Insolvency and directors' duties in Japan: overview

Q&A guide to insolvency and directors' duties in Japan.

The Q&A global guide provides an overview of insolvency from the perspective of companies that are operating within a domestic and/or international group of companies, and considers the various complexities that this can introduce into insolvency procedures. It also has a significant concentration on duties, liabilities, insurance, litigation, and subsequent restrictions imposed on directors of an insolvent company.

To compare answers across multiple jurisdictions, visit the Insolvency and Directors’ Duties Country Q&A tool.

This Q&A is part of the Insolvency and Directors’ Duties Global Guide. For a full list of contents, please visit www.practicallaw.com/internationalinsolvency-guide.

Contents

Corporate insolvency proceedings

1. What are the main out-of-court and court-sanctioned insolvency proceedings involving a liquidation of the company's assets?

The court procedures for insolvency involving liquidation in Japan are bankruptcy proceedings (governed by the Bankruptcy Act, Law No. 75 of 2004) and special liquidation proceedings (governed by a section of the Companies Act, Law No. 86 of 2005).

There are no particular proceedings for out-of-court liquidation, but there are such statutes for business restructuring proceedings. Out-of-court liquidations are usually executed by lawyers.

Bankruptcy proceedings

Bankruptcy proceedings (hasan-tetsuzuki) are similar to the proceedings prescribed in Chapter 7 of the United States Bankruptcy Code. In bankruptcy proceedings, a court-appointed trustee (hasan-kanzai-nin) disposes of the assets of the debtor, and administers the bankruptcy estate (Article 78, paragraph 1, Bankruptcy Act). The trustee makes distributions to creditors in accordance with the order of priority prescribed by law during the final stage of the proceedings (Articles 193 and 194, Bankruptcy Act).

The debtor will be sanctioned if it does not comply with the Bankruptcy Act.

Unsecured creditors cannot take any actions for debt collection during the bankruptcy proceedings, and there are no criminal sanctions (even if the bankrupt does not comply with a court-order to prohibit such act).

Special liquidation

Special liquidation (tokubetsu-seisan-tetsuzuki) is a procedure where insolvent stock companies (kabushiki-kaisha) can be liquidated. Unlike in bankruptcy proceedings the:

  • Debtor maintains the power to dispose of its assets while the liquidation process is performed by the liquidator.

  • Competent court does not appoint a trustee for a debtor filing for special liquidation.

A liquidator is appointed automatically from among the directors, except in cases (Article 478, Companies Act):

  • Where a liquidator is appointed in advance by virtue of the company's articles of association.

  • Where a liquidator is appointed in a shareholders meeting.

The debtor will make distributions to creditors in accordance with either:

  • The settlement agreements with each creditor (wakai-gata).

  • A plan that has been confirmed by the court and approved by a two-thirds majority vote of the creditors (based on the amount of claims) at a creditors' meeting (kyoutei-gata).

The liquidator can be sanctioned if he/she does not comply with the regulation of the procedure.

 
2. Are there statutory proceedings allowing for a rescue/restructuring of the debtor company's operations and debts?

Civil rehabilitation proceedings (minji-saisei-tetsuzuki) and corporate reorganisation proceedings (kaisha-kousei-tetsuzuki), are provided in separate statutes. Both procedures are similar to the proceedings prescribed in Chapter 11 of the United States Bankruptcy Code.

Civil rehabilitation proceedings. As a general rule, in civil rehabilitation proceedings, the debtor maintains the power to manage its business and dispose of its assets even after an order for rehabilitation proceedings has been made (Article 38, paragraph 1, Civil Rehabilitation Act). This is referred to as the debtor-in-possession (DIP) system. In a civil rehabilitation proceeding, only unsecured claims are regulated by the proceeding.

Corporate reorganisation proceedings. In contrast, in corporate reorganisation proceedings, the debtor's business is managed by a court-appointed trustee (kousei-kanzai-nin) (Article 72, paragraph 1, Corporate Reorganisation Act). Unlike civil rehabilitation proceedings, this is a procedure that impairs not only the claims of unsecured creditors, but also the claims of secured creditors and preferred claims.

In both procedures, distributions to creditors can only be made after a rehabilitation plan or a reorganisation plan has been approved by a statutory majority at a creditors' meeting, and has been confirmed by the court.

Out-of-court workouts. In addition to insolvency proceedings, some kinds of out-of-court workouts (shiteki-seiri) are provided in the statutes. One category for this utilises special public organisations, which help and promote business reorganisation, such as the Regional Economy Vitalization Corporation of Japan (REVIC) or the SME Business Rehabilitation Support Co-operative. The other category provides proceedings, as well as qualification, of the organisation which presides over the proceeding. The Industrial Competitiveness Enhancement Act provides so-called "Turnaround ADR". In Turnaround ADR, turnaround professionals provide mediation services in order to facilitate an agreement between a debtor and its creditors (which are generally financial institutions), by offering professional advice from a fair and neutral standpoint.

 
3. What are the general requirements for commencing insolvency proceedings?

Bankruptcy Proceedings

Bankruptcy proceedings are available for both individuals and corporations, and can be commenced if either (Article 15 and 16, Bankruptcy Act):

  • A debtor is continuously unable to pay past-due debts because of an inability to make payment.

  • A debtor's debts exceed its assets.

