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Restructuring & InsolvencyContributing editorBruce Leonard

2016

Restructuring & Insolvency 2016

Contributing editorBruce Leonard

Miller Thomson LLP

PublisherGideon [email protected]

SubscriptionsSophie [email protected]

Business development managers Alan [email protected]

Adam [email protected]

Dan [email protected]

Published by Law Business Research Ltd87 Lancaster Road London, W11 1QQ, UKTel: +44 20 3708 4199Fax: +44 20 7229 6910

© Law Business Research Ltd 2015No photocopying without a CLA licence. First published 2008Ninth editionISSN 2040-7408

The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyer–client relationship. The publishers and authors accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of November 2015, be advised that this is a developing area.

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CONTENTS

2 Getting the Deal Through – Restructuring & Insolvency 2016

Global overview 7Richard Tett Freshfields Bruckhaus Deringer LLPAlan W Kornberg Paul, Weiss, Rifkind, Wharton & Garrison LLP

Australia 8Dominic Emmett and Nicholas EdwardsGilbert + Tobin

Austria 21Friedrich Jergitsch, Florian Knotzer and Carmen RedmannFreshfields Bruckhaus Deringer LLP

Bahamas 31Randol M DorsettGraham Thompson

Bahrain 40Harnek S ShokerFreshfields Bruckhaus Deringer LLP

Belgium 47Geert Verhoeven and Satya Staes PoletFreshfields Bruckhaus Deringer LLP

Bermuda 58Andrew A MartinMJM Limited

Botswana 63Kwadwo Osei-OfeiOsei-Ofei Swabi & Co

Brazil 68Bruno Kurzweil de Oliveira,Joel Luis Thomaz Bastos and Ivo WaisbergDias Carneiro, Arystóbulo, Flores, Sanches, Turkienicz, Amêndola, Waisberg, Thomaz Bastos Advogados

Bulgaria 76Yassen Hristev and Ina BankovskaKinkin & Partners

Canada 84Bruce Leonard and Craig MillsMiller Thomson LLP

Cayman Islands 92Andrew Bolton, Andrew Jackson and Bianca LeacockAppleby

China 100Frank Li, Allan Chen and Rebecca LuFangda Partners

Croatia 109Pavo Novokmet and Andrej SkljarovŽurić i Partneri

Cyprus 117Lia Iordanou Theodoulou, Angeliki Epaminonda and Stylianos TrillidesPatrikios Pavlou & Associates LLC

Dominican Republic 125Mary Fernández, Jaime Senior and Melba AlcántaraHeadrick Rizik Alvarez & Fernández

England & Wales 135Catherine Balmond and Katharina CrinsonFreshfields Bruckhaus Deringer LLP

European Union 153Rachel Seeley and Katharina CrinsonFreshfields Bruckhaus Deringer LLP

France 166Emmanuel Ringeval and Cristina RaduFreshfields Bruckhaus Deringer LLP

Germany 178Franz Aleth and Nils DerksenFreshfields Bruckhaus Deringer LLP

Greece 193Stathis Potamitis and Eleana Nounou PotamitisVekris

Hong Kong 204Georgia DawsonFreshfields Bruckhaus Deringer LLP

Hungary 214Zoltán Varga and Balázs BaranyaiNagy és Trócsányi Law Firm

Indonesia 221Herry N Kurniawan, Theodoor Bakker and Ridzky Firmansyah AminAli Budiardjo, Nugroho, Reksodiputro

Italy 228Raffaele Lener and Giovanna RosatoFreshfields Bruckhaus Deringer LLP

Japan 244Kazuki Okada, Shinsuke Kobayashi and Daisuke FukushiFreshfields Bruckhaus Deringer LLP

Lithuania 258Giedrius KolesnikovasMotieka & Audzevičius

Luxembourg 269Martine Gerber-LemaireOPF Partners

Mexico 276Darío U Oscós Coria and Darío A Oscós RuedaOscós Abogados

Netherlands 289Michael BroedersFreshfields Bruckhaus Deringer LLP

www.gettingthedealthrough.com 3

CONTENTS

Nigeria 302Emmanuel Ekpenyong and Ogenetega OkaleFred-young & Evans LP

Peru 308Rafael Corzo de la Colina and Lisbeth Benavides Kolind-HansenMiranda & Amado Abogados

Romania 316Bogdan Bibicu and Cătălin GeorgescuKinstellar

Russia 323Dmitry Surikov, Maria Zaitseva and Svetlana TolstoukhovaFreshfields Bruckhaus Deringer LLP

Singapore 336Sean Yu Chou, Manoj Pillay Sandrasegara and Mark ChoyWongPartnership LLP

South Africa 344Claire van Zuylen and Adam HarrisBowman Gilfillan

Spain 355Elvira Coloma, Juan Barrios, Natalia Gómez and Teresa GutiérrezFreshfields Bruckhaus Deringer LLP

Sweden 366Mathias Winge and Ellinor RettigSetterwalls

Switzerland 374Christoph StäubliWalder Wyss Ltd

Thailand 387Rapinnart Prongsiriwattana, Suntus Kirdsinsap, Natthida Pranutnorapal and Nantinee SunthonpimolWeerawong, Chinnavat & Peangpanor Ltd

Turkey 394Çağlar KaçarKaçar, Attorneys at Law

United Arab Emirates 404Pervez Akhtar, William Coleman, Mohammad Tbaishat and Dennis MontgomeryFreshfields Bruckhaus Deringer LLP

United States 413Alan W Kornberg and Claudia R ToblerPaul, Weiss, Rifkind, Wharton & Garrison LLP

Quick reference tables 424

JAPAN Freshfields Bruckhaus Deringer LLP


JapanKazuki Okada, Shinsuke Kobayashi and Daisuke FukushiFreshfields Bruckhaus Deringer LLP

Legislation

1 What legislation is applicable to insolvencies and reorganisations? What criteria are applied in your country to determine if a debtor is insolvent?

LiquidationThe applicable legislation is:• for bankruptcy procedures, the Bankruptcy Law (Law No. 75 of 2004);

and• for special liquidation procedures, articles 510 to 574 of the Companies

Act (Law No. 86 of 2005).

ReorganisationThe applicable legislation is:• for civil rehabilitation procedures, the Civil Rehabilitation Law (Law

No. 225 of 1999); and• for corporate reorganisation procedures, the Corporate Reorganisation

Law (Law No. 154 of 2002).

A debtor is insolvent (more accurately a bankruptcy event under the Bankruptcy Law has occurred with respect to the debtor) if it is unable to pay its debts (by reference to its financial position, following a calculation of whether the debtor is generally able to pay all debts already due on a certain date) or the debts it owes exceed its assets (by reference to its finan-cial position, following a calculation of whether the aggregate amount of the debtor’s debts exceeds the aggregate amount of its assets – this is only applicable to corporations).

Courts

2 What courts are involved in the insolvency process? Are there restrictions on the matters that the courts may deal with?

In general, insolvency procedures are heard before the District Court. If there is a conflict of jurisdiction between two or more courts, the procedure will be heard at the court in which the petition was first filed.

Bankruptcy procedure and civil rehabilitation procedureFor a business entity debtor, the district court whose jurisdiction covers the debtor’s main business office in Japan has exclusive jurisdiction. If there is no such place, the district court that has jurisdiction is that in which the assets are located.

The following special rules apply to bankruptcy and civil rehabilitation procedures:• a petition of bankruptcy or civil rehabilitation may be filed at any dis-

trict court dealing with the ongoing bankruptcy or civil rehabilitation procedure of a parent or subsidiary company, a consolidated affiliate, or a representative of the debtor company;

• a petition of bankruptcy or civil rehabilitation may be filed at the dis-trict court that is currently dealing with any ongoing bankruptcy pro-cedure or civil rehabilitation procedure relating to a joint debtor, a guarantor or married couple, and vice versa, if the procedure relating to the other party is ongoing;

• if the number of creditors is 500 or more, a petition of bankruptcy or civil rehabilitation may be filed at the main district court in a region, provided that another district court in the region has jurisdiction (eg, the Tokyo District Court has jurisdiction, if a petition can be filed to the

Yokohama District Court, which is within the jurisdiction of the Tokyo High Court); and

• if the number of creditors is 1,000 or more, a petition of bankruptcy or civil rehabilitation may be filed at the Tokyo or Osaka District Court.

Corporate reorganisation procedureA petition to commence a corporate reorganisation procedure may be filed at: • any district court in which the debtor has its main business office in

Japan; • any district court in which the debtor has its head office; • any district court in which the ongoing corporate reorganisation proce-

dure of a parent or a subsidiary company or a consolidated affiliate is being dealt with; or

• the Tokyo or Osaka District Court.

Special liquidation procedureUnder this procedure, the district court that will have exclusive jurisdiction is that in which head office of the company is located. A petition for special liquidation of the debtor may be made at any district court dealing with the ongoing special liquidation, bankruptcy, civil rehabilitation or corporate reorganisation procedure of a parent company.

Excluded entities and excluded assets

3 What entities are excluded from customary insolvency proceedings and what legislation applies to them? What assets are excluded from insolvency proceedings or are exempt from claims of creditors?

The special liquidation procedure and corporate reorganisation procedure are only available to joint-stock companies. The bankruptcy procedure and civil rehabilitation procedure are available to both individuals and cor-porations. Permanent entities such as national or local governments are excluded from insolvency procedures.

Financial institutions such as banks, credit banks or credit coopera-tives are not exempted from the insolvency procedures. There are, how-ever, special procedures under the Deposit Insurance Law that provide a system for distressed financial institutions to be rebuilt and for the control of the institution to be transferred to a different entity under the supervi-sion of a financial reorganisation receiver.

In addition, the Act on Special Treatment of Corporate Reorganisation Proceedings and Other Insolvency Proceedings of Financial Institutions, which refers to, supplements and restates the Corporate Reorganisation Law, the Civil Rehabilitation Law and the Bankruptcy Law, is applicable to banks and insurance companies which are joint-stock companies and financial institutions in other legal forms such as credit banks, credit coop-eratives, labour credit associations and insurance companies incorporated as mutual companies.

All of the assets a debtor owns as of the commencement of the rel-evant insolvency proceeding are subject to such insolvency proceeding except that:• in a bankruptcy proceeding and if the debtor is an individual, cash up

to ¥440,000 and moveable assets that a creditor is prohibited from attaching are excluded; and

• (except in a corporate reorganisation proceeding) claims secured by a special preferential right, a pledge, a mortgage, a lien under the

© Law Business Research Ltd 2015

Freshfields Bruckhaus Deringer LLP JAPAN


Commercial Code or any other security interests, such as a security by way of transfer existing over the assets of a debtor, may be exercised outside the bankruptcy procedures.

If a debtor holds assets that are owned by a third party (eg, a broker holds shares for its customer) such third party has the right to request the return of such assets.

Public enterprises

4 What procedures are followed in the insolvency of a government-owned enterprise? What remedies do creditors of insolvent public enterprises have?

There is no special procedure for the insolvency of a government-owned enterprise. A government-owned enterprise is subject to the same insol-vency and reorganisation procedures as standard companies; namely, bankruptcy, special liquidation, civil rehabilitation and corporate reorganisation.

