Yuri Ide of Anderson Mori & Tomotsune assesses the bankruptcy and insolvency regime in Japan
Section 1: processes and procedures
1.1 What reorganisation and bankruptcy processes are available for financially troubled debtors?
There are four types of insolvency proceedings available in Japan for the rehabilitation of companies in financial difficulty: corporate reorganisation proceedings (kaisha kosei); civil rehabilitation proceedings (minji saisei); bankruptcy proceedings (hasan); and, special liquidation proceedings (tokubetsu seisan).
Corporate reorganisation proceedings are typically used in complex insolvency cases involving stock companies (kabushiki kaisha), and comes with the mandatory appointment of a reorganisation trustee by the court and with a stay against enforcement by both secured and unsecured creditors. The court typically appoints a third party lawyer (bengoshi) with substantial experience in restructuring cases as the trustee. Since 2009, however, the Tokyo District Court (TDC) has begun the so-called quasi-debtor in possession (DIP) type practice, under which the debtor's director or counsel is appointed as the trustee. In quasi-DIP proceedings, the court appoints an examiner to supervise the trustee's administration of the reorganisation.
Civil rehabilitation proceedings (minji saisei) are used for the rehabilitation of companies of almost any size and type, and for the rehabilitation of individuals. In civil rehabilitation proceedings, the DIP administers the rehabilitation under the supervision of a court-appointed supervisor. In addition to the authority to approve or reject certain of the DIP's activities that are outside of the ordinary course of business, the supervisor has the power to void fraudulent transfers of the debtor's assets or preferential transactions entered into by the DIP. In civil rehabilitation proceedings, enforcement by secured creditors is not stayed, in principle. Accordingly, the debtor has to enter into settlement agreements with secured creditors in order to continue using the relevant collaterals for the conduct of their businesses.
Bankruptcy (hasan) and special liquidation (tokubetsu seisan) proceedings are used when the liquidation and dissolution of the debtor is contemplated.
In bankruptcy proceedings, the court appoints a lawyer as trustee to administer the bankruptcy procedures. Enforcement by secured creditors and creditors with statutory priority are not stayed; rather, such creditors can freely exercise their claims outside of the bankruptcy proceedings. Notwithstanding, the trustee will usually attempt to sell secured collaterals with the agreement of these creditors and contribute a certain percentage of the sales proceeds to the estate. The estate of the debtor is distributed to creditors in accordance with prescribed statutory priorities without any need for voting by the creditors.
Special liquidation proceedings are used for stock companies (kabushiki kaisha). Under such proceedings, a liquidator is appointed by a debtor's shareholders or the court. Distribution of the debtor's estate to creditors has to be approved by creditors with claims to 75% or more of the debtor's total debts or by way of settlement among the creditors. Special liquidation is typically used when the debtor's shareholders are confident of obtaining creditors' cooperation for the liquidation process and wish to control the liquidation process without the involvement of a trustee.
There are certain facts that a court is required to find in respect of the company, and of the insolvency proceedings before they can be commenced:
• Bankruptcy – the company is: insolvent on a balance sheet basis; or unable to pay its debts as they become due generally and on a continuing basis (and therefore insolvent on a cash flow basis).
• Special liquidation – the company: faces severe difficulties with its liquidation process; or is threatening to be insolvent on a balance sheet basis.
• Corporate reorganisation – the company: faces the threat of a bankruptcy event (as described above); or would likely significantly impair its own operations if it pays its debts as they become due.
• Civil rehabilitation proceedings – the company: faces the threat of a bankruptcy event (as described above); or is unable to pay its debts as they become due without significantly impairing its operations.
Under each of the four types of insolvency proceedings, there is usually a so-called gap period between the date of filing and the date of commencement of proceedings during which the court examines the grounds for commencement of proceedings. The duration of such gap period varies from case to case, but is generally about one month for corporate reorganisations and one week for other proceedings.
1.2 Is a stay on creditor enforcement action available?
Additional filing for an injunction order is necessary to obtain a stay of creditor enforcement for the gap period. Such injunction order expires at the commencement of the proceedings, when creditor enforcement is automatically stayed.