However, a petition for the commencement of bankruptcy proceedings will be dismissed if the court discovers that (Article 30, Bankruptcy Act):

  • The expenses for the bankruptcy proceedings have not been prepaid.

  • The petition for commencement of the bankruptcy proceedings has been filed for an unjustifiable purpose, or has not been filed in good faith.

Special liquidation

Creditors, liquidators, company auditors, or shareholders can file a petition for the commencement of special liquidation with respect to a liquidating company. If the court finds that there is a suspicion that a liquidating stock company is insolvent (that is, where its assets are not sufficient to fully discharge its debts) or that there are other circumstances prejudicial to the implementation of the liquidation, it will order the commencement of a special liquidation, in response to the filing (Article 510 and 514, Companies Act).

Civil rehabilitation proceedings

Civil rehabilitation can be commenced if there is a possibility that a debtor will be faced with a situation constituting grounds for commencement of bankruptcy proceedings, or if a debtor is unable to pay its past-due debts without significantly hindering the continuation of its business (Articles 21 and 25, Civil Rehabilitation Act).

A commencement order will generally be issued within approximately one week from the date when a petition for commencement of civil rehabilitation proceedings is filed.

However, a petition for the commencement of civil rehabilitation proceedings will be dismissed if the court finds that (Article 25, Civil Rehabilitation Act):

  • The expenses for the civil rehabilitation proceedings have not been pre-paid.

  • Bankruptcy proceedings or special liquidation proceedings are pending before the court, and enforcement of either of the proceedings corresponds with the common interests of the creditors.

  • It is apparent that a proposed rehabilitation plan is unlikely to be prepared or approved or that the rehabilitation plan is unlikely to be confirmed.

  • The petition for commencement of the civil rehabilitation proceedings has been filed for an unjustifiable purpose or has not been filed in good faith.

Corporate reorganisation proceedings

Corporate reorganisation proceedings are only applicable to stock companies, and can be commenced under the same circumstances as civil rehabilitation proceedings (see above). A commencement order will generally be issued within approximately one month from the date a petition for commencement of corporate reorganisation proceedings is filed.

However, a petition for commencement of corporate reorganisation proceedings will, be dismissed if the court discovers that (Article 41, Corporate Reorganisation Act):

  • The expenses for the corporate reorganisation proceedings have not been prepaid.

  • Bankruptcy proceedings, civil rehabilitation proceedings, or special liquidation proceedings are pending before the court, and enforcement of one of the proceedings corresponds with the common interests of creditors.

  • It is apparent that a proposed reorganisation plan outlining the measures for the continuation of business is unlikely to be prepared, approved or confirmed.

  • The petition for commencement of the corporate reorganisation proceedings has been filed for an unjustifiable purpose or has not been filed in good faith.

 

Insolvency of corporate groups

4. Are there joint insolvency proceedings available that can apply to a whole group of companies? Do all members of a corporate group have to proceed under the same type of insolvency proceeding?

Joint proceedings, in the form of a substantive consolidation of insolvency proceedings (as found in the United States Bankruptcy Code), are not permitted in Japan.

In addition, the insolvency cases for each member of a corporate family do not require a joint proceeding (for example, a single court file, a single judge, a single list of creditors, or a single notice list). The insolvency cases for each family company are independent from each other and can proceed separately.

However, practically speaking, insolvency proceedings for each member of a corporate family are often to be managed jointly, in the form of concurrent processing before a single court and judge.

In bankruptcy proceedings and civil rehabilitation proceedings, the district courts, in principle, have jurisdiction based on the location of (Article 5, paragraphs 1 and 2, Bankruptcy Act and the Civil Rehabilitation Act):

  • Each debtor's main place of business.

  • The general venue of the company.

  • The debtor's property.

In corporate reorganisation proceedings, the district courts, in principle, have jurisdiction based on the location of (Article 5, paragraphs 1 and 2 of the Corporate Reorganisation Act):

  • Each debtor's main place of business.

  • The head office of the company.

In addition, insolvency proceedings provide for certain special rules regarding corporate families. A company or a representative can file a petition with the district court where the insolvency proceedings of a parent company, subsidiary company, consolidated company, or a representative are pending (Article 5, paragraphs 3 to 6, Bankruptcy Act and the Civil Rehabilitation Act; Article 5, paragraphs 3 to 5, Corporate Reorganisation Act).

Under the Bankruptcy Act and the Civil Rehabilitation Act, if a debtor has 1,000 or more creditors, the court shifts jurisdiction to the Tokyo District Court or the Osaka District Court (Article 5, paragraph 9, Bankruptcy Act; Article 5, paragraph 9, Civil Rehabilitation Act). In addition, any corporate reorganisation case can be filed directly with the Tokyo District Court or the Osaka District Court (Article 5, paragraph 6, Corporate Reorganisation Act).

Therefore, when a family of companies meets these conditions, their insolvency proceedings can be filed with the same court and be managed by a single judge. This is even if the members of the corporate family are organised under, or operate in, different locations, and the courts do not otherwise have jurisdiction based on the companies' main places of business, the locations of the business venue, or the locations of their property. These proceedings are recommended to save work and time (for example, in concurrent proceedings, creditors' meetings for a family of companies are in principle held at the same time and place).

Despite the above, a list of creditors and a notice list are always prepared separately for each insolvent company.

