Vol 4 (2007) - Issue 1

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The Japanese Out-of-Court Workout Restructuring and Its International Implications

1. Recent reforms of the Japanese insolvency laws
Japan reformed and brushed up its insolvency laws between 1999 to 2005. The Civil Rehabilitation Law (Civil RL) was enacted in 1999 replacing the Composition
Law of 1922. The Law on Recognition and Assistance to Foreign Insolvency Proceedings was enacted in 2000, abolishing notorious territorialism and adopting most of the provisions included in the UNCITRAL Model Law. In 2002, a new Corporate Reorganisation Law (Corporate RL) revised entirely the Corporate Reorganisation Law of 1952. The new Bankruptcy Law (BL) was enacted in 2002 completely reforming the Bankruptcy Law of 1922. Finally, the new Company Law (CL) abolished the Corporate Arrangement Procedure which had been provided in the Commercial Code (CC) since 1938. This occurred as a consequence of the Civil RL and the new Corporate RL making the provisions of the Corporate Arrangement Procedure of the CC unnecessary in the wake of business reorganisations. Also, the CL revised the Special Liquidation Procedure which was first adopted in 1938 and included in CC.
These law reforms were made to speed up insolvency proceedings, to make it easier to use these statutory proceedings at early stages and to meet advanced insolvency practices developed in industrial countries in recent years.
In Japan, we have two reorganisation proceedings, the civil rehabilitation proceeding and the corporate reorganisation proceeding. Whereas the Civil RL is designed to rehabilitate over-indebted individuals or small and medium-sized corporations (SMEs), the Corporate RL is designed to reorganise bigger business corporations undergoing financial difficulties. The debtor in possession is able to continue its business operation and dispose of its assets in a civil rehabilitation proceeding. But in a corporate reorganisation proceeding, the debtor
is deprived of its power to operate its business and dispose of its assets. It is usually replaced by a court-appointed trustee. Only in exceptional cases would a court appoint an incumbent manager as a trustee. For example, a manager who has been designated as such to turnaround a troubled corporation before the filing of the petition to commence the corporate reorganisation proceeding, may be appointed as a trustee by the court. In a corporate reorganisation proceeding, after the commencement of the procedure, secured creditors
are automatically stayed to realise their secured rights. Upon the debtor’s request, a court may prohibit a secured creditor from commencing or continuing the realisation procedure of its secured rights. In most corporate reorganisation cases, rights of equity security holders are wiped out when creditors’ rights are impaired,but owners of enterprises may remain in their position in civil rehabilitation cases.
The new Company Law of 2005 also provides several useful tools to reorganise troubled business corporations, including 100% amortisation of issued stocks by a resolution adopted by the majority of the stockholders at a meeting convened in the framework of an out-of-court workout procedure, without the need to resort to any statutory insolvency proceeding.