off will not be suspended or stayed in the absence of a consensual agreement.

Stay

In cases of bankruptcy and special liquidation, too, there is no “automatic stay” in Japan.

Pre-commencement

The court may issue a temporary restraining order that prohibits the disposition by the debtor of its property. By this order, the debtor is prohibited from making payments or disposing of collateral. To prohibit a compulsory execution, or to stay a foreclosure on a security interest, the debtor needs to obtain a separate “pre-commencement stay order”.

Post-commencement

Payment of a pre-petition obligation is prohibited in general. However, since a security holder can exercise its right outside the bankruptcy and special liquidation proceedings, the debtor needs to obtain a “post-commencement stay order” to prohibit such action by a security holder.

Pre-judgment Attachments

Once bankruptcy commences, existing pre-judgment attachments are automatically suspended or extinguished. Between the petition for commencement of the proceedings and the order to commence, pre-judgment attachments are not automatically suspended so a separate court order must be obtained to prohibit or suspend pre-judgment attachments.

Existing Equity Owners

Existing equity owners can receive a distribution from the debtor only when all creditors superior to the equity owners are paid in full. In practice, since the commencement requires insolvency of the debtor in bankruptcy, and in special liquidation, a “threat” of insolvency to commence proceedings, the debtor acquires existing shares with no consideration and the existing equity interests will be cancelled and extinguished upon completion of the proceeding.

Recognition Regime

The only source currently codified into statute is the domestication of the UNCITRAL’s model recognition proceeding, which Japan has adopted as its recognition and assistance regime of foreign insolvency proceedings. As a result, a trustee, etc, who has a right to administer and dispose of a debtor’s property in a foreign insolvency proceeding may file a petition with a Tokyo District Court for recognition of such foreign insolvency proceeding.

Court’s Order of Recognition

If the requirements are met (eg, the debtor has a business office, etc, in the country where such foreign insolvency proceeding is petitioned) and a decision to commence such foreign insolvency proceeding is made, the court shall issue an order of recognition.

The court shall dismiss with prejudice on the merits a petition in cases where:

• it is obvious that the effect of the foreign insolvency proceeding does not extend to the debtor’s property in Japan; or
• it is contrary to public policy in Japan to issue a disposition of assistance for the foreign insolvency proceeding, etc.

The court may:

• issue an order to stay other court proceedings (eg, a proceeding for compulsory execution); or
• issue a disposition prohibiting a disposition of property, a disposition prohibiting payment, etc.

No Blanket Recognition

One important aspect of the Japanese version of the UNCITRAL model law is that it does not provide for a blanket recognition of a foreign insolvency proceeding and/or a restructuring plan confirmed thereunder. Specific assistance or recognition of specific remedy will need to be separately sought under the statute for the recognition and enforcement of foreign judgments.

Recognition and Enforcement of Foreign Judgments

If a foreign judgment satisfies all of the requirements below, Japanese courts will recognise the judgment without further determining the merits of the case:

• the foreign judgment is a final and binding judgment rendered by a foreign court;
• the jurisdiction of the foreign court is recognised pursuant to laws, treaties, etc;
• the defeated defendant had been properly served;
• the content of the judgment and the litigation proceedings are not contrary to public policy in Japan; and
• a guarantee of reciprocity is in place between the foreign jurisdiction and Japan.

To enforce the foreign judgment in Japan, a creditor needs to file a petition to seek an “execution judgment”. An execution judgment will be made without investigating or adjudicating the merits of the case.

As criteria for Japanese insolvency proceedings, the following applies:

• corporate reorganisation – stock companies incorporated under the Japanese Corporations Act and foreign companies with similar characteristics as Japanese stock companies that have their principal business office (often construed as having the same meaning as COMI) are eligible debtors;
• civil rehabilitation – debtor companies that have their principal business office (often construed as having the same meaning as COMI) are eligible debtors;
• bankruptcy – the same as civil rehabilitation; and
• special liquidation – only Japanese stock companies are eligible.

There is no statutory determination between restructuring and insolvency-related law; meaning that debtor companies or their stakeholders are allowed to choose which regime to utilise, as long as the debtor satisfies the relevant eligibility criteria. However, for example, when a restructuring-type insolvency proceeding fails, the proceeding would be converted into bankruptcy.

See 6.1 Sources of International Insolvency Law.

There seems to be much interest in cross-border co-ordination on the part of Japanese courts, but, the the knowledge of the authors, there have been no cases where a court entered into a protocol or similar arrangement with a foreign court.

Foreign creditors have the same status as Japanese creditors, respectively, with respect to bankruptcy, civil rehabilitation and corporate reorganisation, in general.

In general, officers and directors of a Japanese company owe a general duty of care of a good manager and a fiduciary duty to the company; the two concepts are often not distinguished in Japan as the laws of other jurisdictions often do, and the terms can be used interchangeably. They are generally understood as consisting of a duty of care and a duty of loyalty to the company. If a breach of these duties is the cause of the company’s financial predicament, the directors and officers may be personally liable to the company for damages.

While there is academic debate as to towards whom the officers and directors owe these duties, since the language of the statute refers to “company” as opposed to, for example, shareholders, the conventional understanding is that they must take into account interests of the company as a whole, but in practical sense, taking into account the interests of the shareholders would, in most cases, be the most appropriate proxy to determine the best interest of the company.