All members of a corporate family do not have to proceed under the same type of proceeding. They can each choose suitable individual procedures, and it is possible in certain cases for one or more of the members to choose not to file for insolvency proceedings. It is common for some members of a corporate family to proceed under the Civil Rehabilitation Act (restructuring procedures), whereas others that are not expected to recover will proceed under the Bankruptcy Act (liquidation procedures).

 
5. Can the same insolvency office holder(s) administer the assets and the liabilities of the entire corporate group? Is a court hearing required to determine whether administration by the same individual(s) is appropriate and, if yes, does notice have to be given to creditors?

Japanese law permits a single trustee to administer the assets and liabilities of an entire corporate family. As a matter of practice, the courts usually appoint the same person(s) as trustee(s) of the corporate family if they are proceeding under the same law unless there is a specific conflict between members of the corporate family or other reasons to appoint separate administrators.

In Japan, courts generally do not avoid appointing a single person as trustee of an entire corporate family simply because a parent company has an outstanding loan to a subsidiary or because a parent company has the guarantor's right of indemnity against a subsidiary. The courts tend to prioritise efficiency and have confidence in the trustees' decisions and discretion about balancing conflicts. However, when there is a severe conflict between creditors of family companies and on the creditors' request, there is a possibility that the court will appoint a different trustee for each family company.

The court does not usually hold a hearing when appointing a trustee. However, in practice, a preliminary consultation before filing a petition for insolvency proceedings is recommended in order for the court to become familiar with the case. Based on the results of the review of the written materials and the consultation, the court will attempt to understand the scale and difficulty of the case. In addition, the court decides who is an appropriate person to be appointed as a trustee and whether or not administration by a single party is appropriate for the case. This does not mean that a hearing is never held. The court, at its own discretion, can order a hearing to hear from creditors, debtors, trustee candidates, and others who may be able to help the court decide on the matter. Therefore, if there is a serious conflict between the creditors of a family of companies, and one of the creditors files a motion to hold a hearing to appoint a trustee, it is theoretically possible for a hearing to be held. However, whether a hearing is held is left to judicial discretion, so interested parties (not only unsecured creditors, but also secured creditors) typically cannot object or appeal the court's decision on a hearing. Also, even when a hearing is held, there is no requirement to give notice to creditors.

 
6. If the law does not permit a single insolvency office holder, are there provisions allowing different office holders to co-ordinate with each other so that the value of the group's assets can be maximised?
 
7. Can professional advisers work for the entire corporate group?

Under the Bankruptcy Act and the Corporate Reorganisation Act, once bankruptcy proceedings or corporate reorganisation proceedings have been commenced by a court, the court will appoint a trustee (hasan-kanzai-nin orkousei-kanzai-nin) at the same time. However, in civil rehabilitation proceedings, the debtor generally remains in control and has the power to manage its business and dispose of its assets after the commencement of the proceedings. In most cases a supervisor (kantoku-iin) can still be appointed by the court under the Civil Rehabilitation Act in order to oversee the conduct of the debtor (Article 54, paragraph 1, Civil Rehabilitation Act).

There is no express provision requiring that a trustee or a supervisor be appointed from amongst parties that have no interest in the case. In practice, the entire corporate family's insolvency proceedings are generally managed by the same trustees and supervisors for the sake of efficiency.

Conflict of interest issues rarely arise and often the same law firm, or its attorneys, can be appointed as trustees and/or supervisors. In addition, accounting or auditing firms are hired by a trustee or debtor in some cases. However, they are also engaged in the accounting or auditing of the entire corporate family without a "Chinese wall" (which is a business term describing an information barrier within an organisation that is set up to prevent exchanges or communication that could lead to conflicts of interest). In this context, no conflict issues under the code of professional conduct of attorneys or accounting and auditing firms are considered to exist.

In addition, an examiner (tyousa-iin) which may be appointed by the court if necessary to investigate the debtor company under the Civil Rehabilitation Act and the Corporate Reorganisation Act, must be selected from amongst parties that have no interest in the case and are suitable for performing the duties of an examiner. However, as working for another family company is not considered to be a conflict of interest, the same examiner is often appointed for the entire corporate family.

 
8. Are the rules regarding members of a corporate group transferring assets to one another different when one or more members are insolvent?

There is no direct rule governing transfers of assets between members of a corporate family. Therefore, transfers of assets between members of a corporate family are acknowledged in principle, and as a result of this understanding, inter-company loan systems are adopted in practice by a lot of corporate groups. However, in the following cases, a director must disclose the material facts of the relevant transactions at a shareholders meeting and obtain the approval of the shareholders' (Article 356, paragraph 1, Companies Act):

  • If the director intends to carry out any transactions with the stock company for himself or for a third party.

  • If a stock company intends to guarantee debts of a director or to otherwise carry out any transactions with a person other than the director that results in a conflict of interest between the stock company and the director.

For example, under Article 356 of the Companies Act, when a director represents a parent company and conducts a transaction with a subsidiary of which he is a director, the director must disclose the material facts of the transaction to the shareholders at a shareholders' meeting or board of directors' meeting, and obtain their approval. Therefore, a catch-all approval is obtained when a corporate group adopts an inter-company loan system practically.