Protection for large financial institutions

5 Has your country enacted legislation to deal with the financial difficulties of institutions that are considered ‘too big to fail’?

Article 102 of the Deposit Insurance Law allows the government to (i) inject capital into a bank; (ii) guarantee deposits not covered by deposit insurance held by a bank; or (iii) nationalise a bank, or any combination of these, if it is determined that the failure of the bank severely jeopardises the mainte-nance of the credit order in Japan or the region in which the bank operates.

Secured lending and credit (immoveables)

6 What principal types of security are taken on immoveable (real) property?

The principal types of security that can be taken on immoveable (real) property are:• mortgage – a mortgage, as set out in the Civil Code, gives a creditor

the right, evidenced by an agreement, to enforce the payment of a debt against a debtor by asking the court to conduct a public auction of the real property that secures the debt and taking the proceeds of that auction. As a result of the ability to force the sale of the real property, the creditor has priority over other creditors. The creditor’s priority is established by the registration of the mortgage at the land registry;

• pledge – a pledge may be given over real property; generally, however, a mortgage as described above is used. See question 6 for pledges on moveable property;

• preferential right – as set out in the Civil Code, preferential rights are a series of security devices that automatically secure certain types of claims (eg, unpaid wages). There are two categories of preferential rights: general preferential rights securing all relevant assets and spe-cial preferential rights securing particular goods or real property; and

• security by way of transfer – a type of security approved by Japanese courts but not specifically set out in the Civil Code. A security by way of transfer involves the transfer of the legal ownership of the subject mat-ter (including real property) of the security from the debtor to the credi-tor at the time that the security is created, subject to the debtor’s right to redeem the subject matter of the security if and when the relevant debt is paid in full. A security by way of transfer allows the debtor to continue to use the secured asset until the creditor enforces the security.

Secured lending and credit (moveables)

7 What principal types of security are taken on moveable (personal) property?

The principal types of security that can be taken on moveable (personal) property are:• pledge – a pledge, as set out in the Civil Code, can be created over both

tangible and intangible assets (such as claims and patents, etc). The pledgee controls the pledged assets in the case of tangible assets by physical possession; or in the case of intangible assets by registration, notice to or consent from the third-party debtor (or such other means as appropriate for the type of assets pledged). The pledgee can satisfy its claim by the disposal of the pledged assets (including through a pri-vate auction) if the pledgor does not pay any outstanding debts that are secured by the pledge;

• lien – as set out in the Civil Code and the Commercial Code, the right of a creditor to retain the property of the debtor to which a claim relates until the debt is paid;

• reservation of ownership – not set out in the Civil Code, but a type of security approved by Japanese courts. This allows a seller of goods to retain ownership of these goods until it receives payment in full. Once the buyer pays the purchase price owed for the goods, the ownership of the goods is transferred to the buyer; and

• preferential right or security by way of transfer (see question 6).

Unsecured credit

8 What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available? Do any special procedures apply to foreign creditors?

An unsecured creditor may bring compulsory execution procedures at the appropriate district court, by filing a debt claim for any of the following: a fixed judgment; a judgment with a declaration of provisional execution; a payment order (summary order by the court clerk) with a declaration of provisional execution; or a notarial document with an agreement of execu-tion, together with documentation of execution. Under the compulsory execution procedures, the district court will arrange for the property that is the subject of the debt claim to be auctioned.

The quickest procedure available to an unsecured creditor is to obtain a notarial document with an agreement of execution from a notary pub-lic. This notarisation can be prepared at a notary public office and a notary fee depends on the amount of consideration for the relevant agreement. A payment order may also be obtained from the court clerk in a relatively short period if the debtor does not raise any objections. However, it may take longer (eg, may take several months) to obtain a fixed judgment or a judgment with a declaration of provisional execution because an unse-cured creditor must follow ordinary litigation procedures.

To prevent a debtor from disposing of its assets prior to completion of the litigation procedures before obtaining a fixed judgment or a judgment with a declaration of provisional execution to the debtor, an unsecured creditor may file a provisional attachment, under which an unsecured creditor may have any disposal of the debtor’s property declared legally invalid.

Once the competent court has declared an insolvency procedures have commenced with respect to a debtor, an unsecured creditor of the debtor is no longer able to carry out compulsory execution (subject to certain exemptions such as set-off below). No special procedures apply to foreign creditors.

Voluntary liquidations

9 What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

Liquidation procedureUnder the Companies Act, a company can be dissolved by a special resolu-tion at a shareholders’ meeting.

After dissolution, the company will automatically go into liquidation. The company is no longer able to conduct business but continues to exist until the liquidation is completed.

The liquidation procedure is managed by a liquidator who is super-vised by the court. Unless another person is appointed by a shareholders’ resolution or by operation of the articles of incorporation, the company’s directors assume the role of liquidators.

During the liquidation, all of the assets of the company are sold to raise funds for distribution to creditors and shareholders. Creditors are repaid in full. If the company’s debts exceed its assets, the company must shift into the special liquidation procedure (see question 10). After the completion of repayment to the company’s creditors, shareholders will receive distribu-tion of remaining assets pro rata to their respective shareholding.

Bankruptcy procedureIn the case of individual bankruptcies, the individual, and in the case of corporate bankruptcies, a director of such company, may file a bankruptcy petition with the court. A fee of ¥1,000 and a deposit, determined by the court, must be paid to cover the costs of the bankruptcy procedures.

The bankruptcy procedures may be commenced if:• a debtor is unable to pay its debts (by reference to its financial position,

following a calculation of whether the debtor is generally able to pay




all debts already due on a certain date); or• debts a debtor owes exceeds its assets (by reference to its financial

position, following a calculation of whether the aggregate amount of the debtor’s debts exceeds the aggregate amount of its assets – this is only applicable to corporations).

When a bankruptcy petition is filed, the court may, prior to the commence-ment of the procedure, order the discontinuance of any ongoing litiga-tion procedures or administrative procedures relating to the assets of the debtor. Discontinuation of compulsory executions, executions of a pro-visional attachment or a provisional disposal or auctions based on a lien (other than liens under the Commercial Code) against the assets of the debtor, which are based on claims that may not have a priority under the bankruptcy procedure, may be ordered either with respect to individual assets or to all assets, unless such discontinuation causes unjustifiable damage to creditors.

The court may also order a discontinuance of any ongoing execution of corporate security rights against the debtor’s assets that are based on claims that may not have a priority under the bankruptcy procedure (ie, enforcement of such security rights would be prohibited); or the debtor’s liability limitation procedure with respect to the Shipowners Law and the Oil Pollution Compensation Law, for which the court has not ordered the commencement of the debtor’s liability limitation procedure.

The court may also grant orders imposing provisional attachments, provisional disposals or any other necessary measures to preserve the debtor’s business and assets. In addition, exercising secured claims may be prohibited by the court prior to the commencement of the procedure.

If the debtor falls within the grounds of one of the two conditions above under which a bankruptcy procedure may be commenced, the court will order the commencement of the procedure and simultaneously appoint a trustee-in-bankruptcy.

If the remaining assets of the debtor are not sufficient to cover the cost of the procedure, the court will conclude the procedure and will not appoint a trustee (then the debtor company will shift to a liquidation proce-dure). A corporation can be appointed as a trustee-in-bankruptcy but one or more lawyers are usually appointed as the trustees in bankruptcy.

On commencement of the bankruptcy procedure, the assets of the debtor form the bankrupt estate. The trustee administers the bankrupt estate in place of the debtor.

Once the court orders the commencement of the bankruptcy proce-dure, claims against the bankrupt debtor that existed prior to the com-mencement of the bankruptcy procedure may only be enforced through the bankruptcy procedure. Ongoing procedures such as compulsory exe-cution or executions of provisional attachments, provisional disposals or corporate security rights against the bankrupt estate will become invalid.

Claims secured by a special preferential right, a pledge, a mortgage, a lien under the Commercial Code or any other security interests, such as a security by way of transfer, existing over the assets of a debtor, may be exercised outside the bankruptcy procedures. Further, a creditor may exer-cise the right of set-off if a creditor owes a debt to a debtor at the time of the commencement of the bankruptcy. There is a possibility that the court may approve the extinction of certain security rights on a debtor’s assets with the exchange by the trustee of the relevant amount of cash equiva-lent to the proceeds of a sale of the assets less an amount set aside for the bankrupt estate, if selling such assets and dissolving certain security rights match the general interests of creditors and do not unjustifiably harm the interest of the creditor who has the security rights on such assets.

Special liquidation procedureAgain, the special liquidation procedure is only available to joint-stock companies. The special liquidation procedure may be commenced if a joint-stock company is already in liquidation and:• it is found that there is a significant impediment to the liquidation pro-

cedure (eg, if the assets and debts of the company are very complex); or

• it is suspected that the company’s debts exceed its assets.

A liquidator may file a petition for special liquidation at the court. Usually, a director of the company will become the liquidator after dissolution of the company. A liquidator must be an individual. A fee (¥20,000) and a deposit, decided by the court, are payable to cover the costs of the special liquidation procedure.

If a petition is filed, the court may grant an injunction to preserve the assets of the company, to prohibit any changes to the registry of sharehold-ers or to preserve the assets of promoters, directors, liquidators or auditors, prior to the commencement of the special liquidation procedure.

Once the court has ordered commencement of a special liquidation procedure, the debts of the company must be paid to creditors in propor-tion to the amount of their claims. Petitions of bankruptcy, compulsory execution or executions of provisional attachments or provisional dispos-als are prohibited during the special liquidation procedure and any ongoing procedures of such nature will cease automatically upon commencement of the special liquidation procedure.

However, claims secured by a special preferential right, a pledge, a mortgage, a lien under the Commercial Code or any other security inter-ests, such as a security by way of transfer, existing over assets of a debtor, and a general preferential right such as a lien under the Civil Code or a cor-porate security right can be exercised outside the special liquidation proce-dure. A creditor may also exercise a right of set-off if a creditor owes a debt to a debtor at the time of the commencement of the special liquidation.

Upon commencement of the special liquidation procedure, a liquida-tor may still continue as a liquidator under the supervision of the court. However, when the special liquidation procedure begins, a lawyer, in addi-tion to or instead of the original liquidator, is usually appointed as a liquida-tor by the court.

Involuntary liquidations

10 What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects?

Bankruptcy procedureA creditor of a company may file a bankruptcy petition with the court. A fee (¥20,000) and a deposit, decided by the court, must be paid to cover the costs of the procedure. In addition, a creditor must prove prima facie to the court that it has a valid claim against a debtor and that grounds for bank-ruptcy exist. The grounds for and the effects of involuntary bankruptcy are the same as for the voluntary bankruptcy procedure, as are other aspects of the subsequent process.

Special liquidation procedureA creditor, liquidator, statutory auditor or shareholder of the company that is already undergoing liquidation may file a petition to commence a special liquidation procedure with the court. A fee (¥20,000) and a deposit, deter-mined by the court, must be paid to cover the costs of the procedure. The grounds for and the effects of involuntary special liquidation are the same as for voluntary special liquidation, as are other aspects of involuntary spe-cial liquidation.

