Vol 7 (2010) - Issue 6

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Current Trends and Insolvency Cases in Japan

I. Insolvency trends in Japan in 2009
1. Act Concerning Temporary Measures to Facilitate Financing for Small and Medium-Sized Enterprises
The Act Concerning Temporary Measures to Facilitate Financing for Small and Medium-Sized Enterprises (hereinafter the 'Act') was enacted on 30 November 2009 and came into effect on 3 December 2009, to respond to the increasing number of distressed companies due to the economic recession. It is a provisional act, and will expire on 31 March 2011.
The purpose of the Act is to encourage financial institutions to respond flexibly when small and medium-sized companies request postponement of or interest reduction for their loan obligations, while leaving decision-making up to the financial institutions themselves. The Act provides a nonbinding target for financial institutions which the financial institutions are not obligated to meet. However, financial institutions are required to report the number of requests that they accept to the Financial Services Agency, and this likely constitutes a de facto obligation to promote cash flow for debtors by accepting a reasonable number of requests.
For example, according to press releases from the six Japanese mega banks (Mitsubishi Tokyo UFJ, Mizuho, Resona, Sumitomo Trust and Chuo Mitsui Trust), they received a total of 73,000 requests covering a total of JPY 3,300 billion (approximately USD 33 billion) from December 2009 until the end of March 2010. Of these, 48,000 were accepted, totaling JPY 2,500 billion (approximately USD 25 billion), and only 1,400 requests in the amount of JPY 70 billion (approximately USD 0.7 billion) have already been rejected.

2. Number of filings and total amount of debt
There is evidence that debtors' cash flow has improved due to changes in the terms of their loans, under this Act. For example, according to data from Tokyo Shoko Research on Japanese insolvency cases involving more than JPY 10 million (approximately USD 0.1 million) in total debt, the number of bankruptcy filings in 2009 declined 8.8% to 14,732, the first decrease in the past four years. Also, the total amount of debt declined 49.1% to JPY 7,137 billion (approximately USD 71 billion), following a rapid increase in total debt in 2008 due to a series of large insolvencies during the financial crisis. The downward trend has continued in 2010, evidenced by the fact that the number of filings from January to April 2010 declined 16.6% on the same period in 2009, to 4,621. Tokyo Shoko Research commented that the main reason for this trend is government policies, such as providing guaranties in critical situations requiring urgent action and the Act Concerning Temporary Measures to Facilitate Financing for Small and Medium-Sized Enterprises, which supports the cash flow of companies.
The three largest insolvency cases in 2009 were Japan Air Lines (and two of its affiliates; 'JAL'), Lopro, and WILLCOM, a large PHS company. JAL was one of the largest insolvency cases in Japanese history, with JPY 2,322 billion (approximately USD 23 billion) of debts. Lopro, a large business loan company had JPY 250 billion (approximately USD 2.5 billion) of debts, while Willcom had JPY 206 billion (approximately USD 2 billion) of debts. All of these companies applied to instigate corporate reorganisation procedures.
Below, I consider a number of recent novel strategies which are being employed to resolve insolvencies, and examine how they were used or the role they played in each of the above WILCOM and JAL insolvency cases in Japan in 2009.