If a corporate group is financially distressed, there is no direct rule with regard to transfers of assets between members of a corporate family. However, in cases where members of a financially distressed corporate family transfer assets before the commencement of insolvency proceedings, there is a related rule known as the avoidance rule (Chapter VI, section 2, Bankruptcy Act; Chapter VI, section 2, Civil Rehabilitation Act; Chapter III, section 4, Corporate Reorganisation Act). In general, a trustee (in bankruptcy proceedings and corporate reorganisation proceedings) or a court-appointed supervisor (in civil rehabilitation proceedings) has the power to invalidate acts taken by the debtor before the commencement of the relevant insolvency proceedings. This is when the proceedings are considered as prejudicing equality amongst the creditors and/or are against the nature of the insolvency proceedings. Any payment or provision of a security interest to another group company can easily be invalidated. This means that the holder of the invalidation right must prove that the creditor was aware of the debtor's insolvency at the time of the act, however, if the creditor is an insider (such as a director, executive officer, inspector, auditor, liquidator, or any other person of equivalent status), the creditor will be presumed by law to have known, at the time of the act, that it may prejudice other creditors. In addition, in cases where the majority of voting rights of all shareholders of the debtor are held independently by its subsidiary or jointly by a parent and its subsidiary, the parent will be presumed by law to have known that fact.

When a member company is in the course of insolvency proceedings, the transfer of its important assets is generally restricted without the consent of the supervisory commission or the permission of the court.

 
9. How are claims of one member of a corporate group against other members of the group treated in a formal insolvency processes for those members?

There is no unified rule or regulation concerning how to treat claims of one member of a corporate family against other members of the corporate family.

There is no difference between inter-company claims and other types of claims. In principle, courts and trustees treat inter-company claims in the same way as third-party claims. Therefore, there is theoretically no statutory subordination of inter-company debt in insolvency proceedings in Japan.

However, practically, it is common for claims of one member of a corporate family against other members of the corporate family to be subordinated in the form of a lower dividend rate in the rehabilitation/reorganisation plan. This is for the purpose of obtaining the consent of the other claimants to the rehabilitation/reorganisation plan. The basis of this treatment is provided in Article 168 of the Corporate Reorganisation Act and Article 155 of the Civil Rehabilitation Act. These articles provide that the details of the amendment of rights under a rehabilitation/reorganisation plan must be equal amongst the rehabilitation/reorganisation creditors. However, this does not apply in cases where:

  • A disadvantaged rehabilitation/reorganisation creditor consents.

  • Fairness and equality will be maintained despite differentiating between creditors.

It is possible for a debtor or a trustee to waive inter-company claims due to the need to obtain approval from other lenders to its proposed civil rehabilitation plan or corporate reorganisation plan.

In bankruptcy proceedings, a trustee can enforce inter-company claims and is not required to waive the claims. However, trustees sometimes request that the parent company does not file or withdraws its claim. The reasoning for the trustees' decision is the "good faith principle" or as a set-off for claims the subsidiary may have against the parent company.

 

Substantive consolidation

10. Is pooling of assets and liabilities of some or all members of a corporate group allowed, so that a creditor of one member becomes, in essence, a creditor of all members?

The Japanese insolvency laws do not incorporate a system for the pooling of assets and liabilities of all members of a corporate family.

The insolvency proceedings of a parent and its subsidiaries can be combined under a single administration in Japan. However, there are no formal procedures that combine the assets and liabilities of the companies into one forum, for example by pooling and transferring assets from one administration to another. In some cases, a trustee or a debtor in possession realise a consolidation using M&A or a company split. In addition, as a matter of practice, particularly in corporate reorganisation cases, there are many exceptions. Some reorganisation plans under which family companies merge into one company provide for the:

  • Same payment conditions (for example, percentage share and timing of payment) amongst the family of companies.

  • Integration of a principal claim and a guarantee claim (the plan allows only major claims).

  • Denial of the exercise of a guarantor's right of indemnity.

However, there are many theoretical arguments concerning the stipulations.

 
11. What proceedings are required for the court to order the pooling of assets and liabilities?

The Japanese insolvency laws do not incorporate a system for the pooling of assets and liabilities of all members of a corporate family.

 
12. Is the partial pooling of assets and liabilities allowed? What conditions apply?
 
13. If the pooling of assets and liabilities is permitted, are there any protections for certain types of creditors?
 

Secured creditors

14. How are secured creditors treated in relation to a group of companies?

If a creditor has a security interest in the assets of one member of the family, and a guarantee from another member of the family, both claims are valid in the insolvency proceedings for the entire family. The creditor can participate in all of the insolvency proceedings with the full amount of the claim at the time of commencement of the proceedings (Article 104, Bankruptcy Act; Article 86, paragraph 2, Civil Rehabilitation Act; Article 135, paragraph 2, Corporate Reorganisation Act). When the creditor participates in the guarantor's insolvency proceedings, the creditor does not have to deduct a portion of the claim that can be satisfied through the exercise of security. However, as a matter of course, the creditor cannot receive payment over the amount of the claim. In addition, particularly in corporate reorganisation cases, there are many exceptions. Some reorganisation plans under which family companies merge into one company stipulate the:

  • Same payment conditions (for example, percentage share and timing of payment) amongst the family of companies.

  • Integration of a principal claim and a guarantee claim (the plan allows only major claims).

  • Denial of the exercise of a guarantor's right of indemnity.