Voluntary reorganisations

11 What are the requirements for a debtor commencing a formal financial reorganisation and what are the effects?

Civil rehabilitation procedureThe purpose of the civil rehabilitation procedure is to enable a debtor in financial difficulties to pay its debts and continue its business by obtaining the court-sanctioned consent of creditors who are owed a substantial por-tion of the debts.

A debtor may file a petition for civil rehabilitation with the court. A fee (¥10,000) and a deposit, determined by the court, must be paid to cover the costs of the civil rehabilitation procedure. In addition, a debtor must prove prima facie to the court that the grounds for civil rehabilitation exist.

The civil rehabilitation procedure may be commenced if:• there is a significant likelihood that a bankruptcy event will occur (see

question 9 for a list of bankruptcy events); or• the debtor is unable to pay its debts already due on a certain date with-

out substantially impeding its ability to carry on its business.

When the petition is filed, the court will usually order a preservation meas-ure under which the payment of debts and granting of security to credi-tors (other than payment of taxes, salaries, utility bills, office rents, lease fees for office equipment, debts under a certain threshold and other items specified by the court) are prohibited.

The court will also appoint a supervisor. Certain types of corporate actions specified by the court (which include the transfer and disposal of assets, the receipt of assets, the borrowing of money and the giving of




guarantees and the assumption of liabilities) will be restricted by the court and require the supervisor’s approval.

In addition, when a civil rehabilitation petition is filed, the court may, prior to the commencement of the procedure, order a discontinuance of any ongoing bankruptcy, special liquidation, litigation or administrative procedures relating to the assets of the debtor. Discontinuation of compul-sory executions, executions of a provisional attachment or a provisional disposal or auctions based on a lien (other than liens under the Commercial Code) against the assets of the debtor may be ordered either with respect to individual assets or to all assets, unless such discontinuation causes unjustifiable damage to creditors. The court may also grant orders impos-ing provisional attachments, provisional disposals or any other necessary measures to preserve the debtor’s business and assets. Furthermore, exer-cising secured claims may be prohibited by the court prior to the com-mencement of the procedure.

If the debtor falls within the grounds of one of the two conditions above under which a civil rehabilitation may be commenced, the court will order the commencement of the procedure. Before making an order for the commencement of the civil rehabilitation procedure, the court must hear opinions from a labour representative (such as a labour union), except where it is obvious to the court that the petition should be dismissed or there are prima facie grounds to commence the civil rehabilitation pro-ceedings. As a general rule, under the civil rehabilitation procedure the debtor will remain in charge of its business. As explained above, a super-visor is appointed in most cases to approve certain activities as specified by the court. If the court deems it necessary, it can appoint an administra-tor (rather than a supervisor) who will operate the debtor’s business and administer all of the debtor’s assets which means the debtor company loses day-to-day control of the business. A corporation can be appointed as a supervisor and administrator.

Once the court orders the commencement of the civil rehabilita-tion procedure, rehabilitation claims (claims against the debtor’s assets that exist prior to the commencement of the civil rehabilitation proce-dure and other specific claims against the debtor set out under the Civil Rehabilitation Law, such as a claim for interest, that arise after the com-mencement of the procedure) may not be paid out, received or extin-guished (excluding by waiver of the claim by the creditor) other than in accordance with the rehabilitation plan, unless otherwise specified in the Civil Rehabilitation Law, such as paying claims of small companies whose main customer is the debtor (only if the business of such a small com-pany is likely to suffer significant damage if debts owed to it are not repaid immediately) or claims of small amounts with the permission of the court. Petitions for bankruptcy, civil rehabilitation, special liquidation or compul-sory executions, executions of provisional attachment or provisional dis-posal or auctions based on a lien (other than liens under the Commercial Code) against the assets of the debtor are prohibited. Ongoing procedures of the type previously mentioned are discontinued or lose effect automati-cally. Any litigation procedure or administrative procedure relating to the assets of the debtor will be suspended at the commencement of the civil rehabilitation procedure.

Claims secured by a special preferential right, a pledge, a mortgage, a lien under the Commercial Code or any other security interests, such as a security by way of transfer, existing over the properties of the debtor, shall be exercised outside the civil rehabilitation procedure unless the court prohibits the exercise of such security rights pursuant to the Civil Rehabilitation Law (this is different from the corporate reorganisation pro-cedure below under which enforcement of security will be restricted). A creditor may execute a right of set-off until the due date of the claim fil-ing period if a creditor owes a debt to a debtor at the time the procedure commences.

There is a possibility that the court may approve the release of certain security rights on a debtor’s assets with the exchange by the debtor of the relevant amount of cash equivalent to the value of the assets subject to such security rights, if the assets are essential for a debtor to continue its business.

Corporate reorganisation procedureThe purpose of the corporate reorganisation procedure is to enable a company in financial difficulty to reconstruct its business by involving all relevant parties in a reconstruction process sanctioned by the court. The corporate reorganisation procedure is available for Japanese joint-stock companies and foreign joint-stock companies that have business premises

in Japan and is designed to be used by a large corporation whose bank-ruptcy would have a significant adverse effect on society.

A joint-stock company may file a corporate reorganisation petition with the court. A fee (¥20,000) and a deposit, determined by the court, must be paid to cover the costs of the corporate reorganisation proce-dure. In addition, a debtor company must prove prima facie to the court that grounds exist for corporate reorganisation. The grounds for corporate reorganisation are similar to those for civil rehabilitation. When the peti-tion is filed, the court will usually issue a preservation and administration order and appoint a lawyer as preservation administrator and order him or her to operate the business of the debtor company and manage the debtor company’s assets until the commencement of the corporate reorganisation procedure.

Under the preservation and administration order, the preservation administrator will be required to seek court approval for certain activities specified by the court, such as payments of debts to creditors (except for items specified by the court), the disposal of assets, borrowing of money, any waiver of important rights and any alteration of collateral granted on the debtor company’s assets.

The court may also, before the commencement of the procedure, order the discontinuance of any ongoing bankruptcy, civil rehabilitation or special liquidation procedures, the exercise of corporate security rights and litigation or administrative procedures relating to the assets of the debtor. Discontinuation of compulsory executions or executions of provi-sional attachments, provisional disposals, enforcement of security rights or auctions based on liens against the assets of the debtor may be ordered with respect either to individual assets or to all assets, unless such discon-tinuation causes unjustifiable damage to creditors. Further, the court may order a provisional disposal or any other necessary measures to preserve the debtor’s business and assets.

If the company falls within the grounds under which a corporate reor-ganisation procedure may be commenced, the court will order the com-mencement of the corporate reorganisation procedure. Before making an order for the commencement of the corporate reorganisation procedure, the court must hear opinions from a labour representative (such as a labour union), except where it is obvious to the court that the petition should be dismissed or there are prima facie grounds to commence the corporate reorganisation procedure. An administrator is always appointed simulta-neously upon the commencement of a corporate reorganisation procedure and immediately assumes responsibility for the operation of the business and management of the debtor company’s assets under the corporate reor-ganisation procedure.

The court has recently been trying to introduce the practice of a debtor-in-possession (DIP) type corporate reorganisation under which a member of the existing management of the debtor company will be appointed as an administrator, if:• the management were not involved in illegal or unjustifiable activities;• major creditors are not opposed to the appointment of a member of

management as the administrator;• a sponsor (if any) has agreed to the appointment of a member of man-

agement as the administrator; and• implementation of the proceedings would not be impaired by appoint-

ing a member of management as the administrator.

Under this type of corporate reorganisation, a preservation administrator will not be appointed and a member of the existing management contin-ues to operate the business during the period from filing to the commence-ment of the proceedings. Instead, the court will issue a supervision and investigation order and appoint a lawyer as a supervisor and investigator to monitor and investigate the business operated by the management. Under the supervision and investigation order, certain types of activities that fall outside the scope of the ordinary course of business as specified by the court (eg, disposal of assets, acquisition of assets, making loans, fil-ing a lawsuit with the court, settlement of claims and arbitration, waiver of rights and alteration of security granted over the debtor company’s assets) will be restricted by the court and require the supervisor and investigator’s approval. The court will also issue a preservation order under which the payment of claims that existed before the petition was filed and the grant-ing of security with respect to such claims become subject to court approval with the same exceptions (eg, payment of salaries and payment of liabili-ties below a certain de minimis threshold and other items specified by the court). In addition, when the petition is filed, the court will sometimes issue a cessation order freezing the enforcement of the security interests




in order to cover the period until the commencement of the proceedings, at which time the enforcement of the security interests will be prohibited by operation of law.

Once the court orders the commencement of the corporate reor-ganisation procedure, reorganisation claims (claims against the debtor’s assets existing prior to the commencement of the corporate reorganisa-tion procedure and other specific claims against the debtor set out under the Civil Rehabilitation Law, such as a claim for interest, arising after the commencement of the procedure) may not be paid out, received or extin-guished (excluding by waiver of the claim by the creditor) without follow-ing the reorganisation plan unless otherwise specified in the Corporate Reorganisation Law, such as paying claims of small companies whose main customer is the debtor (only if the business of such small company is likely to suffer significant damage if debts owed to it are not repaid immediately) or claims of small amounts with the permission of the court. Petitions for bankruptcy, civil rehabilitation, corporate reorganisation, special liqui-dation, compulsory execution, executions of provisional attachment or provisional disposal, execution of security rights, auctions based on lien or corporate security rights are prohibited and ongoing procedures of this type shall be discontinued or lose effect automatically.

Any litigation procedure or administrative procedure relating to the assets of a debtor will be suspended at commencement of the corporate reorganisation procedure.

Under the Corporate Reorganisation Law, even claims secured by a special preferential right, pledge, mortgage, lien under the Commercial Code or any other security interests, such as security by way of transfer, existing over the assets of the debtor, cannot be exercised outside the pro-cedure. A creditor may, however, execute a right of set-off until the expira-tion of the claim filing period if a creditor owes a debt to a debtor at the time the procedure commences.

Involuntary reorganisations

12 What are the requirements for creditors commencing an involuntary reorganisation and what are the effects?

Civil rehabilitation procedureIf there is a significant likelihood that a bankruptcy event will occur (see question 9 for a list of bankruptcy events), a creditor may also file a civil rehabilitation petition. A fee (¥10,000) and a deposit, determined by the court, must be paid by the creditor filing the petition to cover the costs of the procedure. A creditor must also prove prima facie to the court that the grounds for civil rehabilitation exist and must establish that it has a valid claim against a debtor.

Other aspects of the subsequent process are the same as the voluntary civil rehabilitation.

Corporate reorganisation procedureIf there is a significant likelihood that a bankruptcy event will occur (see question 9 for a list of bankruptcy events), a petition to begin a corporate reorganisation procedure may be filed by a creditor whose claim amounts to 10 per cent or more of the debtor company’s paid-up capital or a share-holder that holds voting rights equal to 10 per cent or more of the total voting rights of the debtor company. A fee (¥20,000) and a deposit, deter-mined by the court, must be paid to cover the costs of the procedure. A creditor or shareholder must not only prove prima facie to the court that grounds for the corporate reorganisation exist but must also inform the court, with respect to a creditor, of the value of its claims, and with respect to a shareholder, of the size of its voting rights.

Other aspects of the subsequent process are the same as voluntary cor-porate reorganisation.

