Download Reply to the Local Insolvency Experts

AIIFL Symposium on
Corporate Rescue in China:
Chinese and Comparative Perspectives
7 October 2002
Insolvency Experts’ Local Questionnaire
Japan’s Answer
Hon.Prof.Dr. Shinjiro TAKAGI
Please see attached my paper entitled “How to Best Restructure In Japan”
in detail.
1.
Background Information
A) Briefly provide an overview of your country’s economic environment,
in particular the relevance and significance of any political, social or
cultural influences.
No.
B) Is there systemic insolvency of the banking and/or corporate sectors?
No, but Japan is now in more than ten years recession.
C) Is there ongoing or recent law reform activity in the areas of
commercial and insolvency law? If so, please describe.
Yes, see attached article entitled “how to best resctructure in Japan”.
D) Is the judiciary effective? Respected by insolvency practitioners?
Yes, especially in Tokyo and Osaka.
2.
Structure of Business Organizations
A) What are the main forms of business organizations in your country?
Company limited or Kabushikigaisha.
B) What is the usual size of business organizations?
Mid size.
C) Briefly describe the usual forms of management and ownership of these
organizations (eg, public v. private ownership, extent of family control,
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etc.)
Both, public and private ownership.
D) Comment briefly on the accounting standards adopted by these
organizations and whether independent, outside accountants are
employed.
Big corporations with capital of more than 500 million Japanese Yen or
with debts of more than 20 billion Japanese Yen must employ
independent and outside accountants.
E) Are there any statutory or regulatory bodies that monitor or supervise
these organizations?
No, but for financial institutions and other specified corporations.
F) Overall, is there a strong ethos of corporate governance and disclosure?
Yes, but I think it is not sufficient yet.
3.
Nature of Financing for Business Organizations
A) What are the main sources of financing for these organizations?
Secured and unsecured bank loans, project finance loans, structured
finance including securitization, equity financing issuing stocks and
bond, leasing, etc..
B) What are the common types of financing (eg, debt v equity)?
Both.
C) In relation to each type of financing, briefly describe in particular:
i) the duration;
vary.
ii) the usual parties;
banks and other finacial institutions, insurance and security
companies, leasing corporations and numerous personal investors.
iii) the types of expenditure usually funded by such financing
vary .
iv) whether there is a developed legal regime governing such types of
financing.
Yes.
D) Briefly describe bank lending practices (eg, cash flow v asset lending).
Both.
E) Briefly describe bank monitoring procedures.
Periodical checking of financial statements and hearing.
F) Which is the most commonly employed type of financing, and why?
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Secured and unsecured bank loans. Other financings are too
complicated for smaller sized corporations.
4.
Secured Creditors
A) Briefly describe the usual forms of security.
Real estates including land and buildings, accounts receivables.
B) Which is the most commonly employed type of security, and why?
Real estates. Valuable and stable.
C) Is there a system of registration for any types of security?
Yes.
D) How are the priorities regulated between competing types of security?
Perfected time by means of registration.
E) Briefly describe the available options open to a security holder to
enforce its security interest.
For real estate, judicial sale.
For accounts receivables, direct collection from a third party debtor.
For movables, taking possession and non-judicial sale.
F) Can security holders self-enforce their interests?
Yes, for movables without breaching peace.
G) Does the legal system provide an effective means for the enforcement of
secured rights by security holders and also provide adequate protection
of their rights?
Yes.
H) Overall, is it more common for secured creditors to enforce their rights
against the security when the corporate debtor is in financial difficulty
or to attempt to negotiate a suitable arrangement?
First negotiation, then enforcement.
5.
Unsecured Creditors
A) Briefly describe the options available to an unsecured creditor to collect
debts owed.
Civil execution proceedings according to Civil Execution Code.
Attachment and judical sale of real estate, movables and other assets.
Garnishment of debts owed by third party debtors, intellectual
properties and other assets.
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B) May unsecured creditors pursue self-enforcement?
No, but for exceptional emergent cases.
C) Does the legal system provide an effective means for the collection of
debts by unsecured creditors and also provide adequate protection of
their rights?
Yes, but debtors own insufficient available assets to be attached usually.
