Vol 12 (2015) - Issue 4

Article preview

The Recent History of Business Reorganisation Workouts in Japan

1. Workout in 1900s
The Composition Law (CL) was enacted in 1922 incorporating elements of the Austrian Composition Law, which is similar to the German Composition Law of 1923. However, the CL was not deemed as a good law since it induces debtors to escape debt obligations. Courts are reluctant to issue stay orders fearing they may become abused by debtors absconding with their hidden assets immediately after the interim stay orders.
In many cases, a number of workouts were conducted out of court improperly under the initiative of immoral groups that intend to defraud creditors and debtors dealing with remaining debtors’ assets unfairly. The Company Law was amended incorporating the English-style Corporate Arrangement in 1938. Because Japanese wartime started at that time, the Arrangement was rarely used.
In 1952, Corporate Reorganisation (CR) Law was enacted which reflected Chapter X of the US Former Bankruptcy Act. The CR was used for bigger business corporations whereas the Arrangements were used for small and medium-sized companies (SMEs). When nearly all creditors whose claims are more than 90% in value of the aggregate amount of all debts owed by the debtor agreed to the plan, then the plan approved the court and the approved Corporate Arrangement Plan becomes effective, but it does not bind dissenting minority creditors in order for their claims not to be impaired. Due to the insufficiency of statutory reorganisation schemes, private out of court workouts (OOCW) were conducted with varying degrees of fairness. Where there was professional involvement, the OOCW were conducted more fairly.

2. A series of insolvency law reforms
Japan was the last runner among industrial countries to reform insolvency laws which started in the mideighties. The Insolvency laws reform made during the late nineties and early 2000s are as follows:
– The Civil Rehabilitation Law in 1999;
– An Act to Approve and Assist Foreign Insolvency Proceedings in 2000;
– The New Bankruptcy Law in 2004; and
– The New Corporate Reorganisation Law in 2002.
– Special Liquidation Proceeding was reformed and Corporate Arrangement was abolished in 2006.

3. Guidelines for out of court workout
In order both to expedite disposition of non- and poorly performing loans (NPLs) and to reorganise ailing business corporations, I chaired a Drafting Committee assembling Japanese Bankers’ Association, Japanese Federation of Managers’ Associations and other relevant organisations to create the ‘Guidelines for Out of Court Workout’ (GL) assisted by the Financial Service Agency (FSA), the Bank of Japan (BOJ) and other governmental agencies. The GL was drafted in line with the London Approach and the INSOL 8 Principles.
In addition to the INSOL Principles, the GL sets out substantial requirements for reorganisation plans as well as procedural matters. For example, the GL stipulates that the debtor company must restore its profitability within three years and its total assets must exceed total debts within three years after the completion of the OOCW process by the GL. In addition to the best interest test, creditors should receive more payments than those of hypothetical statutory reorganisation plans such as corporate reorganisation or civil rehabilitation plans.
Close to fifty big business corporations were reorganised using the GL. They include Toyo Shutters, Hakodate Dock and Shipyard, Nippon Yakin, Hazama Construction, Fujita Construction, Seibu Department Store and others.