SECTION 1: Market overview
1.1 What have been the recent bankruptcy and reorganisation
trends or developments in your jurisdiction?
The number of bankruptcy and in-court reorganisation cases
has been declining. This is due in large part to the
government's encouragement of lending banks to take a more
flexible approach toward small and medium-sized enterprises
(SMEs). As a result, many SMEs have managed to postpone
repayment of their debts for many years through out-of-court
discussions with their lenders.
However, companies with irremediable financial problems, who
are therefore unlikely to reach out-of-court restructuring
arrangements with their creditors, are still required to
undergo bankruptcy or reorganisation proceedings. Such
proceedings have become increasingly complex due to the growing
number of Japanese companies maintaining overseas operations,
which entails the need to consider the global business as a
whole when making restructuring arrangements.
1.2 Please review some recent important cases and their
impacts in terms of precedents or shaping current
Due to the recent downturn in the maritime sector, there
have been a number of judicial and out-of-court reorganisations
of shipping companies where cross-border issues have had to be
considered. The Sanko Shipping and Daiichi Chuo Shipping cases,
for example, involved filings in multiple jurisdictions for
recognition of and assistance for insolvency proceedings in
Japan. Correspondingly, Japanese courts have also issued
recognition and assistance orders for the reorganisation
proceedings of several Korean shipping companies, including
Hanjin Shipping Co.
SECTION 2: Processes and procedures
2.1 What reorganisation and insolvency processes are
typically available for debtors in your jurisdiction?
Four types of insolvency proceedings are available in Japan
for the rehabilitation of companies in financial difficulty.
These are: corporate reorganisation proceedings (kaisha
kosei); civil rehabilitation proceedings (minji
saisei); bankruptcy proceedings (hasan); and,
special liquidation proceedings (tokubetsu
Corporate reorganisation proceedings are typically used in
complex insolvency cases involving stock companies. They come
with the mandatory appointment of a reorganisation trustee by
the court and with a stay against enforcement by both secured
and unsecured creditors. The court typically appoints a
third-party lawyer (bengoshi) with substantial
experience in restructuring cases as the trustee. Since 2009,
however, the Tokyo District Court (TDC) has begun the so-called
quasi-debtor in possession (DIP) type practice, under which the
debtor's director or counsel is appointed as the trustee. In
quasi-DIP proceedings, the court appoints an examiner to
supervise the trustee's administration of the reorganisation.
Civil rehabilitation proceedings (minji saisei) are
used to rehabilitate companies of almost any size and type, and
for the rehabilitation of individuals. In civil rehabilitation
proceedings, the DIP administers the rehabilitation under the
supervision of a court-appointed supervisor. In civil
rehabilitation proceedings, enforcement by secured creditors is
not stayed, in principle. Accordingly, the debtor has to enter
into settlement agreements with secured creditors in order to
continue using the relevant collateral to conduct their
Bankruptcy (hasan) and special liquidation
(tokubetsu seisan) proceedings are used when the
liquidation and dissolution of the debtor is contemplated.
In bankruptcy proceedings, the court appoints a lawyer as
trustee to administer the bankruptcy procedures. Enforcement by
secured creditors is not stayed. Rather, the secured creditors
can freely exercise their claims outside of the bankruptcy
proceedings. Notwithstanding, the trustee will usually attempt
to sell secured collateral with the agreement of the secured
creditors and contribute a percentage of the sales proceeds to
the estate. The debtor's estate is distributed to creditors in
accordance with prescribed statutory priorities without any
need for voting by the creditors.
Special liquidation proceedings are used for stock
companies. Under these proceedings, a liquidator is appointed
by a debtor's shareholders or the court. Distribution of the
debtor's estate to creditors has to be approved by creditors
with claims to two-thirds or more of the debtor's total debts
or by way of settlement among the creditors. Special
liquidation is typically used when the debtor's shareholders
are confident of obtaining the creditors' cooperation for the
liquidation process and wish to control the liquidation process
without the involvement of a trustee.