Mandatory commencement of insolvency proceedings

13 Are companies required to commence insolvency proceedings in particular circumstances? If proceedings are not commenced, what liabilities can result? What are the consequences if a company carries on business while insolvent?

If a joint-stock company is already in liquidation and a liquidator discovers that the company’s debts are likely to exceed its assets, he or she is required to make a petition for the commencement of the special liquidation proce-dure. If the liquidator fails to do so, he can be fined up to ¥1 million.

If a company takes certain actions to carry on business after it sus-pended payments, the trustee-in-bankruptcy appointed by the court in the

following bankruptcy procedure can annul certain acts of the company (eg, granting security to specific creditors) that would jeopardise the interests of its creditors. Almost all the same measures may be taken by the adminis-trator or supervisor in a civil rehabilitation procedure or the administrator in a corporate reorganisation procedure, but do not apply in the case of a special liquidation procedure.

Doing business in reorganisations

14 Under what conditions can the debtor carry on business during a reorganisation? What conditions apply to the use or sale of the assets of the business? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities? What powers can directors and officers exercise after insolvency proceedings are commenced by, or against, their corporation?

Under the civil rehabilitation procedure, the directors of a debtor company may continue to operate the business. In a corporate reorganisation, an administrator is always appointed and immediately assumes responsibility for the operation of the business.

Under both the civil rehabilitation procedure and the corporate reor-ganisation procedure, a debtor or an administrator may deal with the company’s assets (including to sell such assets) in the ordinary course of business, unless such activities are restricted by the court (eg, office lease fee, small amount payments such as less than ¥100,000 would not be restricted). The claims of the creditor that supplies goods or services after the commencement of the procedure are regarded as ‘common benefit claims’ that may be satisfied at any time outside the insolvency procedure.

Under the civil rehabilitation procedure, even though a debtor or the directors of the debtor company continue to operate the debtor’s business, the court can appoint an investigator (to investigate the debtor’s assets), a supervisor (to approve certain activities as specified by the court) or an administrator (to take the place of the debtor or the directors of the debtor company). Under the civil rehabilitation procedure, a supervisor is appointed in most cases, but an administrator is only appointed in excep-tional circumstances.

In certain circumstances it is possible for creditors (including secured parties) or shareholders to call a joint meeting to supervise the debtor’s business. Under the civil rehabilitation procedure, a creditor that holds 10 per cent or more of the total amount of identified claims against a debtor or a committee of creditors (see question 25), as well as the court or the debtor, can call a creditors’ meeting. Under the corporate reorganisation procedure, a committee of creditors, secured parties or shareholders, a creditor whose claim amounts to 10 per cent or more of the claims regis-tered against the debtor company or a shareholder holding voting rights equal to 10 per cent or more of the total voting rights of the debtor com-pany, as well as the court or an administrator, can call an affiliates’ meeting (equivalent to a creditors’ meeting in the civil rehabilitation procedure).

Stays of proceedings and moratoria

15 What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganisations? In what circumstances may creditors obtain relief from such prohibitions?

Since the purpose of liquidation procedures is to liquidate a debtor’s assets for impartial distribution to all creditors, it is important to preserve the debtor’s assets and prevent creditors from freely exercising their rights. Under the bankruptcy procedure and the special liquidation procedure, the court may grant an injunction prior to the commencement of the proce-dure to preserve the assets and to prevent the exercise of unsecured rights. Once the liquidation procedure has commenced, compulsory execution or other enforcement of unsecured rights are prohibited. Nevertheless, hold-ers of a special preferential right, a pledge, a mortgage, a lien under the Commercial Code or other security rights, such as security by way of trans-fer, are able to exercise those rights outside the bankruptcy procedure and the special liquidation procedure (ie, the debtor’s assets subject to these preferential rights are not captured within the bankruptcy procedure and the special liquidation procedure).

Under reorganisation procedures, the primary goal is to keep the busi-ness in operation with a view to rehabilitating it. The exercise of claims is, therefore, strictly limited and the court may order the discontinuance of not only executions of unsecured rights but also enforcement of security




prior to the commencement of the procedure. While the civil rehabilitation procedure allows a creditor to exercise claims secured by a special prefer-ential right, a pledge, a mortgage, a lien under the Commercial Code or other security rights, such as security by way of transfer, outside the proce-dure, the corporate reorganisation procedure does not.

A creditor may appeal against an order of the court for the discontinu-ance of unsecured and secured rights and the court may alter or withdraw the order at its discretion.

Post-filing credit

16 May a debtor in a liquidation or reorganisation obtain secured or unsecured loans or credit? What priority is given to such loans or credit?

LiquidationUnder the bankruptcy procedure, with the approval of the court, a trustee in bankruptcy may borrow money on behalf of the debtor only if it is neces-sary for the preservation and management of the debtor’s assets. Such a loan or provision of credit is treated as a common benefit claim (ie, claim arising for the common benefit of all creditors such as the fees of the super-visor that has priority over general unsecured claims) that will be paid to the creditor in full when it becomes due in priority to other general unse-cured creditors’ claims.

ReorganisationUnder the civil rehabilitation and corporate reorganisation procedures, a debtor (or an administrator on behalf of the debtor) can borrow money to continue the debtor’s business even after the commencement of the rele-vant procedure. At the time of ordering the civil rehabilitation or corporate reorganisation procedure, the court may require a debtor or an administra-tor to seek its prior approval for any borrowing. A claim against the debtor during a reorganisation is treated as a common benefit claim that will be paid to the creditor in full when it becomes due. Even after the civil rehabil-itation or corporate reorganisation procedures are converted into a bank-ruptcy procedure, these claims will be treated as common benefit claims that have priority over general unsecured claims.

Set-off and netting

17 To what extent are creditors able to exercise rights of set-off or netting in a liquidation or in a reorganisation? Can creditors be deprived of the right of set-off either temporarily or permanently?

Set-offUnder the bankruptcy procedure and the special liquidation procedure, if a creditor owes a debt to a debtor at the time of the commencement of the procedure, the creditor may set off that debt against its claims against the debtor at any time prior to completion of the procedure.

Under the civil rehabilitation procedure and corporate reorganisation procedure, a creditor can set off a debt it owes to a debtor against its claim if it was owed the debt at the time of the commencement of the procedure; and the claim becomes due before the expiration of the claim filing period (see question 22).

Under any of the liquidation and reorganisation procedures, there are two situations in which a creditor may not exercise a right of set-off. The first is when a creditor assumed a debt:(i) after the commencement of the insolvency proceedings;(ii) by executing a contract regarding the disposal of the debtor’s assets

mainly for the purpose of set-off or by assuming a debt owed to the debtor, and with the knowledge that the debtor is unable to pay its debts;

(iii) with the knowledge that there had been a suspension of payments (except where the debtor was not unable to pay when there had been a suspension of payments); or

(iv) with the knowledge that a petition for insolvency had been made.

Note that (ii), (iii) and (iv) will not apply if the debt arose by operation of the law, on grounds that existed before the creditor obtained knowledge of the debtor’s inability to pay its debts, the suspension of payment or the fact that the petition of insolvency has been made, or on grounds that existed not less than one year before the petition for the commencement of insolvency proceedings was made.

The second situation in which a creditor may not exercise a right of set-off is when a person who owes a debt to the debtor acquired a claim:(i) from a third party following the commencement of the insolvency

proceedings;(ii) with the knowledge that the debtor was unable to pay its debts;(iii) with the knowledge that there had been a suspension of payments

(except where the debtor was not unable to pay when there had been a suspension of payments); or

(iv) with the knowledge that a petition for insolvency had been made;

Note that (ii), (iii) and (iv) above will not apply if the claim arose by opera-tion of the law, on grounds that existed before the person who owes the debt to the debtor obtained knowledge of the debtor’s inability to pay its debts, the suspension of payment or the fact that a petition for insolvency had been made, or on grounds that existed not less than one year before the petition for the commencement of insolvency proceedings was made, or by an agreement with the debtor.

NettingA close-out netting clause set out in a master agreement in respect of instruments traded by reference to market prices is effective in Japan and the balance as a result of netting will be recognised as a single claim under relevant insolvency proceedings.

Even if no close-out netting clause exists, a contract in respect of instruments that is not due on the commencement of insolvency proceed-ings will be automatically terminated and netted out if the instruments are traded by reference to market prices and the purpose of the contract can-not be achieved unless the obligations are performed on a specific date or within a certain period.

Sale of assets

18 In reorganisations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets? In practice, does your system allow for ‘stalking horse’ bids in sale procedures and does your system permit credit bidding in sales?

Under the civil rehabilitation procedure, a debtor must obtain the approval of the court to transfer the whole or a material part of its business. The court may approve the transaction only if it is necessary for rehabilita-tion or reorganisation of the business. However, if the court has approved a rehabilitation plan that includes a business transfer, the debtor is not required to obtain additional court approval for that business transfer. The court may, if necessary, order that the debtor or administrator must obtain court consent to sell specific assets of the debtor.

Under the corporate reorganisation procedure, a business transfer will be made in compliance with the reorganisation plan. Before completion of the reorganisation plan, an administrator may transfer the whole or a material part of the business with the approval of the court. The court may, if necessary, order that the administrator must obtain court consent to sell specific assets of the debtor.

Under both the bankruptcy procedure and the special liquidation pro-cedure, a business transfer and a sale of specific assets require the approval of the court unless otherwise stated in applicable laws.

In theory, the sale of assets under insolvency proceedings does not automatically release the assets from the secured interests over them. However, in practice, a debtor or an administrator will contact the secured parties and negotiate the price to be paid to them in consideration for the release of the assets. If the negotiation is successful, the assets will be sold free and clear of claims and liabilities. If one or more of the secured parties (typically lower-ranked secured parties who cannot expect any distribu-tion) do not agree to a release of their security interests, then the debtor or the administrator may consider a petition for the extinction of such secu-rity interests. Under the Bankruptcy Law, the Civil Rehabilitation Law and the Corporate Reorganisation Law, the court may order the extinction of security interests over assets of a debtor subject to certain conditions. If the security interests are declared to be released, the assets can be sold free and clear from the claims (see question 30 for further details).




Even if an interim agreement is being negotiated for a business trans-fer, or sale and purchase of any assets of the debtor, the debtor or the administrator may continue to seek better terms from other parties.

Creditors are not allowed to set off their claim against a debt that was incurred after the commencement of the procedures by the creditors. Therefore, a creditor seeking to purchase the assets or business of the debtor during the bankruptcy, civil rehabilitation, corporate reorganisation or special liquidation procedures is not permitted to pay the purchase price by reducing the amount of its claim against the debtor. Accordingly credit bidding is not permitted in Japanese insolvency proceedings.

Intellectual property assets in insolvencies

19 May an IP licensor or owner terminate the debtor’s right to use it when an insolvency case is opened? To what extent may an insolvency administrator continue to use IP rights granted under an agreement with the debtor? May an insolvency representative terminate a debtor’s agreement with a licensor or owner and continue to use the IP for the benefit of the estate?

The licensor or owner of IP cannot terminate the debtor’s right to use it because of the commencement of insolvency procedures. A clause in an IP licence providing for a right of termination on insolvency is considered to be void. Under the Bankruptcy Law, Civil Rehabilitation Law and the Corporate Reorganisation Law, the administrator or debtor can either choose to terminate the licence contract or to pay the licence fee and con-tinue to use the IP rights.