 

Insolvency proceedings for international corporate groups

15. What extra considerations are necessary if one or more members of the corporate group is incorporated under or governed by the laws of another jurisdiction?

Members of a corporate family incorporated under or governed by the laws of another country are permitted to file a petition for bankruptcy proceedings and civil rehabilitation proceedings in Japan only when they have a business office or other office or property in Japan. This applies despite the fact that they are subsidiaries of a Japanese company (Article 4, paragraph 1, Bankruptcy Act; Article 4, paragraph 1, Civil Rehabilitation Act). In addition, the members are allowed to file a petition for corporate reorganisation proceedings only when they have a business office in Japan (Article 4, Corporate Reorganisation Act). This does not mean that other members are barred from filing for insolvency proceedings with a court of the country where they are incorporated or governed because the Japanese insolvency laws allow concurrent proceedings in different countries.

 
16. If insolvency/restructuring proceedings are started for corporate group members in different countries, do international treaties or EU legislation apply?

Japan ratified the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (UNCITRAL Model Law) in 1997, to deal with cross-border insolvency cases. Japan also enacted the Act on Recognition and Assistance for Foreign Insolvency Proceedings (RAFIP) in 2000, which was based on the UNCITRAL Model Law. The RAFIP provides for Japanese proceedings to recognise foreign insolvency proceedings, and to give them effect in Japan.

Japan has not ratified any other international treaties concerning insolvency proceedings.

 
17. Do domestic courts typically attempt to exercise jurisdiction over all the assets of a company filing locally (regardless of where the assets are located) or do they limit their jurisdiction to local assets?

Japan expressly abandoned its territorial approach to cross-border insolvency and adopted an approach based on the principle of universality. The courts generally attempt to exercise jurisdiction over the assets of a company filing domestically even if its assets are located overseas (Article 34, paragraph 1, Bankruptcy Act; Article 38, paragraph 1, Civil Rehabilitation Act; Article 72, paragraph 1, Corporate Reorganisation Act).

In addition, after an order to commence insolvency proceedings is made, courts are not allowed to enforce compulsory executions, provisional seizures, and provisional dispositions that are based on a insolvency claim, against property located in Japan and overseas. However, this does not necessarily mean that the insolvency proceedings are enforceable in the foreign country where a debtor's property exists. It is necessary for the foreign country to have a procedure that recognises and assists Japanese courts in disposing and managing assets through its insolvency proceedings.

 
18. Do local courts enforce court orders from foreign jurisdictions that attempt to exercise jurisdiction over assets located in your jurisdiction that are owned by a company subject to foreign insolvency proceedings?

The Act on Recognition and Assistance for Foreign Insolvency Proceedings (RAFIP) enables foreign insolvency proceedings to be effective and recognised with the assistance of Japanese procedures. A Japanese court (that is, the Tokyo District Court) will recognise a foreign insolvency proceeding if a foreign trustee files a petition that meets the legal requirements. In order to achieve the objectives of the RAFIP, the court can order a stay, suspension and revocation of the proceedings, including a:

  • Procedure for compulsory execution, provisional seizure or disposition of assets.

  • Court proceeding in an action relating to the debtor's property.

  • Prohibition of disposition of property and payment.

In addition, the court can decide on a disposition ordering that the debtor's business and property in Japan must be administered by a recognition trustee (syounin-kanzai-nin) and permit it to recognise various powers to meet the objectives of the proceedings in accordance with the RAFIP.

 
19. Can the courts co-operate with foreign courts to co-ordinate the administration of group assets?

It is possible for foreign insolvency proceedings that are commenced in a foreign state and are equivalent to bankruptcy proceedings and civil rehabilitation proceedings, to be taken against the debtor under insolvency proceedings in Japan. Insolvency proceedings provide for co-operation with a foreign trustee who has the right to administer and dispose of the debtor's property in the foreign insolvency proceedings (Article 245, Bankruptcy Act; Article 207, Civil Rehabilitation Act; Article 242, Corporate Reorganisation Act). A trustee or debtor in possession can request that a foreign trustee provides co-operation and any necessary information for the proper implementation of the insolvency proceedings. The trustee or debtor in possession must try to comply with the foreign trustee's request.

The powers of foreign trustees in insolvency proceedings are provided in the Japanese insolvency laws and:

  • A foreign trustee can file a petition for commencement of insolvency proceedings against a debtor if certain conditions are satisfied (see Question 3).

  • A foreign trustee can attend a creditors' meeting and provide opinions in the insolvency proceedings against the trustee or debtor.

  • A foreign trustee can prepare a proposed rehabilitation/reorganisation plan and submit it to the court within the period decided by the court (in civil rehabilitation proceedings or corporate reorganisation proceedings commenced against the debtor). This power is not permitted under the Bankruptcy Act because bankruptcy proceedings are a liquidation procedure.

  • The foreign trustee can receive notice regarding the issue of an order for the commencement of insolvency proceedings, or an order to change or revoke an order.

In addition, foreign trustees can participate in insolvency proceedings while representing a creditor who has not filed a proof of claim (saiken-todokede-syo) but has participated in the foreign insolvency proceedings against the debtor, if the foreign trustees have the power under the laws and regulations of the foreign state. However, a trustee or debtor in possession, representing a holder of a filed claim who has not participated in the foreign insolvency proceedings can participate in the foreign insolvency proceedings (Article 247, Bankruptcy Act; Article 210, Civil Rehabilitation Act; Article 245, Corporate Reorganisation Act).