Enforcements of secured claims are stayed in corporate reorganisations but are generally not stayed in other types of proceedings. The exercise of rights of set-off cannot be stayed, although such rights have to be exercised by the claim bar date in corporate reorganisation and civil rehabilitation proceedings.
1.3 What are the key features of a reorganisation plan and how is it approved?
The plan is proposed by the trustee or the DIP in corporate reorganisation and civil rehabilitation proceedings. Although creditors are also entitled to file a plan in such proceedings, it is uncommon for the creditors to file a plan and sometimes it is not easy for a Japanese court to approve a plan that is filed by creditors. This is because the involvement of, and disclosure of financial details to, creditors are generally limited in Japanese insolvency proceedings.
In corporate reorganisations, creditors are categorised into the classes of secured creditors and unsecured creditors for voting. The passing of a plan of reorganisation requires the approval of secured creditors representing two-thirds or more of the value of secured claims and of unsecured creditors representing a simple majority of the value of unsecured claims. Under plans of reorganisation, secured claims are usually paid in full up to the valuation of the relevant collateralised assets, with only the payment schedules amended. However, a plan that provides for a haircut or other amendments to secured claims requires the approval of secured creditors representing three-fourths or more of the value of secured claims.
In civil rehabilitation cases, where secured claims are freely exercisable outside of the proceedings, only unsecured creditors (including secured creditors with deficiency claims) vote on the plan of rehabilitation. Claims are generally grouped into a single unsecured class, although contractual subordinated claims are put into a separate class. A plan of rehabilitation requires the votes of a majority of creditors voting on the plan, provided they also represent a simple majority of the value of claims.
1.4 Can a creditor or a class of creditor be "crammed-down"?
Yes. Notwithstanding the disapproval of a plan by a class of creditors, a court has the power in both corporate reorganisation and civil rehabilitation proceedings to approve a plan if it finds it fair and equitable, as long as one of the classes of creditors approves the plan. Whether the best interest rule (payouts under the plan are larger than payouts in liquidation) is satisfied is a critical factor in assessing whether a plan is fair and equitable.
1.5 Is there a process for facilitating the sale of a distressed debtor's assets or business?
To facilitate the sale of the debtor's assets, the court can approve the sale of the debtor's business outside of the plan, if a prompt sale is necessary to rehabilitate the debtor's business. Although the court is obliged to take into account the views of creditors, no formal voting on the sale is required. This is similar to a 363 sale under chapter 11 of the US Bankruptcy Code, except that creditors have no right to file a formal objection to the sale in Japanese proceedings.
Credit-bidding is deemed prohibited under Japanese insolvency proceedings because it can constitute the set-off between pre-filing claims and post-filing obligations (in view of the fact that buyers' obligation to pay the purchase price typically accrue post-filing). Although stalking-horse bids are not expressly prohibited under Japanese law, there are no precedents of such bids in Japanese insolvency proceedings.
1.6 What are the duties of directors of a company in financial difficulty?
The directors do not have obligations to file an insolvency proceeding when the company faces financial difficulty, because they have broad discretion on the company's management. However, the creditor may pursue the director's personal liability under a special provision in the Companies Act: if the creditor proves that the director permitted the company to enter into a transaction that the director knew or should have known that the company is subsequently unable to perform due to the company's financial difficulty.
1.7 What priority claims are there and is protection available for post-petition credit?
Post-petition credits qualify as administrative claims that are required to be paid in full in accordance with the contractual terms. However, where proceedings transition from corporate reorganisation or civil rehabilitation to bankruptcy, administrative claims can be paid only on a pro-rata basis if the estate does not have sufficient cash to satisfy all administrative claims. There is no equivalent of the US chapter 11 priming-lien or super-priority systems in Japan.