D) Overall, is it more common for unsecured creditors to pursue legal
remedies when the corporate debtor is in financial difficulty or to
negotiate a suitable arrangement?
Both.
6.
Overall Insolvency Law Regime
A) What are the principal laws governing insolvency in your country?
Bankruptcy Law, Civil Rehabilitation Law, Corporate Reorganization
Law, Commercial Code.
i) Are there separate insolvency laws for individuals and corporate
enterprises?
Are there separate laws for liquidation and
reorganization?
Yes.
ii) Is the insolvency law a separate piece of legislation, or is it part of
the general company law?
Separate pieces.
iii) Is there separate insolvency legislation for regulated industries such
as banks, investment banks, insurance companies, etc?
Yes.
B) Briefly summarize recent insolvency statistics for your country.
In 2001.
Straight bankruptcy 168,811
Civil Rehabilitation
1,110
Corporate Reorganization 47
Special Liquidation
335
C) Which courts are competent to exercise jurisdiction in insolvency
matters? Is there any specialized court to hear insolvency matters?
District courts with general jurisdiction, but larger district courts have
their bankruptcy divisions.
D) Is there a sufficient pool of professionals competent and experienced in
handling insolvency matters?
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Yes, but not enough.
E) Please advise on the identity of the relevant government authority and
their role in the insolvency process.
Financial Supervisory Agency and Deposit Insurance Organization
assume supervisory role including appointment of trustees for bankrupt
banks, credit unions, insurance corporations and security corporations.
7. Liquidation and Formal (Court-Based) Restructuring
A) What types of insolvency proceedings are available against a corporate
debtor?
Bankruptcy Law, Civil Rehabilitation Law, Corporate Reorganization
Law and Commercial Code.
i) In relation to each type of insolvency proceeding:
a) Who may commence the proceeding?
A debtor, creditors and sometimes stockholders.
b) What are the procedures for commencing the insolvency
proceeding?
Filing a petition and a opening order rendered by a court.
c) What is the usual time gap between the commencement of the
proceeding and the final distribution to creditors in a liquidation
and the approval of a plan in a reorganization?
Bankruptcy cases 1 year.
Civil rehabilitation cases 6-7 months.
Corporate Reorganization cases a few years.
d) What claims are recognized?
Unsecured claims.
In corporate reorganization cases, secured claims also
recognized.
e) What percentage of their debts do creditors generally recover?
In bankruptcy cases, about 5%.
In rehabilitation and reorganization cases vary considerably.
B) Powers to recover assets. In relation to each type of insolvency
proceeding:
i) What kinds of avoidance powers will be triggered by the
commencement of the insolvency proceeding?
Preferences and fraudulent transfers.
ii) Who exercises the avoidance powers?
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Trustees and supervisors.
iii) How frequently are avoidance powers exercised and are they
effective?
Not very often but effective.
iv) Describe the procedures for examination and against whom they are
applicable.
Creditors, transferees and beneficiaries are sued. Any witnesses can
be examined.
v) Describe any additional powers that may be used to increase the
pool of assets available for distribution to creditors.
Assumption and rejection of executory contracts.
C) Rights and liabilities of specific classes of parties.
i) In relation to each type of insolvency proceeding, how does the
commencement of the proceeding affect the following classes of
parties:
a) Corporate directors and officers
 Are there any civil/criminal liabilities (eg, fraudulent trading
or wrongful trading)?
 Yes.
 Are their powers of management curtailed?
 Yes.
 Other effects
 Special summary proceedings to recover damages.
b) Secured Creditors
 Are their rights to realize their security subject to a stay or
moratorium?
 In corporate reorganization proceeding, yes.
 In civil rehabilitation proceeding, yes in some cases.
 In straight bankruptcy cases, no.
 Is the priority of their claims adversely affected?



Yes, in some extent.
Other effects
Amount of secured claims are limited to the value of the
collateral.
c) Unsecured Creditors
 Are their rights to commencing legal actions or to collect
their claims subject to a stay or moratorium?
 Yes.
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
Is the priority of their claims adversely affected?
 Yes.
 Other effects
d) Workers
Prority status.
e) Other specific type of creditors in your country
Administrative expences and sovereign debts.