The courts in Japan do not publish or unofficially use the Guidelines Applicable to Court-To-Court Communications in Cross-Border Cases or any other similar guidelines.

 

Directors' duties

20. Does your jurisdiction encourage or discourage overlapping boards or management teams for separate members of a corporate group?

There is no specific rule concerning overlapping boards or management teams for separate members of a corporate family.

The Japanese insolvency laws and the Companies Act do not encourage or discourage overlapping boards or management teams for separate members of a corporate family. This is an issue left to each company's business judgement.

 
21. What legal consequences are there for the directors of a parent company where they are not directors of the subsidiary but do manage the subsidiary's affairs?

There is no express provision regarding de facto directors or shadow directors under Japanese law. Therefore, if the directors of a parent company manage the affairs of the subsidiary, creditors of the subsidiary cannot enforce rights against the parent company or its management.

However, there are two issues:

  • Firstly, under Japanese labour law (Article 10, the Labour Standards Act, Law No. 49 of 1947), an "employer" refers to any person who acts on behalf of the business operator in matters concerning employees of the business (and not just the business operator or manager of the business). Therefore, if the directors of a parent company manage the subsidiary's affairs relating to employees, the parent company will be regarded as the employer and the directors of the parent company and will directly bear the obligations or responsibilities under Japanese labour law regarding the employees of the subsidiary.

  • Secondly, there is no express provision regarding de facto directors or shadow directors. However, in some exceptional cases, the courts have found that when a person has falsely passed themselves off to the public as the representative of the company and made important decisions on behalf of the company, the person was liable for damages to third parties when they acted in bad faith or with gross negligence (Article 429, Companies Act) (for example, Toho Yakuhin K.K. v K.K. Cherry et al., 1376 Hanrei Jiho 110 (Tokyo Dist. Ct., Sept. 3, 1990)). However, a person who is not a director of a company is not liable to the shareholders and creditors of subsidiaries in normal cases.

 
22. What are the main duties and responsibilities of directors and officers to the company, shareholders and third parties? Do they change when the company becomes insolvent?

Bankruptcy proceedings and corporate reorganisation proceedings

In bankruptcy proceedings and corporate reorganisation proceedings, a trustee has the exclusive right to manage and dispose of the debtor's assets (Article 78, paragraph 1, Bankruptcy Act; Article 72, paragraph 1, Corporate Reorganisation Act). In these circumstances, the duties or responsibilities of officers or directors are generally suspended and become limited to the rights toward the company (for example, the right to call a shareholders meeting). In addition, the right of directors or officers to demand payment or remuneration is suspended.

Civil rehabilitation proceedings

In civil rehabilitation proceedings, where the officers or directors have the authority to manage and dispose of the debtor's assets, the law imposes new duties that differ from the duties outside insolvency proceedings. Article 38, paragraph 2 of the Civil Rehabilitation Act provides that, in cases where civil rehabilitation proceedings have commenced, the debtors (directors, officers or liquidators) owe a duty of fairness and good faith towards their creditors.

There is no specific rule concerning the duties or responsibilities of officers and directors of a family of companies. In addition, there is no specific rule when only one of the related companies is insolvent.

 
23. How are competing duties addressed where directors and officers of different group company members overlap and there are conflicts of interest between the group members?

There is no direct rule addressing cases where competing fiduciary duties of officers and directors of various company family members overlap and conflicts of interest exist between the family members.

However, there is a related rule in the Companies Act of Japan. Directors that have a special interest in the resolution of a meeting of the board of directors cannot participate in the vote (Article 369, paragraph 2, Companies Act). Therefore, when a director represents a parent company and conducts a transaction with one of the parent company's subsidiaries, the director cannot cast a vote on the resolution regarding the transaction.

 
24. What specific types of conduct are in breach of the duties and responsibilities of directors and officers?

When a company becomes financially distressed, officers and directors can be given wide discretion regarding business judgements, including whether they can continue the business without defaulting on obligations to creditors. The directors or officers must be reasonably informed and be reasonable in the process of researching the judgements under the business judgement rule and insolvency proceedings must not have commenced.

The activities or judgements of the officers or directors will not violate their duties and responsibilities unless they exceed the scope of the business judgement rule.

The following types of conduct do not usually violate the duties and responsibilities of officers and directors because the acts typically occur in the course of business within the scope of reasonable business judgements:

  • Failure to take reasonable steps to minimise losses to creditors.

  • Failure to inform creditors of insolvency.

  • Continuing to trade when there is little prospect of being able to pay when due.

However, officers or directors conducting the above acts will be liable to shareholders, creditors and other third parties if they:

  • Had a clear understanding that the company was unable to continue its business.

  • Did not gather appropriate information.

  • Made a decision without appropriate information and the decision was extremely unreasonable.

The following types of conduct can be considered to be within the scope of the reasonable business judgement rule, but they can be avoided by a trustee or debtor after the commencement of insolvency proceedings:

  • Undervaluation of corporate assets in a preference or other transaction to the detriment of creditors.

  • Preferring payment to one creditor as opposed to another when insufficient monies are available to pay both.