1.8 Is there a different regime for banks and other financial institutions?
The Reorganisation Special Measures Act (Kosei Tokurei Ho) applies in the insolvency proceedings of certain financial institutions, such as banks and insurance companies. Due to the vast number of depositors and policyholders involved as creditors, claims filings and voting are typically handled by agents, such as the Deposit Insurance Bank of Japan (DICJ) and the Life Insurance Policyholders Protection Corporation of Japan. These agents provide financial support to protect insured deposits and insurance benefits, and also establish entities to succeed to the operations of the failed financial institutions or insurance companies if time is required to locate a buyer for the businesses or assets of the financial institutions. The Deposit Insurance Act of Japan was amended in 2014 to introduce a system for the orderly resolution of financial institutions in order to avoid systemic risks in the financial markets.
Section 2: international/cross border issues
2.1 Can bankruptcy or reorganisation proceedings be opened in respect of a foreign debtor?
Yes. In principle, however, only stock companies established under Japanese law are entitled to file for corporate reorganisation and special liquidation. A foreign debtor with business premises, offices or assets in Japan can also file for civil rehabilitation and bankruptcy in Japan.
2.2 Can recognition and assistance be given to foreign bankruptcy or reorganisation proceedings?
Yes. Under the Law on Recognition of and Assistance in Foreign Insolvency Proceedings (known as Shonin Enjo Ho), which is modeled on the United Nations Commission on International Trade Law (Uncitral) Model Law, the TDC has the power to recognise foreign bankruptcy and reorganisation proceedings, and provide assistance if certain conditions such as the applicability of a universality principle to the foreign insolvency proceedings and the necessity of the TDC's assistance are satisfied.
Section 3: other material considerations
3.1 What other major stakeholders (such as governmental or regulatory institutions) could have a material impact on the outcome of the reorganisation?
The involvement of regulators in reorganisation proceedings is generally very limited. In case of the reorganisation of financial institutions, regulators may have substantial control before the filing for reorganisation proceedings; however, once the proceedings are commenced by the court, the regulators' involvement in, and control over, the reorganisation becomes limited, unless a government entity (typically the DICJ) is appointed as the trustee in the reorganisation.
Most employees' claims qualify as priority claims or administrative claims. The court is required to take into account the views of the labour union or the employees' representative regarding corporate reorganisation and civil rehabilitation plans.
Section 4: current trends
4.1 Outline any bankruptcy and reorganisation trends specific to your jurisdiction.
Out-of-court workouts are increasingly preferred over corporate reorganisation and civil rehabilitation. There are several out-of-court workout schemes available in Japan, such as the Turnaround ADR (Jigyo Saisei ADR) the process of which is supervised by a mediator, and the scheme administered by the REVIC (a state-owned organisation which facilitates workouts by coordinating the activities of lenders and provides financing to the debtor).
The key differences between workouts and court proceedings are that: trade creditors are paid in full in out-of-court workouts; and the unanimous consent of the affected financial creditors is required in out-of-court workouts. In respect of trade claim protection, the scope of protected trade claims in court proceedings (such as small amount convenience claims or critical vendor claims) has been expanded to preserve the value of the debtor's business. Regarding the requirement for the unanimous consent of affected financial creditors, new legislation to give effect to a workout plan that lacks the consent of a small number of creditors is under consideration.
First published by our sister publication IFLR magazine. Take your free trial today.
Anderson Mori & Tomotsune
About the author
Yuri Ide is a partner at Anderson Mori & Tomotsune, and has been principally involved in insolvency and restructuring cases, in which she represents debtors, investors and creditors. Her recent work includes the representation of ad hoc bondholders groups in corporate reorganisation cases, the representation of debtors' out of court workouts, and the representation of the debtors of a Japanese corporation in parallel insolvency proceedings between the US chapter 11 and Japanese corporate reorganisation. She has extensive experience in M&A, litigation and crisis management matters, especially with in an international context.
Ide has served as the co-chair of the Japan chapter of the International Women's Insolvency and Restructuring Confederation (IWIRC) since 2012. Before joining Anderson Mori & Tomotsune in April 2015, Ide was a partner at Bingham Sakai Mimura Aizawa.