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DIP and the Trustee in Restructuring Proceedings: The Trend in Japan and Indications for the Future in China
Jin Chun, Associate Professor, Daito Bunka University, and Yuri Ide, Partner, Bingham McCutchen Sakai Mimura Aizawa, Tokyo, Japan1. Introduction
Japan has two types of insolvency proceedings for corporate rehabilitation: Civil Rehabilitation (Minji Saisei) and Corporate Reorganisation (Kaisha Kosei). The major differences between the two proceedings are: (i) Civil Rehabilitation is a Debtor in Possession ('DIP') proceeding where the debtor retains the right to operate the business and to dispose of its assets (Article 38, paragraph 1 of the Civil Rehabilitation Law), whereas under a Corporate Reorganisation a trustee is appointed, who assumes the day-to-day running of the business (Article 72, paragraph 1 of the Corporate Reorganisation Law); and (ii) under a Corporate Reorganisation, the rights of third parties to enforce security interests against the bankrupt entity are subject to a mandatory moratorium and, as part of the reorganisation, may also be subject to amendment (Article 47, paragraph 1 of the Corporate Reorganisation Law), whereas third party security interests can be freely exercised under Civil Rehabilitation proceedings (Article 53 of the Civil Rehabilitation Law). However, the Japanese courts have, since 2009, undertaken socalled 'quasi-DIP' Corporate Reorganisations, in which elements of both Corporate Reorganisation proceedings and Civil Rehabilitation proceedings appear. Generally speaking, DIP proceedings are increasingly being used in restructurings.
In China, the new Enterprise Bankruptcy Law, which was published on 27 August 2006 and enacted on 1 June 2007 (the 'New Bankruptcy Law'), adopted reorganisation proceedings (Chong Zheng) as the basic procedure for the rehabilitation of an enterprise. China’s reorganisation proceedings provide for the mandatory moratorium against the security interest and the amendment of the secured claims while it allows the DIP to manage the rehabilitation. As such, China’s reorganisation proceedings seem to be a hybrid of Japan’s Civil Rehabilitation and Corporate Reorganisation procedures. However, there remain a number of issues in the New Bankruptcy Law to be interpreted by the courts and there is therefore some confusion as to the current practice and application in this area.
In this article, we will look at the recent increase in reliance on DIP proceedings in Japan and consider what implications DIP practice in Japan may have for the Chinese restructuring market, which is likely to see an increase in DIP-type proceedings in the future.
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