In addition, if the acts were performed by officers or directors with malice or gross negligence, it is possible that they would be held liable for the damage caused by their actions.

The misappropriation of corporate assets clearly violates the duties and responsibilities of officers and directors because the acts are unacceptable in the operation of a company.

 
25. What civil and criminal liability exists for directors and officers if they breach their duties and responsibilities?

Civil liability

Article 423 of the Companies Act provides the civil liability of directors to their companies.

Article 429 of the Companies Act provides the civil liability of directors to third parties (including shareholders and creditors) when they have performed their duties in bad faith or with gross negligence.

Criminal liability

Article 265 of the Bankruptcy Act. Under the Bankruptcy Act, a director will be sentenced to imprisonment of up to ten years and/or a penal fine of not more than JPY10,000,000, if (Article 265, paragraph 1, Bankruptcy Act):

  • He acts in a way to cause harm to creditors, regardless of whether occurring before or after the commencement of bankruptcy proceedings.

  • A determination to commence the bankruptcy proceedings with regard to the debtor becomes final.

The same punishment applies to a person who becomes counterparty to transactions that are listed in paragraph 1(iv) of Article 265 of the Bankruptcy Act.

The actions that are considered to cause harm to creditors include:

  • The concealment or destruction of the debtor's property.

  • Falsifying the transfer of the debtor's property or assumption of debts.

  • Altering the debtor's assets and causing harm to the debtor's financial condition.

  • Disposition of the debtor's property that is adverse to creditors.

Similar provisions are also contained in Article 255, paragraph 1 of the Civil Rehabilitation Act and Article 266, paragraph 1 of the Corporate Reorganisation Act.

Article 266 of the Bankruptcy Act. It is an offence (regardless of whether occurring before or after the commencement of bankruptcy proceedings) when the debtor furnishes collateral, or acts for the extinguishment of debt that is not the debtor's obligation, or the manner or timing of which is not the debtor's obligation, with regard to debt against a specific creditor for the purpose of harming other creditors, and a determination to commence bankruptcy proceedings with regard to the debtor becomes final (Article 266, Bankruptcy Act). The debtor will be sentenced to imprisonment of up to five years and/or a penal fine of up to JPY5 million.

Similar provisions are also contained in Article 256, paragraph 1 of the Civil Rehabilitation Act and Article 267, paragraph 1 of the Corporate Reorganisation Act.

Article 270 of the Bankruptcy Act. Article 270 of the Bankruptcy Act provides information about misrepresentations. It is an offence for a person who conceals, forges, or alters the books, documents, or materials of the debtor's affairs and assets for the purpose of harming creditors (regardless of whether occurring before or after the commencement of reorganisation proceedings) and a determination to commence reorganisation proceedings with regard to the debtor becomes final. The applicable penalty is imprisonment of up to three years and/or a penal fine of up to JPY3 million.

Similar provisions are also contained in Article 259 of the Civil Rehabilitation Act and Article 270 of the Corporate Reorganisation Act.

 
26. Is potential personal civil or criminal liability a factor in officers and directors deciding if and when to put the company into a formal insolvency/reorganisation procedure?

In general, the existence of potential personal civil or criminal liability is not a factor for directors to decide on whether to put a company into a formal insolvency proceeding. When a company becomes financially distressed, officers and directors are afforded wide discretion with regard to business judgements, including whether they can continue the business without defaulting on obligations to creditors. Officers and directors would not be subject to civil or criminal liability unless they:

  • Conducted acts with a clear understanding that the company was unable to continue its business.

  • Did not gather appropriate information.

  • Made a decision without appropriate information and the decision was extremely unreasonable.

Therefore the existence of potential personal civil or criminal liability is a limited factor when deciding whether or not to file a petition for insolvency proceedings.

 
27. Is insurance available to protect directors and officers from claims arising while operating a financially distressed company?

Insurance is generally available at realistic premiums unless the officers or directors are engaged in illegal activities (although it depends on the terms and conditions of the insurance).

In addition, availability of insurance is not a factor when deciding whether to put the company into insolvency proceedings. Under the business judgement rule, officers and directors are given wide discretion regarding business judgements, including whether they can continue the business without defaulting on obligations to creditors.

 
28. Can directors and officers resign from their positions if the company becomes financially distressed and what difference will this make to their potential liability?

Officers and directors can resign from their positions even after the company becomes financially distressed. However, resignation itself does not make any difference to their potential liability. Moreover, their obligation still continues where there are no other officers in office, or where there is a vacancy which results in a shortfall in the number of officers prescribed in the articles of incorporation, until a newly elected officer assumes his/her office.

 
29. How common is litigation against directors and officers for violation of their duties after commencement of insolvency/reorganisation proceedings? Is the litigation typically successful?

There are not many cases where lawsuits are filed against officers and directors for violations of their duties after the commencement of insolvency proceedings. There were only 35 petitions (during a seven year period) for the assessment procedure of officer's liability (yakuin-sekinin-satei) that were filed with the Tokyo District Court. In comparison, there were 20,445 petitions for bankruptcy proceedings during the same period.

In petitions for the assessment procedure of officer's liability, a trustee or debtor in possession generally investigates whether or not directors and officers should be held liable and consults with the court in advance. Therefore, once a petition for the assessment procedure of officer's liability is filed, the lawsuits are generally successful.