Rejection and disclaimer of contracts in reorganisations

20 Can a debtor undergoing a reorganisation reject or disclaim an unfavourable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?

Under both the civil rehabilitation procedure and corporate reorganisa-tion procedure, a debtor or an administrator may choose whether or not to cancel an agreement with bilateral obligations (ie, including ordinary sales and purchase agreements but not an agreement with unilateral obligation) if neither party (ie, neither the debtor or the creditor) has completed the performance of its obligations by the time of the commencement of reha-bilitation proceedings or corporate reorganisation proceedings. Therefore, if the agreement is not bilateral or if either the debtor or the creditor has already performed their obligations by the time of the commencement of the relevant insolvency proceedings, the debtor or the administrator may not decline to perform their obligations under such agreement. However, the debtor or the administrator cannot terminate a lease or licence agree-ment with which a lessee or licensee has perfected its rights against third parties (eg, registration of the building subject to the relevant land lease under the Act on Land and Building Leases).

Under the civil rehabilitation procedure, at the time of ordering the civil rehabilitation procedure the court may order that the debtor or the administrator must obtain consent from the court when the debtor or the administrator cancels agreements with unperformed bilateral obli-gations. Similarly, under the corporate reorganisation procedure, the administrator may be required by the court to obtain consent from the court to cancel agreements with unperformed obligations. If agreements with unperformed bilateral obligations are cancelled, a creditor’s claims for damages arising from such cancellation will be regarded as unse-cured claims in both civil rehabilitation and corporate reorganisation proceedings.

Under both the civil rehabilitation procedure and corporate reorgani-sation procedure, when a debtor fails to pay to a creditor after the civil rehabilitation procedure or corporate reorganisation procedure is com-menced, the failure to pay would not constitute breach of contract under Japanese contract law which could trigger the statutory right to terminate the relevant contract. On the other hand, the creditor may terminate a con-tract with the debtor on the basis of the contractual clause under which the creditor is entitled to terminate the relevant contract as a result of the com-mencement of such insolvency procedure, so long as the contractual clause is not connected with the debtor’s failure to pay due to an insolvency event.

Arbitration processes in insolvency cases

21 How frequently is arbitration used in insolvency proceedings? Are there certain types of insolvency disputes that may not be arbitrated? Will the court allow arbitration proceedings to continue after an insolvency case is opened? Can disputes that arise in an insolvency case after the case is opened be arbitrated with the consent of the parties? Can the court direct the parties to such disputes to submit them to arbitration?

Arbitration is rarely used in Japan (both with respect to insolvency proceed-ings and other areas of law), although there is no particular limitation on the availability of arbitration in insolvency cases. Although it is not clear from the law, it is generally considered that an arbitration proceeding can be continued after an insolvency procedure is commenced. It is also the prevailing opinion that an arbitration agreement will be binding even after an insolvency procedure is commenced, and thus creditors can apply for the commencement of an arbitration procedure based on an existing arbitration clause. To agree to submit certain disputes to arbitrators and to abide by their arbitral award, an administrator in a bankruptcy procedure and a liquidator in a special liquidation procedure require permission from the court. Under the civil rehabilitation procedure and corporate reor-ganisation procedure, the court may order that debtors or administrators request the court’s permission to conclude such an arbitration agreement.

Successful reorganisations

22 What features are mandatory in a reorganisation plan? How are creditors classified for purposes of a plan and how is the plan approved? Can a reorganisation plan release non-debtor parties from liability, and, if so, in what circumstances?

Civil rehabilitationAfter expiration of the period for filing claims (see question 29), the debtor or administrator must prepare a civil rehabilitation plan and submit it to the court within the period prescribed by the court. The plan must be viable and fair as between the creditors of each separate class. Under the civil rehabilitation procedure, creditors’ claims are divided into four cat-egories: secured interests of certain types over a particular asset (eg, spe-cial preferential right, pledge, mortgage, lien under the Commercial Code, or any other security interests, such as security by way of transfer); pre-ferred claims (such as unpaid wages or tax payments); unsecured claims; and common benefit claims (claims arising for the common benefit of all creditors such as the fees of the supervisor and any necessary running costs incurred following the commencement of civil rehabilitation) that are excluded from the civil rehabilitation procedure and are paid in full when they become due. Secured interests over a particular asset of the debtor will be exercised outside the civil rehabilitation procedure and only the shortfall will be treated as unsecured claims under the civil rehabilitation procedure.

Following submission of the civil rehabilitation plan, the court will convene a creditors’ meeting where the plan is discussed by the creditors, except where the court decides not to hold a meeting and allow creditors to vote by post instead. The civil rehabilitation plan will be subject to the approval of a simple majority of the creditors present at the meeting or, as the case may be, a simple majority of the creditors who exercise their voting rights by post and a majority of the creditors who represent between them at least half of all allowed creditors’ claims. Once the civil rehabilita-tion plan has been approved by the creditors, the debtor or administrator will seek the court’s approval of the plan. Upon the approval of the court, the rights of all creditors and shareholders are modified in accordance with the civil rehabilitation plan.

The rehabilitation plan can modify some or all of the rights of ‘credi-tors’, if approved, but it cannot release non-debtor parties (ie, directors, accounting advisers, statutory auditors, executive officers, accounting auditors or lenders) from their liabilities. However, the debtor or the administrator may, during the course of the civil rehabilitation procedure and outside the rehabilitation plan, release those parties from all or part of their liability by following the procedures set out in the Companies Act, such as obtaining unanimous shareholders’ approval and the permission of the court for waiver of the claims.

Corporate reorganisationAs under the civil rehabilitation procedure, the corporate reorganisation plan will be prepared and submitted to the court by the administrator within the period prescribed by the court after expiration of the period for




filing claims. The plan must be viable and fair as between the creditors or shareholders of each separate class. Under the corporate reorganisation procedure, creditors’ claims are divided into four categories: secured inter-ests of certain types (a special preferential right, a pledge, a mortgage, a lien under the Commercial Code, or any other security interests, such as a security by transfer) over a particular asset of the debtor; preferred claims; unsecured claims; and common benefit claims. Secured claims cannot be exercised outside the corporate reorganisation procedure.

Following submission of the corporate reorganisation plan, the court will convene meetings for each class of creditors and shareholders to dis-cuss the plan, except where the court decides not to hold a meeting and allow creditors and shareholders to vote by post instead. The reorganisa-tion plan must be approved by each class of creditors and shareholders, as follows:• if the plan only extends the due date of secured claims, the approval

of the secured creditors representing two-thirds of all allowed secured claims (by value) is required;

• if the plan does more than just extend the due date of secured claims, the approval of three-quarters of all allowed secured claims (by value) is required; and

• if the plan proposes the abolition of the whole business of the debtor, then the approval of nine-tenths of all allowed secured claims (by value) is required.

The reorganisation plan will be subject to the approval of a simple major-ity of the unsecured creditors that represent between them at least half of allowed unsecured creditors’ claims (by value). The reorganisation plan must be approved by a simple majority of shareholders that hold a majority of total voting rights in the debtor. Once the reorganisation plan has been duly approved by the creditors and shareholders, the administrator will seek the court’s approval of the plan. Upon approval by the court, the rights of all creditors and shareholders will be modified in accordance with the reorganisation plan.

As with the civil rehabilitation procedure, the reorganisation plan can modify some or all of the rights of creditors, if approved, but it cannot release non-debtor parties. However, the debtor or the administrator may release those parties outside the reorganisation procedure.

Expedited reorganisations

23 Do procedures exist for expedited reorganisations?The civil rehabilitation procedure includes two types of simplified reor-ganisation procedures to expedite a reorganisation. One is the simplified civil rehabilitation procedure, in which there is no investigation of claims against the debtor. This procedure may be started after the expiration of the period for filing claims (see question 28) with the approval of credi-tors who represent between them at least three-fifths (as determined by the court) of all creditors’ claims (by value). The second an agreed reha-bilitation procedure, in which there is no investigation of claims against the debtor or approval of a civil rehabilitation plan in a creditors’ meeting. The agreed rehabilitation procedure may be started after the expiration of the period for filing claims with the approval of all of the creditors and the court.

Unsuccessful reorganisations

24 How is a proposed reorganisation defeated and what is the effect of a reorganisation plan not being approved? What if the debtor fails to perform a plan?

Civil rehabilitationThe civil rehabilitation plan may be rejected either by disapproval of the plan at a creditors’ meeting or by the court’s decision after credi-tor approval at the meeting. If a proposed civil rehabilitation plan is not approved by the majority of creditors or by the court itself, the court will order the termination of the civil rehabilitation procedure and may order the commencement of bankruptcy procedures. If the debtor fails to per-form its obligations under an approved plan, the creditor may enforce its claim against the debtor.

The court may also annul the plan following a petition by a creditor who holds a claim against the debtor equal to or more than 10 per cent of the remaining debt obligations of the debtor set out in the plan, if the plan was approved in an unjustifiable way (eg, creditors’ approval has been obtained through fraudulent means), the debtor failed to perform the plan, or the debtor was in violation of restrictions ordered by the court. The

court may abolish the plan by its own decision if the debtor was in viola-tion of restrictions ordered by the court or it is unlikely that the plan will be successfully performed. On annulment or abolishment of the plan by the court, the rights of all creditors and shareholders will be restored to their state before they were modified in accordance with the rehabilitation plan.

Corporate reorganisationThe corporate reorganisation plan may only be formally rejected by the court following meetings of creditors and shareholders to discuss the plan. If the corporate reorganisation plan is not accepted by the creditors or the shareholders, the court may force the creditors or shareholders to accept the plan by amending it to protect the interests of dissenting creditors or shareholders. If the court rejects the corporate reorganisation plan, the court will order the termination of the corporate reorganisation procedure and may order the commencement of bankruptcy procedures. Even after the court has approved a corporate reorganisation plan, it may abolish the plan by its own decision if it is unlikely that the plan will be successfully performed. Even on such abolishment of the plan by the court, the rights of all creditors and shareholders will remain as modified in accordance with the reorganisation plan.

Insolvency processes

25 During an insolvency case, what notices are given to creditors? What meetings are held? How are meetings called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors’ committees? What are insolvency administrators’ reporting obligations? May creditors pursue the estate’s remedies against third parties?

Notices given to creditorsWhen any of the insolvency proceedings are commenced, a notice is sent to all creditors known to the debtor and a public notice is posted in the courthouse and in the official gazette. Throughout the insolvency proceed-ing, all creditors who have submitted a claim must be notified of any credi-tors’ meetings that are to be convened (with some limited exceptions).

Creditors’ meetingsUnder Japanese insolvency law, a court or, in the case of a special liquida-tion procedure, a liquidating company, must convene a ‘creditors’ meeting’ in certain circumstances.

In relation to the bankruptcy procedure, a creditors’ meeting does not have to be held, however, the court will convene a meeting under certain circumstances, including at the request of either the trustee-in-bank-ruptcy, the creditors’ committee or certain of the creditors or if the court deems it necessary.

Usually, an initial creditors’ meeting is held on a date decided by the court. In the meeting, the trustee-in-bankruptcy reports to the creditors: • the financial status of the debtor; • the reasons for bankruptcy;• whether there are any circumstances that require a court order to

assess the liabilities of the officers of the debtor or a court order to freeze the officers’ assets; and

• any other matters necessary for the bankruptcy procedure.