D) Matters specific to formal court-based reorganizations
i) Who is responsible for formulating the plan or scheme?
In civil rehabilitation cases, debtors or a trustees if appointed.
In corporate reorganization cases, trustees.
ii) What are the main sources of funding for the debtor during the
formal workout process and what protection is given to the
providers of such funds?
Reserved money, proceeds of accounts receivables collected after
the filing of the petition and new money lending.
iii) Are there any time limits within which a plan or scheme must be
formulated?
Yes.
iv) Describe the voting procedures and approval requirements.
a) Are creditors divided into separate classes?
In civil rehabilitation cases, no.
In corporate reorganization case, yes.
b) For approval, what percentages of amount of debts and of
creditors are required? (eg. 2/3 of amount, majority in number)
In civil rehabilitation cases, simple majority in amount and
number.
In corporate reorganization case, for unsecured creditors simple
majority, for secured creditors 2/3 for extension only and 3/4 for
other impairments both in amounts.
c) Is court approval necessary?
Yes.
v) Is the approved plan or scheme binding on all creditors?
Yes.
vi) What are the rights of those who voted against the scheme?
Impaired according to approved plan.
vii) What happens when a plan or scheme is not approved?
Converted to straight bankruptcy cases mostly.
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8.
Out-of-Court Workouts
A) Are out-of-court workouts common? More common than formal
court-based reorganizations?
Yes.
B) What are the incentives/disincentives for using out-of-court
restructuring mechanisms rather than formal court-based mechanisms?
Speed and less expensive. For big cases, less adversely affects to
reputation.
C) Are out-of-court mechanisms controlled/administered by the private
sector or the public sector?
Private.
i) Are asset management companies (“AMCs”) involved in the
process? If so, what are their roles?
No.
ii) Are there any specific procedures mandating government or any
public body intervention in certain workouts (eg, for banks or where
fraud is discovered?)
No.
iii) Is there a sufficient pool of professionals competent and experienced
in handling out-of-court workouts?
Yes, but not enough.
D) Are the out-of-court mechanisms formal or informal?
Yes.
i) Are there any structured informal workout guidelines or procedures
that exist in the country (eg, the London Approach?)
Yes.
E) Who the parties are to out-of-court restructuring agreements?
Banks and other financial institutions mostly.
F) What are the carrots (incentives) and sticks (disincentives) for
negotiating and reaching a consensus?
Economical reasonableness.
G) What are the frequently used devices for facilitating rescue (eg,
debt/equity swaps, delayed payment, etc.) or for providing exit
strategies for creditors (eg, debt trading)?
Partly exemption or release of debts, extension, debts to equity swaps.
H) What are the main sources of funding during the out-of-court workout
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process and what protection is given to the providers of such funds?
Former lenders of big amounts. Priority status.
I) To what extent do secured creditor remedies (eg, receivership) lead to
out-of-court rescues?
No receivership system in Japan.
J) What options are available to creditors should the out-of-court workout
negotiations ultimately collapse?
Court supervised bankruptcy and reorganization proceedings.
K) Are there any specific legislative provisions that give effect to the
out-of-court workout plan in a formal judicial restructuring proceeding
(eg, a “prepack”)?
No.
L) Please give an assessment of the overall effectiveness and fairness of the
out-of-court workout procedures.
Multi-creditors out of court workout according to the Guideline adopted
in 2001 by National Bank Association, Federation of Managers Groups
and other relevant organizations is effective.
See attached paper entitled “how to be structure in Japan”.
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Cross-Border Insolvency
The new Law for recognition and assistance to foreign insolvency
proceedings which adopted UNCITRAL Model Law was enacted in Japan in
2001.
A) Outbound issues – Describe the problems that may arise in formal
court-based reorganizations or in out-of-court workouts when the
debtor company in your jurisdiction has assets outside the
jurisdiction.
Assets located in oversea countries consist of estate of debtor
corporations.
B)
Inbound issues – Describe the problems that may arise in formal
court-based reorganizations or in out-of-court workouts when the
debtor company in another jurisdiction has assets in your jurisdiction.
Foreign representatives may request to recognize and assist the
foreign proceeding in Tokyo District Court.
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