 
30. What defences against civil and/or criminal sanctions are available to directors and officers?

The main defence is the business judgement rule. The rule also generally applies and shields directors from liability if the directors gather appropriate information and make decisions that are not unreasonable based on that information.

The following can also be defences for officers or directors:

  • Good faith.

  • Due diligence.

  • Reliance on outside consultants or professionals.

  • Exercise of reasonable judgement with intent to preserve the "on going value" of the enterprise.

The defences are helpful for officers or directors to improve the possibility that they will gather appropriate information and make a reasonable decision based on that information.

 
31. If it appears that "going concern values" will result in a higher return to creditors than a liquidation of the assets, can directors and officers be protected if they decide to continue operations to protect the values for the benefit of all creditors?

When a company becomes financially distressed, officers and directors are afforded wide discretion regarding business judgements, including whether they can continue the business without defaulting on obligations to creditors. They are not obliged to file a petition for insolvency proceedings.

Whether or not "going concern values" will result in a higher payout to creditors than a liquidation of assets, or the result is an increase of debt owed to creditors, is not directly relevant to the decision to continue the company's business. This means that protecting the interests of creditors is not widely respected before the commencement of insolvency proceedings, but business judgements are generally respected.

 
32. If a company becomes insolvent, is a director or officer of the insolvent company legally restricted from acting as a director or officer in another company, or from obtaining credit as a promoter of another company?

Even if a company becomes insolvent, officers and directors of the company are not legally restricted from acting as officers or directors in another company unless formal insolvency proceedings are initiated and a trustee is appointed.

 
33. If a director or officer becomes personally insolvent, is he legally restricted from continuing to act as a director or officer of his current company or another company?

Current company

If an officer or director of a company personally files for bankruptcy, this can be grounds for termination of their engagement agreement with their current company (Article 653, Civil Code, Law No.89 of 1896; Article 330, Companies Act). The officer or director will be legally restricted from continuing to serve as an officer or director of their insolvent company on commencement of their personal bankruptcy. However, they can be appointed again as an officer or director after the commencement of bankruptcy (but there are not many cases where this has happened).

Another company

An officer or director is not legally restricted from becoming an officer or director of another company if he becomes personally insolvent.

 

Online resources

Japanese Law Translation Database System

W www.japaneselawtranslation.go.jp/?re=02

Description. The official website maintained by the Ministry of Justice, provides up-to-date English translations of certain Japanese laws and regulations (if the title of a translation of law indicates that the translation is a tentative translation which has not yet been proofread or corrected by a native English speaker or legal translation expert, the translation may be revised in the future).

Judgments of the Supreme Court

W www.courts.go.jp/app/hanrei_en/search?

Description. The official website maintained by the Supreme Court of Japan, provides some English translations of court judgments (at present, this website does not cover all cases). The translations of judgments on this website are unofficial, and the Supreme Court of Japan assumes no responsibility for the accuracy of translations.

Ministry of Economy, Trade and Industry of Japan

W www.meti.go.jp/english/policy/economy/revital/

Description. The official website maintained by the Ministry of Economy, Trade and Industry of Japan, provides documents in English (potentially out-of-date) related to industrial revitalisation policy (including documents about turnaround ADR).



Contributor profiles

Michihiro Mori, Partner

Nishimura & Asahi

T +81 3 5562 8500 (Main), +81 3 5562 8909 (Direct)
F + 81 3 5561 9711
E m_mori@jurists.co.jp
W www.jurists.co.jp/en/

Professional qualifications. Judge, Tokyo District Court, 1995; Staff Attorney, Civil Affairs Bureau of General Secretariat of the Supreme Court, 2000; Judge, Fukuoka District Court, 2003; Attorney at Law, Admitted in Japan, 2005

Areas of practice. Restructuring and insolvency; dispute resolution and labour law.

Recent transactions

  • Filed corporate reorganisation proceeding for Japan Air Lines.
  • Advised on restructuring, filed corporate reorganisation proceedings and was appointed and acted as trustee representative for Hayashibara Group.

Languages. Japanese, English

Professional associations/ memberships

  • INSOL International.
  • International Insolvency Institute.
  • International Bar Association.

Publications

  • Japanese-English Model Work Rules (2nd Edition) (Chuou-Keizaisha) 2015.
  • The Labour and Employee Benefits multi-jurisdictional guide (Japan Chapter) 2011.

Natsuki Taira

Nishimura & Asahi

T +81 3 5562-8500 (Main), +81 3 5562 9094 (Direct)
F + 81 3 5561 9711
E n_taira@jurists.co.jp
W www.jurists.co.jp/en/

Professional qualifications. Attorney at law, admitted in Japan, 2014

Areas of practice. Restructuring and insolvency; labour law and general corporate law.


{ "siteName" : "PLC", "objType" : "PLC_Doc_C", "objID" : "1248142388615", "objName" : "Insolvency and directors duties in Japan overview ", "userID" : "2", "objUrl" : "http://us.practicallaw.com/cs/Satellite/us/resource/6-607-8886?null", "pageType" : "Resource", "academicUserID" : "", "contentAccessed" : "true", "analyticsPermCookie" : "22e97be00:15b0af9e485:-1346", "analyticsSessionCookie" : "22e97be00:15b0af9e485:-1345", "statisticSensorPath" : "http://analytics.practicallaw.com/sensor/statistic" }