Furthermore, after all distributions to creditors have been made, the trustee-in-bankruptcy shall give an accounting report either at a creditors’ meeting or in writing. Under the special liquidation procedure, a creditors’ meeting will be held when the liquidator deems it necessary. Creditors whose claims represent 10 per cent or more of the total claims (by value) can ask the liquidator to hold a creditors’ meeting.

In the civil rehabilitation and corporate reorganisation procedures, a creditors’ meeting is not necessarily held. In the civil rehabilitation pro-cedure, the court will convene a meeting at the request of the debtor or administrator, creditors’ committee or creditors who hold claims against the debtor equal to 10 per cent or more of the amount of claims of all creditors.

In the corporate reorganisation procedure, the court will convene a meeting at the request of the administrator, relevant committees (com-mittees of unsecured creditors, secured creditors and shareholders), credi-tors that hold claims against the debtor equal to 10 per cent or more of the amount of claims of all creditors that reported their debt to the debtor or




shareholders who hold voting rights equal to 10 per cent or more of the vot-ing rights of total shareholders.

In both civil rehabilitation and corporate reorganisation procedures, the court may convene a meeting if it determines a creditors’ meeting nec-essary. Usually, an initial creditors’ meeting is held at which the admin-istrator reports the financial status of the debtor to its creditors and the creditors state their opinion as to the suitability of the administrator, the business and the management of the debtor’s assets. Following the sub-mission of the civil rehabilitation or corporate reorganisation plan, the court may convene a creditors’ meeting (in the case of the corporate reor-ganisation procedure, such a meeting may also be attended by the share-holders) to discuss the plan except where the court decides not to hold a meeting and allows creditors and shareholders, if applicable, to vote by post instead.

A reorganisation plan cannot provide for the release of liabilities owed by third parties who are not part of the debtor group subject to the reor-ganisation plan.

CommitteesIn relation to the bankruptcy and civil rehabilitation procedures, creditors may form a creditors’ committee. In the corporate reorganisation proce-dure, secured creditors, unsecured creditors and shareholders may form a secured creditors’ committee, an unsecured creditors’ committee or a shareholders’ committee respectively. Please refer to question 27 for fur-ther details of these committees.

Information available to the creditors or creditors’ committees and reporting obligations of insolvency administrators

In the bankruptcy procedure, the trustee-in-bankruptcy must, imme-diately after the commencement of the procedure, submit to the court and the creditors’ committee (if one exists), an inventory of the debtor’s prop-erty and the debtor’s balance sheet together with a report outlining: • the financial status of the debtor;• the reasons why the debtor became bankrupt;• whether circumstances require a court order to assess the liabilities of

the officers of the debtor or a court order to freeze the officers’ assets; and

• any other matters necessary for the bankruptcy procedure.

If a creditors’ meeting is held, the trustee-in-bankruptcy must summarise the contents of the above report to the creditors at the creditors’ meeting. If a creditors’ meeting is not held, the trustee-in-bankruptcy must provide the creditors who are known to the trustee-in-bankruptcy with a summary of the above report. In addition, the trustee-in-bankruptcy must report to the court the status of the administration and disposition of the debtor’s property together with any other matters requested by the court. The trustee-in-bankruptcy must also report the status of the debtor’s property to the creditors’ meeting upon a resolution of the creditors’ meeting. The trustee-in-bankruptcy shall, upon the termination of his or her office, give an accounting report either at a creditors’ meeting or in writing.

If the creditors’ committee requests, or a resolution of the creditors’ meeting is made, the debtor and its related parties, such as any representa-tives, directors or statutory auditors, must provide necessary explanations concerning the bankruptcy to the creditors. The creditors may, under cer-tain circumstances, ask the court to ensure the disclosure and copying of any documents (or other objects) that have been prepared by the court or submitted to the court by the trustee-in-bankruptcy or any other persons (such as the debtor).

In the civil rehabilitation procedure, the debtor or the administrator (if one has been appointed) must, immediately after the commencement of the procedure, submit to the court and the creditors’ committee (if one exists), an inventory of the debtor’s property and the debtor’s balance sheet together with a report on:• the reasons why the debtor became insolvent;• the past and present status of the business and assets of the debtor;• whether circumstances require a court order to assess the liabilities of


• any other matters necessary for the civil rehabilitation procedure.

The debtor or, if an administrator has been appointed, the administrator, usually holds a briefing session for all the creditors immediately after the commencement of the procedure outlining the issues to be explained in the above report, together with any other material issues for the procedure

in general. The debtor or the administrator (if one has been appointed) must also report to the court the status of the business and property of the debtor and any other matters requested by the court.

In the corporate reorganisation procedure, the administrator, immedi-ately after the commencement of the procedure, must submit to the court and the creditors’ committee (if one exists), the inventory of the debtor’s property and the debtor’s balance sheet together with a report describing:• the reasons why the debtor became insolvent;• the past and present status of the assets and the business of the debtor;• whether circumstances require a court order to assess the liabilities of


• any other matters necessary for the corporate reorganisation procedure.

The administrator has to:• hold a briefing session for the creditors and other interested parties

(such as shareholders) and summarise the content of the above report;• deliver the summary of the report to the creditors and other interested

parties by other methods; or• take any other appropriate measures. The administrator must also

report to the court the status of the business and property of the debtor and any other matters requested by the court.

In the civil rehabilitation and corporate reorganisation procedures, if the debtor or the administrator intends to transfer its business to a third party and asks a court for approval of the transfer (see question 18), the court has to explain the transfer to the creditors who are known to the court and hear opinions from them before the court approves such a transfer. In addi-tion, prior to a creditors’ resolution for a rehabilitation plan or a reorganisa-tion plan, the court must send a draft rehabilitation or reorganisation plan (together with related documents) to the creditors and, if necessary, hold a briefing session to explain the plan to the creditors. The creditors may, under certain circumstances, ask the court to ensure the disclosure and copying of any documents (or other objects) that have been prepared by the court or submitted to the court by the debtor or any other persons (such as the administrator). The administrator will, upon the termination of his or her office, give an accounting report to the court.

In the special liquidation procedure, when the liquidator has com-pleted the investigations into the current status of the liquidating com-pany’s property and prepared an inventory of the liquidating company’s property and balance sheet, the liquidating company must submit them to the court without delay. The liquidating company also has to report to the creditors the outcome of such investigations and summarise the inventory of the property and balance sheet. It must state its opinions on the pros-pects of the liquidation procedure (and its implementation) at a creditors’ meeting, or by any other appropriate means. The creditors may, under cer-tain circumstances, ask the court to ensure the disclosure and copying of any documents (or other objects) that have been prepared by the court or submitted to the court by the liquidating company (or any other persons). In addition, whenever a creditors’ meeting is to be held, the person calling the meeting must provide the creditors known to him or her with neces-sary materials so that the creditors are informed when they exercise their voting rights.

Remedies against third partiesIn all the insolvency proceedings, creditors may not initiate proceedings to pursue remedies against third parties. Only a trustee or administrator may initiate such proceedings.

Enforcement of estate’s rights

26 If the insolvency administrator has no assets to pursue a claim, may the creditors pursue the estate’s remedies? If so, to whom do the fruits of the remedies belong?

Under the bankruptcy procedure, the civil rehabilitation procedure and the corporate reorganisation procedure, the right to pursue a claim for the ben-efit of the estate belongs solely to the insolvency administrator. The credi-tors cannot pursue the estate’s remedies, which the debtor possesses. The creditors may only claim damages if the insolvency administrator neglects to pursue a claim.




Creditor representation

27 What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?

In relation to the bankruptcy and civil rehabilitation procedures, creditors may form a creditors’ committee. Under the corporate reorganisation pro-cedure, secured creditors, unsecured creditors and shareholders may form a secured creditors’ committee, an unsecured creditors’ committee or a shareholders’ committee respectively. As such committees are voluntarily formed, there are no regulations regarding the selection and the appoint-ment of the members of the committees. Such committees may participate in the relevant procedures if the court approves. The court may give such approval only if:• the number of the committee members is between three and 10;• a majority of the creditors that have submitted claims (or, in the case of

the shareholders’ committee, a majority of the shareholders) consent to the committee’s participation in the procedure; and

• the committee fairly represents the interests of all creditors (or, in the case of the shareholders’ committee, the interests of all shareholders). The committees are not prohibited from retaining advisers.

Each committee is given certain powers, which include the right:• to state its opinion to the court, the debtor or the administrator regard-

ing the procedure;• to convene creditors’ meetings; and• to supervise the implementation of the procedure.

If a committee has contributed to the smooth progress of bankruptcy proceedings or the rehabilitation or reorganisation of the debtor, and has incurred necessary expenses for such activities, the court may, following a creditor’s petition (or, in the case of a shareholders’ committee, a share-holder) permit reimbursement of any reasonable expenses, from the prop-erty of the debtor.

In the special liquidation procedure, there are no provisions regarding a creditors’ committee.

Insolvency of corporate groups

28 In insolvency proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes? May assets be transferred from an administration in your country to an administration in another country?

As set out in question 2, insolvency proceedings by the parent and its sub-sidiaries can be combined for administrative purposes. However, there are no procedures that combine the assets and liabilities of these companies into one pool and transfer assets from an administration in Japan to an administration in another country. As a general rule, it is argued that credi-tors may submit their claims not only against a debtor, but also where it is deemed appropriate to pierce the corporate veil against that debtor’s par-ent or subsidiaries.

Claims and appeals

29 How is a creditor’s claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Are there provisions on the transfer of claims? Must transfers be disclosed and are there any restrictions on transferred claims? Can claims for contingent or unliquidated amounts be recognised? How are the amounts of such claims determined?

In bankruptcy, civil rehabilitation and corporate reorganisation proce-dures, the court decides and publicly announces the period for filing claims (which must be between two weeks and four months in duration), during which creditors must file their claims against the debtor with the court to be able to participate in the proceedings.

When filing its claim, a creditor is required to report prescribed mat-ters, such as the amount and basis of the claim and whether any right of priority exists. After expiration of the period for filing claims, the court clerk will prepare a claim chart listing all claims filed with the court and the claims that are subject to examination.

If a creditor’s claim is disputed by the debtor, the trustee-in-bank-ruptcy, the administrator or any other creditor, the creditor may initiate legal action against the person objecting to the claim. If no objection has arisen with respect to a claim at a creditors’ meeting or within the claim examination period, the amount and priority of the claim will be finalised. In relation to the special liquidation procedures, creditors (except those already known to the debtor) must submit their claims to the liquidator. There is no specific provision regarding how to submit a claim, which claims may be disallowed or what action the creditor should take to chal-lenge a disallowance.

Under the Bankruptcy Law, the Civil Rehabilitation Law and the Corporate Reorganisation Law, a creditor that acquires a claim that has been filed with the court is required to inform the court that it has acquired the claim to participate in the proceedings. The creditor can claim the claim’s full face value via the insolvency proceedings even when the claim has been acquired by the creditor at a discount. There are no other restric-tions on the transfer of either claims or transferred claims.

