Vol 6 (2009) - Issue 1

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Out-of-Court Workout based on the Guidelines and the Alternative Dispute Resolution Scheme for Business Reorganisation in Japan

1. Out-of-court workout with multiple financial creditors

In Japan, there are two statutory reorganisation schemes, the Civil Rehabilitation Law of 1999 and Corporate Reorganisation Law of 2002. In addition to these two statutory reorganisation schemes, a Commission was established and organised by the National Bankers Association, the Federation of Economic Organisations and other relevant organisations which, in turn, established the Guidelines for the Out-of-Court Workout in 2002. The Guidelines were drafted referencing the INSOL 8 Principles and have been utilised to reorganise many distressed corporations.

1.1. Process of out-of-court workout based on the Guidelines

The procedure established by the Guidelines begins with the debtor corporation applying together with its ‘main creditor bank’ for a multi-creditor out-of-court workout in cases where a number of financial creditors possess lending exposures. The application must be accompanied by documents that describe the causes of the debtor becoming financially distressed and a proposed reorganisation plan. The proposal should include not only a business reorganisation plan but also a debt restructuring plan. The ‘main creditor bank’ then investigates the documents and the reorganisation plan to determine whether the descriptions and statements are accurate and the proposed plan is both feasible and reasonable. If the ‘main creditor bank’ determines that the criteria have been met and agrees that the plan can be acceptable to all other non-main banks whose debts are to be forgiven under the reorganisation plan, it will issue a notice of ‘standstill’ to all other ‘relevant financial creditors’ and convene the first meeting of creditors. The ‘relevant creditors’ are those creditors whose claims are requested to be waived in the proposed plan. They usually consist of banks and other financial institutions, but trade creditors with significant exposures may be included in the category of ‘relevant creditors’ when the waiver of their trade claims are necessary to accomplish effective debt restructuring. The meeting must be held within two weeks after the notice of standstill was issued.

At the first meeting of creditors, unanimous consent among creditors must be obtained to extend the standstill period. If they all agree, then a creditors’ committee may be elected. The committee can designate professionals (including lawyers, accountants and consultants) to examine the accuracy of the financial statements and the reasonableness and feasibility of the proposed reorganisation plan. During the standstill period, the relevant creditors should refrain from any collection efforts, enforcement or realisation of secured rights, improvement of their exposures in relation to other relevant creditors, and should maintain the original balance of their claims. Before the end of the third month after the first meeting was held, a second meeting must take place at which all relevant creditors are to indicate whether they accept the plan or not. If all creditors whose rights will be impaired by reorganisation plan grant their consent to the proposed plan, the reorganisation plan becomes authorised and the debts owed to the relevant creditors will be changed according to the provisions contained in the plan. If one or more creditors refuse to agree to the plan, the outof- court workout process is terminated and the debtor should decide whether to file a petition with a court to begin statutory insolvency proceedings.