In Japan, there is no clear judicial precedent or statutory provision nor guideline or rule regarding any change in directors’ duties when the company starts to be in financial distress. Thus, there is no rule that the directors’ duties shift to be owed towards creditors when the company is on the verge of insolvency, for example. Also, as noted in 5.1 The Different Types of Liquidation Procedure, the current law does not require a company or its directors/officers to file for an insolvency proceeding.

The directors of a company owe a fiduciary duty to the company. The standard of care is interpreted to be “the level of care that is normally expected to be taken by a prudent manager in that situation”; the level of care required may be increased if the director was appointed because of their special skills. Japan, too, incorporates the concept of “business judgement rule” in determining the satisfaction of the fiduciary duty of a director; the rule is predicated on the thought that directors should be given wide discretion with respect to business judgements as long as they are reasonably informed when making the decisions and the process of reaching those judgements is reasonable.

In Japan, directors’ fiduciary duties are interpreted to include a duty to supervise their peer directors (including representative directors) and employees. As a result, if a director knowingly or negligently overlooks the misconduct of another director or an employee, and the company suffers damage from that misconduct, the director who overlooked the misconduct may be liable for the damage suffered by the company, together with the culprits (ie, ones responsible for the misconduct).

Furthermore, if the subject company is a “large corporation” (a company with paid-in capital of JPY500 million or more, or with liabilities of JPY20 billion or more, on its latest financial statement), the directors are obligated to establish or confirm internal control systems, and to monitor the effectiveness of such internal control system. Thus, if misconduct occurred without being detected or if financial distress arose from a failure of the system, then directors could be in breach of their duties.

Creditors and shareholders may bring derivative lawsuits against such directors and officers, but the damage will be compensated towards the company.

However, directors are also liable to third parties (including shareholders) for damage suffered by them because of wilful misconduct or gross negligence in performing their duties as a director. Due to the directors’ duties being interpreted to include a duty to supervise their peer directors and employees, not only is the director who is directly responsible for the misconduct liable but any director who does not exercise a due level of care in supervising that director may also be liable. In addition, there may be tort liabilities toward third parties under the Civil Code of Japan if directors commit wilful misconduct or negligence.

Once insolvency proceedings commence, any action or lawsuit brought by a creditor against a director would be stayed and the trustee/supervisor will be the ones responsible to look into the merits of the claim and pursue directors’ liabilities.

See 7.2 Personal Liability of Directors.

A director may also be criminally liable for certain types of misconduct (eg, damaging the company to benefit the director or a third party, accepting a bribe or providing benefits for the exercise of shareholders’ rights).

Also, if a director fails to comply with the duties required under the Corporations Act, including the obligation to keep the appropriates books and records, that director may be subject to administrative fines.

Pre-commencement

Prior to the commence of an insolvency proceeding against a debtor company, a creditor might be entitled to exercise a right to demand rescission of a fraudulent act of the debtor company under the Civil Code of Japan, assuming that certain requirements are satisfied. Such statutory rights granted to creditors are similar to the right of avoidance of the trustee/supervisor as described below. The difference is, in the case of this pre-commencement statutory right under the Civil Code, under certain circumstances, the creditor who brought the claim may be entitled to receive the subject matter of the fraudulent act (eg, ownership of the property fraudulently transferred by the company) or the cash value of the subject matter.

Post-commencement

Only the trustee (in bankruptcy and corporate reorganisation) or the supervisor (in civil rehabilitation) has the power to avoid acts taken by the debtor before these proceedings commence, which are deemed to impair equality among the creditors and/or which are against the concept of the proceedings (the “right of avoidance”).

The following explanation is based on an example of bankruptcy which is common among other proceedings.

Avoidance of Acts Prejudicial to Creditors

The acts subject to this right of avoidance are acts reducing the liable assets. In order to avoid such acts, it must be done intentionally by a party to the transaction, or the act must be done after the debtor’s suspension of payments, etc.

The main examples of such acts are as follows:

• selling real estate at a very low price;
• guaranteeing the debt of someone without any guarantee charge; and
• gifts, waivers of claims, etc, made by the debtor during the six months prior to the debtor’s suspension of payments or after such suspension.

Avoidance of an Act of Disposing of the Debtor’s Property With Reasonable Value From the Counterparty

Even if the debtor received reasonable consideration from the buyer of the property, the disposition is subject to the right of avoidance if the following conditions are met:

• the disposition creates an actual threat that the debtor will conceal the property more easily;
• the debtor had the intention to conceal or dispose of the consideration at the time of the disposition; and
• the buyer knew the debtor’s intention at the time of the disposition.

Avoidance of Provision of Security, etc, to Specific Creditors

The acts subject to this right of avoidance are granting a security interest or repayment of an existing debt made with respect to an existing debt after insolvency or a petition to commence bankruptcy.

The main examples of these acts are as follows:

• after the petition to commence bankruptcy, upon the request of a creditor knowing the petition, the debtor grants the creditor a security interest on the debtor’s property to secure the creditor’s claim; and
• after the debtor becomes insolvent, a creditor knowing the debtor’s insolvency demands that the debtor repay the creditor’s claim and the debtor does so.

Look-Back Period

As a general rule, the right of avoidance is exercisable for two years after the insolvency proceedings commence or 20 years after the act to be avoided was done. However, the right of avoidance requiring an act was conducted after payments were suspended or while knowing that payments were suspended is exercisable only when the act was conducted within one year before the petition for commencement.

See 8.1 Circumstances for Setting Aside a Transaction or Transfer.