Under the Bankruptcy Law, the Civil Rehabilitation Law and the Corporate Reorganisation Law, claims for contingent or unliquidated amounts are recognised. Claims for contingent or unliquidated amounts must be provisionally calculated as of the commencement of the proceed-ings, and the actual amounts will be determined within the applicable pro-ceedings. A creditor is free to claim interest that accrued after the opening of any of bankruptcy, civil rehabilitation and corporate reorganisation pro-cedures. However, such claim are subordinated to other claims by opera-tion of laws (see question 36) and therefore, practically the creditor cannot expect to receive any distribution on that claim.

Modifying creditors’ rights

30 May the court change the rank of a creditor’s claim? If so, what are the grounds for doing so and how frequently does this occur?

As a general rule, the court cannot change the rank of a creditor’s claim, which is stipulated under the law. However, under the Bankruptcy Law, the Civil Rehabilitation Law and the Corporate Reorganisation Law, the court has the right to give permission for the release of security rights. Under the Bankruptcy Law, the court can approve the release of a security right by the administrator, who can then sell the relevant property and pay the relevant amount to the holder of the security right, if this is in the general interests of all of the creditors. Under the Civil Rehabilitation Law, if a property is indispensable for the continuation of the debtor’s business, the court can approve that the relevant security rights are released by making the debtor (or the administrator, if appointed) pay the price of such property to the court and distributing it to the security holders. Under the Corporate Reorganisation Law, when it is necessary for the reorganisation, the court can approve that security rights are released by making the administrator pay the price of such property to the court.

Priority claims

31 Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganisations? Which have priority over secured creditors?

There are no governmental or non-governmental privileged and priority claims in any of the insolvency proceedings, except for taxation payments, which are treated preferentially in insolvency proceedings. Claims given priority in the law and claims arising for the common benefit of all credi-tors (such as the fees for the trustee or administrator and any necessary running costs incurred following the commencement of the proceeding) are treated as ‘common benefit claims’ and have priority over other claims. The common benefit claims are paid in full when they become due.

Employment-related liabilities in restructurings

32 What employee claims arise where employees are terminated during a restructuring or liquidation? What are the procedures for termination?

If a company has to terminate the employment of the employees during a restructuring or liquidation, it must follow the rules under the Labour Standard Act and the Labour Contract Act. In order to legally terminate the employment: • a company has to give at least 30 days’ prior notice to an employee or

pay at least 30 days’ salary to the employee in lieu of notice; and




• there must be objective and reasonable grounds for the termination and such termination must be socially acceptable (eg, where the employee is performing at a consistently low level in carrying out her duties and the employer can prove that improvement of her perfor-mance is unlikely even if additional training are provided).

In the context of restructuring or downsizing, the following four factors will generally be considered by the court in determining the reasonable-ness of termination: • the necessity to reduce personnel (economic condition of the

company); • the necessity to terminate employees in order to reduce the number of

personnel (possibility of job rotation or voluntary resignation); • the fairness of the standards used for selecting the particular employ-

ees whose employment is being terminated; and• procedural fairness.

Employees whose employment has been terminated can bring claims to have their jobs reinstated and to be paid unpaid wages by arguing that the termination did not satisfy the conditions set out above and is therefore void. Where large numbers of employment contracts are terminated or where the business ceases operations, it is likely that they will cooperate through a trade union and as a result the number of employee claims is likely to increase. If the termination were found to be invalid, the company would have to pay unpaid wages (past and future wages). If the termination were found to be valid, the company would have to pay unpaid wages and retirement allowance (where applicable).

Unpaid wages and retirement allowance including pension have cer-tain priorities in restructuring or liquidation proceedings. If there exist deficiencies in pension plans or schemes, employees will have claims against the company with certain priorities.

Pension claims

33 What remedies exist for pension-related claims against employers in insolvency proceedings and what priorities attach to such claims?

In Japan employees have pension-related claims against an entity (often a trust), which is segregated from the employers’ and managers’ pension assets. Accordingly, the employer’s insolvency does not affect such claims, although it may affect the membership of any pension funds in which the employee has participated.

Environmental problems and liabilities

34 In insolvency proceedings where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator, secured or unsecured creditors, the debtor’s officers and directors, or on third parties?

The insolvency administrator (in a bankruptcy procedure and a corporate reorganisation procedure) or the debtor (in a civil rehabilitation procedure) is primarily responsible for dealing with the environmental issues identi-fied during the relevant insolvency procedures. Thus secured or unsecured creditors, or third parties do not have any liability for such environmental issues, unless they have agreed to bear certain costs to remedy the damage caused. Generally, the insolvency administrator or the debtor is expected to closely discuss with the insolvency court how the identified environmen-tal issue (eg, land pollution) can be cleaned up during the insolvency pro-cedure and to try to remedy it on the debtor’s account as much as possible.

Liabilities that survive insolvency proceedings

35 Do any liabilities of a debtor survive an insolvency or a reorganisation?

In a civil rehabilitation procedure, once the rehabilitation plan is finally approved by the court, the debtor will be discharged from every unse-cured claim other than claims approved by the rehabilitation plan, claims that have not be filed within the filing period due to grounds not attribut-able to the relevant creditors or certain other liabilities set out in the Civil Rehabilitation Law. Common benefit claims, preferred claims, secured interests of certain types (special preferential rights, mortgage, lien under

the Commercial Code, or any other security interest, such as security by way of transfer) will survive the rehabilitation procedure.

In a corporate reorganisation procedure, once the reorganisation plan is approved by the court, the debtor will be discharged from every secured and unsecured claim other than claims approved by the reorganisation plan, claims for retirement benefits of the debtor’s officer (such as direc-tors, auditors, representative directors and executive officers) and the debtor’s employees who took office or were employed after the commence-ment of the reorganisation procedure or certain other liabilities set out in the Corporate Reorganisation Law. Common benefits claims will survive the rehabilitation procedure.

Distributions

36 How and when are distributions made to creditors in liquidations and reorganisations?

In the bankruptcy procedure, distributions to creditors will be made after the permission of the court clerk is obtained. A distribution will be made each time the trustee-in-bankruptcy receives sufficient funds to be distrib-uted by liquidating the debtor’s assets. A creditor that has a secured inter-est over a particular asset of the debtor may enforce such interest outside the bankruptcy proceedings. Other claims are paid in the following order of priority as calculated by the trustee-in-bankruptcy and approved by the supervisors (if they are appointed) or by the court:• common benefit claims (including tax);• preferred claims (such as unpaid wages);• unsecured claims;• subordinated claims (such as interest that accrued after the declara-

tion of bankruptcy); and• subordinated claims created by agreements.

Within each category of claim, each claim will be settled on a pro rata basis.In the special liquidation procedure, distributions to creditors can be

made by the liquidator at any time after the relevant claim is submitted to the liquidator; however, in practice, such distributions are rarely made at this stage. If the distribution plan is approved by creditors and the court, distributions to creditors will be made subject to the plan.

In relation to the civil rehabilitation and corporate reorganisation procedures, distributions to creditors will be made in accordance with the approved civil rehabilitation or corporate reorganisation plan (subordi-nated claims created by agreements are inferior to the ordinary unsecured claims in the plan).

Transactions that may be annulled

37 What transactions can be annulled or set aside in liquidations and reorganisations and what are the grounds? What is the result of a transaction being annulled?

As a general rule, if neither the debtor nor the counterparty has completely performed its obligations under an agreement with bilateral obligations, the trustee-in-bankruptcy under the bankruptcy procedure, the debtor (or the administrator, if appointed) under the civil rehabilitation procedure or the administrator under the corporate reorganisation procedure has the discretion to terminate such an agreement. However, the trustee, debtor or administrator cannot terminate a lease or licence agreement in relation to which the lessee or licensee has perfected its rights against third parties. Further, the counterparty of the debtor with respect to a continuing supply and service agreement (eg, for electricity or gas) cannot refuse to provide that service for the reason that the debtor has not paid for it.

In the bankruptcy procedure, the following acts can be annulled by a legal action initiated by the trustee-in-bankruptcy:• any acts of the debtor (excluding the creating of securities or dissolv-

ing of debts) that were taken with the knowledge that such actions would jeopardise the interests of its creditors;

• any acts of the debtor (excluding the creating of securities or dissolv-ing of debts) that would jeopardise the interests of its creditors that the debtor made after it suspended payments or filed a petition of com-mencement of bankruptcy procedures;

• any disposal of its assets in exchange for adequate consideration by the debtor, made in circumstances where the disposal would enable the debtor to conceal or provide the proceeds free of charge or other-wise jeopardise the interest of creditors, the debtor had such an inten-tion at the time of the transaction and the purchaser was aware of that intention of the debtor;




• any acts of the debtor (limited to creating securities or dissolv-ing debts) that were taken after the debtor became unable to pay its debts (and the creditor had knowledge of the debtor’s inability to pay its debts or suspension of payment) or after the petition for the com-mencement of the insolvency procedure was filed (and the creditor knew that the petition had been filed); and

• any acts of the debtor (limited to creating securities or dissolving debts) that it was under no obligation to perform or that it performed other than in accordance with its obligations, including payments made before the applicable due date, and that were made in the 30 days preceding the date on which the debtor became unable to pay its debt or later, and the creditor knew that the debtor’s act would jeop-ardise the interests of other creditors.

Almost all the same measures may be taken by the administrator or super-visor in a civil rehabilitation procedure or the administrator in a corporate reorganisation procedure, but do not apply in the case of a special liquida-tion procedure.

If a transaction is annulled, the debtor’s assets that were the subject of the transaction are restored to their original state.

Proceedings to annul transactions

38 Does your country use the concept of a ‘suspect period’ in determining whether to annul a transaction by an insolvent debtor? May voidable transactions be attacked by creditors or only by a liquidator or trustee? May they be attacked in a reorganisation or a suspension of payments or only in a liquidation?

There is no definition of a ‘suspect period’ under the bankruptcy, civil reha-bilitation and corporate reorganisation procedures. However, with respect to an act that is outside the scope of the debtor’s obligations (see above), the 30 days preceding the date on which the debtor suspended payments or filed a petition for the commencement of any insolvency proceeding or later, as set out in the relevant insolvency laws, can be said to function as the ‘suspect period’.

Voidable transactions can only be challenged by a trustee-in-bank-ruptcy (in a bankruptcy procedure), a supervisor or an administrator, as appropriate (in a civil rehabilitation procedure), or an administrator (in a corporate reorganisation procedure) and only in these procedures.

Directors and officers

39 Are corporate officers and directors liable for their corporation’s obligations? Are they liable for pre-bankruptcy actions by their companies? Can they be subject to sanctions for other reasons?

There is no particular provision that makes corporate officers or directors liable for any obligations owed by their companies under insolvency pro-cedures. However, under the Companies Act, if a corporation causes dam-age to a third party due to the wilful misconduct or gross negligence of its director, that director will be liable to the third party.

Under the Bankruptcy Law, the directors of the debtor will incur crimi-nal sanctions (imprisonment for up to 10 years or a fine of up to ¥10 million, or both) if they do any of the following before or after the commencement of the bankruptcy procedure, with the intention of jeopardising the inter-ests of the debtor’s creditors:• hide or destroy any assets of the debtor;• disguise a disposal or a debt burden with respect to any assets of the

debtor;• change the condition of any assets of the debtor or impair its assets; or• dispose of assets of the debtor in a manner contrary to the interests of

creditors or incur obligations that are against the interests of creditors.

