Vol 5 (2008) - Issue 5

Article preview

Tools for Corporate Reorganisations in Japan

1. Introduction

Japanese insolvency laws and practice have changed significantly in the past ten years. The enactment of the Civil Rehabilitation Act in 1999 was the starting point for such changes. Since then, the new Law for Recognition and Assistance for Foreign Insolvency Proceedings was enacted in 2000, and the Corporate Reorganisation Act and the Bankruptcy Act were renewed in 2002 and 2004 respectively. In addition, the Company Law came into effect in 2006, abolishing the major part of the Commercial Code relating to corporations and providing many tools for corporate restructuring.

Along with such law reforms, the practice of dealing with distressed companies has changed. It has become the trend for a debtor corporation to file for insolvency protection at an early stage, and for the courts in Japan to open insolvency cases more easily. In addition, the Industrial Revitalisation Corporation of Japan, incorporated in 2003 induced the practice of corporate restructuring through an out-of-court workout at an early stage.

This article provides an overview of the tools available in Japan to reorganise corporations in financial trouble.

2. Guideline for the out-of-court workout

Out-of-court workout is a useful tool for reorganising a debtor corporation with excessive debts without impairing trade creditors’ claims, which would deteriorate the value of the business. However, it would be difficult to achieve fair and transparent out-of-court workout with no guidelines upon which interested parties could rely. In order to provide a tool for a fair and transparent out-of-court workout, the Guideline for Out-of-Court Workouts (‘the Guideline’) was introduced in September 2001 by a committee established by the National Bankers Association, the Federation of Economic Organisations, and other relevant organisations associated with the Financial Services Agency, the Ministry of Finance, the Ministry of Economy, Trade and Industry, the Bank of Japan and the Deposit Insurance Corporation.

2.1 Requirements for a restructuring plan under the Guideline

The Guideline was designed to clear the huge number of non-performing loans owed to multiple banks and financial institutions and to restore the debtor corporation to viability. Although the Guideline refers to the INSOL 8 principles for international multi-creditors, it also includes requirements for a business restructuring plan as well as procedural rules. The requirements for the plan include the following:

(i) the insolvency and negative earnings of the debtor corporation should be cleared within three years of acceptance of the proposed plan;
(ii) the interests of the debtor’s controlling shareholders should, in principle, be divested and the proportional interest of the existing shareholders should be reduced or eliminated altogether through a capital reduction and subsequent capital increase;
(iii) the debtor’s current managers should retire upon the acceptance of the proposed plan;
(iv) the plan should, in principle, emphasise equal treatment of all relevant creditors; and
(v) the plan should be economically reasonable, including the expectation of a larger recovery in comparison to the envisioned plans under the statutory insolvency proceedings.

2.2 Procedural rules

According to the Guideline, the workout begins with the debtor corporation applying to a ‘main bank’ for a multi-bank out-of-court workout. The application is accompanied by a proposed reorganisation plan as well as financial documents to explain reasons for its financial difficulties, and the feasibility of the plan. Debt and business restructurings should be formulated in the proposed plan. The main bank then goes through the application documents to determine whether the statements are accurate and the plan is feasible and reasonable.