The directors of the debtor will also incur criminal sanctions (at the level set out above) if they obtain or make a third party obtain assets of the debtor without a trustee’s approval or any other justifiable reason for the purpose of jeopardising the interests of the debtor’s creditors with the knowledge that the bankruptcy procedure was commenced or other protective orders were made.

Amending, hiding or destroying financial records for the purpose of jeopardising the interests of the debtor’s creditors are also criminal offences under the Bankruptcy Law (with sanctions of imprisonment for up to three years or a fine of up to ¥3 million, or both).

Breach of other duties set out in the Bankruptcy Law by a director would also result in criminal sanctions for that director. For example, a director who refuses to provide an explanation required, to accept inspec-tions or to disclose the assets of the company, or a director who provides false explanations or information will be criminally liable under the Bankruptcy Law (imprisonment of up to three years or a fine of up to ¥3 million, or both). Also, a director who interferes with the operations of the trustee-in-bankruptcy through fraudulent means or by forcible obstruc-tions will be subject to criminal sanctions (imprisonment for up to three years or a fine of up to ¥3 million, or both).

Similar criminal sanctions will be imposed under the civil rehabilita-tion or corporate reorganisation procedures, while the special liquidation procedures do not have any such sanctions.

Furthermore, if a director or officer of a debtor enters into a transac-tion with a third party and does not inform that third party that the debtor is insolvent or is likely to become insolvent and the third party suffers damage as a result of a subsequent insolvency, the director or officer can be punished on the basis that he or she has committed fraud under the Criminal Code (with a sanction of imprisonment for up to 10 years).

Groups of companies

40 In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?

Except for extreme cases where a parent is seen as ‘abusing’ the judi-cial personality of its subsidiary (eg, the subsidiary is used as a facade of the parent’s benefit), in which case the corporate veil of the subsidiary is pierced and the parent is liable for the subsidiary’s liabilities, a parent or affiliated corporation will generally not be responsible for the liabilities of subsidiaries or affiliates.

A court looks at each group company separately and cannot order a distribution of group company assets pro rata without regard to the assets of the individual corporate entities involved.

Insider claims

41 Are there any restrictions on claims by insiders or non-arm’s length creditors against their corporations in insolvency proceedings taken by those corporations?

No.

Creditors’ enforcement

42 Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?

Once the insolvency proceedings have begun, a debtor’s creditors are prohibited from seizing any of the debtor’s assets to enforce their rights against the debtor, except where a secured creditor, holding security over a particular asset of the debtor, enforces such a security (although in the corporate reorganisation procedure, a secured creditor cannot enforce its security).

Liquidation is generally carried out in a manner agreed by secured creditors and the debtor. Alternatively, liquidation can be in accordance with the Civil Enforcement Law, in line with the procedure applicable to the types of security in place. The cash generated by the liquidation will be paid to secured creditors to satisfy their claims and any remaining sums will be paid to the debtor, trustee or administrator for distribution to other creditors. There is no other process by which the debtor’s assets may be seized and liquidated outside of the bankruptcy process or court proceedings.

Corporate procedures

43 Are there corporate procedures for the liquidation or dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

Under the Companies Act, a company may be dissolved in various ways, including on the occurrence of certain trigger events set out in its articles of incorporation, by court order and by a special resolution at a shareholders’ meeting to dissolve the company. After dissolution, the company will go into liquidation and all the assets of the company will be sold. A director, a person prescribed by the articles of incorporation, a person appointed at a shareholders’ meeting of the company or a person appointed by the court




will be appointed as liquidator and the court will supervise the liquidator. The liquidator will issue public notices and individual notices to known creditors of the dissolved company to request the submission of claims immediately after dissolution. The liquidator sells all of the debtor’s assets and makes the necessary distributions to creditors who have submitted claims. Any remaining assets will be distributed to shareholders.

Conclusion of case

44 How are liquidation and reorganisation cases formally concluded?

The bankruptcy procedure is concluded when the court orders an end to the proceedings after a final creditors’ meeting at which the trustee-in-bankruptcy reports that the final distribution of the debtor’s assets to the creditors has been completed (or after the period for publication of the trustee’s report has ended, if no such meeting is held).

The civil rehabilitation procedure is concluded:• if neither a supervisor nor an administrator is appointed, when the

rehabilitation plan is finalised by the court;• if a supervisor is appointed, when the rehabilitation plan is completed

or when three years have passed since the finalisation of the plan by the court; or

• if an administrator is appointed, when the rehabilitation plan is com-pleted or when the court confirms that the rehabilitation plan will defi-nitely be carried out.

The corporate reorganisation procedure is concluded by a declaration of the court when all the actions under the corporate reorganisation plan are completed, more than two-thirds of the claims under the plan have been paid to creditors (and there have been no defaults under the plan) or the court confirms that the corporate reorganisation plan will definitely be car-ried out.

Special liquidation procedures are concluded when all of the claims are paid in accordance with the agreed plan or when the need for the spe-cial liquidation procedure no longer exists.

International cases

45 What recognition or relief is available concerning an insolvency proceeding in another country? How are foreign creditors dealt with in liquidations and reorganisations? Are foreign judgments or orders recognised and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments? Has the UNCITRAL Model Law on Cross-Border Insolvency been adopted or is it under consideration in your country?

The Act on Recognition of and Assistance for Foreign Insolvency Proceedings (ARAFIP) sets out the requirements for recognition of insol-vency proceedings initiated outside Japan and the measures required to be taken to extend such proceedings to the debtor’s assets in Japan. The Tokyo District Court, which has exclusive jurisdiction over these procedures, will, when certain requirements are met, recognise insolvency proceedings that have been commenced with respect to a debtor outside Japan and will take measures to extend the effect of such insolvency proceedings to the assets and business of a debtor in Japan. These measures include prohibiting the separate enforcement or attachment by creditors against a debtor’s assets in Japan and issuing an administrative order that grants power to a court-appointed administrator to administer a debtor’s assets and business in Japan.

Under the Bankruptcy Law, the Civil Rehabilitation Law and the Corporate Reorganisation Law, the effect of the bankruptcy, civil reha-bilitation or corporate reorganisation proceedings under Japanese law is extended to a debtor’s assets outside Japan and an adjustment mechanism between the insolvency proceedings under Japanese law and one or more insolvency proceedings with respect to the same debtor under foreign law is provided for under these laws.

A foreign creditor will be treated in the same way as a Japanese credi-tor under the insolvency proceedings, including in relation to the exercise of any security interests it holds against a debtor.

Japanese courts will enforce a foreign judgment in Japan if:• the foreign court is recognised as having jurisdiction over the case

according to Japanese conflict-of-laws principles or relevant treaties;

• the defendant has been properly notified of the commencement of the proceedings or has not been properly notified but nevertheless assumed that proceedings had been commenced;

• the judgment or the procedure of the lawsuit is not against public pol-icy in Japan (eg, punitive damages are against Japanese public policy); and

• there is reciprocity of recognition between Japan and the country where the judgment was issued.

For more than 70 years, Japanese law adopted the ‘territoriality principle’ whereby insolvency proceedings initiated in Japan do not extend to the debtor’s assets outside Japan and insolvency proceedings initiated outside Japan will not extend to the debtor’s assets in Japan. This policy has long been criticised by overseas as well as domestic practitioners and, in 2000, the insolvency laws were amended to resolve this issue (for details of these laws, see above). However, the UNCITRAL Model Law has not yet been adopted in Japan.

COMI

46 What test is used in your jurisdiction to determine the COMI (centre of main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?

Under the ARAFIP, the concept of the ‘debtor’s principal business office’ is essentially equivalent to the COMI under the UNCITRAL Model Law. Although ‘debtor’s principal business office’ is not defined under the ARAFIP, a recent court precedent held that, to decide the location of a ‘debtor’s principal business office’, the Japanese court would take into account the various elements of the debtor as a whole, in particular the location of the debtor’s headquarters or centre of business management and strategy, and the debtor’s major asset and business operation. There is no explicit test or court precedent to determine the location of the ‘prin-cipal business office’ of a corporate group of companies, but a similar approach should be taken as summarised above.

Cross-border cooperation

47 Does your country’s system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognise foreign proceedings or to cooperate with foreign courts and, if so, on what grounds?

The ARAFIP addresses the relationship between domestic and foreign proceedings in Japan. Under the ARAFIP, a foreign administrator may file a request to the Japanese court (ie, Tokyo District Court) to recognise the foreign proceedings and take necessary measures including the foreclo-sure of assets and appointment of a domestic administrator in Japan. After the ARAFIP has been effective in 2000, there are several precedents where foreign insolvency proceedings have been recognised in accordance with the ARAFIP.

The Bankruptcy Law, the Civil Rehabilitation Law and the Corporate Reorganisation Law also address the cooperation between domestic administrators and foreign administrators in cross-border insolvency and restructurings. For example, under these laws, domestic administrators may ask foreign administrators to provide any information needed. In addi-tion, the laws provide a mechanism under which foreign administrators may file a petition in Japanese insolvency proceedings. Furthermore, the laws also allow foreign administrators to participate in domestic proceed-ings on behalf of creditors who participated in a foreign proceeding but not in a Japanese one. This will apply to domestic administrators in Japan on a reciprocal basis. To give a recent example, in its decision of 31 July 2012, the Tokyo District Court refused to recognise a foreign insolvency proceeding initiated by a debtor’s insolvency administrator appointed in Italy. Under the ARAFIP, the court shall refuse to recognise a foreign insolvency pro-ceeding in respect of a debtor if another foreign insolvency proceeding in respect of the same debtor has been already recognised in Japan and such recognised foreign insolvency proceeding constitutes the debtor’s ‘pri-mary foreign proceeding’. Under the ARAFIP, ‘primary foreign proceed-ing’ for a business enterprise is defined as a foreign insolvency proceeding petitioned for in the country where the debtor’s principal business office




is located (see question 46 for more details of the meaning of ‘principal business office’). In this case, the Tokyo District Court has already recog-nised a foreign insolvency proceeding in respect of the same debtor initi-ated in the US and it held that the US insolvency proceeding constitutes the debtor’s ‘primary foreign proceeding’. Therefore, in accordance with the ARAFIP, the debtor’s foreign insolvency proceeding initiated in Italy has been refused recognition in Japan.

Cross-border insolvency protocols and joint court hearings

48 In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?

Japan is not a signatory to any protocols or other arrangements to coordi-nate proceedings with courts in other countries. Also, there is no precedent of a Japanese court communicating with or holding joint hearings with courts in other countries.

Update and trends

In the civil rehabilitation procedure for Skymark Airlines (the No. 3 airline operator in Japan), Intrepid (a US leasing company and Skymark’s largest creditor) submitted its own civil rehabilitation plan, contending that the civil rehabilitation plan submitted by Skymark was inappropriate because it named ANA as a sponsor, which jeopardises Skymark’s independence as a third power competing against its bigger rivals, ANA and JAL. Two civil rehabilitation plans will be put to creditors’ vote at a creditors meeting to be held in August. There is no major new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders.


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