In bankruptcy, the court must find that the debtor is
insolvent on a balance sheet basis or unable to pay its debts
as they become due generally and on a continuing basis before
it commences the case. In corporate reorganisation and civil
rehabilitation, the court must find that the company faces the
threat of a bankruptcy event (as described above), or would
likely greatly impair its own operations if it paid its debts
as they became due before it commences the case.
Under each of the four types of insolvency proceedings,
there is usually a so-called gap period between the date of
filing and the date of commencement of proceedings during which
the court examines the grounds for commencement of proceedings.
The duration of the gap period varies from case to case, but is
typically one month for corporate reorganisations and one week
for other proceedings.
2.2 Is a stay on creditor enforcement action
Additional filing for an injunction order is necessary to
obtain a stay of creditor enforcement for the gap period. This
injunction order expires at the commencement of the
proceedings, when creditor enforcement is automatically
Enforcements of secured claims are stayed in corporate
reorganisations but are generally not stayed in other types of
proceedings. The exercise of rights of set-off cannot be
stayed. However, such rights have to be exercised by the claim
bar date in corporate reorganisation and civil rehabilitation
2.3 How could the reorganisation and/or insolvency
processes available in your jurisdiction be used to implement a
Debtors and creditors can file corporate reorganisation and
civil rehabilitation. Shareholders holding more than ten
percent of voting rights may also file corporate
Creditors have to file the claims by the bar date which is
set by the court at the time of the commencement of the case.
The claims are examined by the trustee in the corporate
reorganisation and by the DIP in the civil rehabilitation.
The trustee evaluates the debtor's assets on a market value
basis in the corporate reorganisation. In civil rehabilitation,
the evaluation by the DIP is made based on the liquidation
The plan is proposed by the trustee or the DIP in corporate
reorganisation and civil rehabilitation proceedings. Although
creditors are also entitled to file a plan in such proceedings,
it is rare for creditors to file a plan because the involvement
of, and disclosure of financial details to, creditors is
generally limited in Japanese insolvency proceedings. However,
in some cases, the court approves the creditors' competing plan
for voting and a proxy fight takes place at the court.
In corporate reorganisations, creditors are categorised into
the classes of secured creditors and unsecured creditors for
voting. Passing a reorganisation plan requires the approval of
secured creditors representing two thirds or more of the value
of secured claims and of unsecured creditors representing a
simple majority of the value of unsecured claims. Under plans
of reorganisation, secured claims are usually paid in full up
to the value of the relevant collateralised assets, with only
the payment schedules amended. However, a plan that provides
for a haircut or other amendments to secured claims requires
the approval of secured creditors representing three quarters
or more of the value of secured claims.
In civil rehabilitation cases, where secured claims are
freely exercisable outside of the proceedings, only unsecured
creditors (including secured creditors with deficiency claims)
vote on the plan of rehabilitation. Claims are generally
grouped into a single unsecured class. However, contractually
subordinated claims are put into a separate class and the
creditors of those subordinated claims are not entitled to vote
on the plan if the debtor is insolvent on its balance
A plan of rehabilitation requires the votes of a majority of
creditors voting on the plan, provided they also represent a
simple majority of the value of claims.
2.4 How can a creditor or a class of creditors be crammed
Notwithstanding the disapproval of a plan by a class of
creditors, a court has the power in both corporate
reorganisation and civil rehabilitation proceedings to approve
a plan if it finds it fair and equitable, as long as one of the
classes of creditors approves the plan. Whether the best
interest rule (payouts under the plan are larger than payouts
in liquidation) is satisfied is a critical factor in assessing
whether a plan is fair and equitable.
2.5 Is there a process for facilitating the sale of a
distressed debtor's assets or business?
To facilitate the sale of the debtor's assets, the court can
approve the sale of the debtor's business outside of the plan,
if a prompt sale is necessary to rehabilitate the debtor's
business. Although the court is obliged to take into account
the views of creditors, no formal voting on the sale is
required. This is similar to a 363 sale under Chapter 11 of the
US Bankruptcy Code, except that creditors have no right to file
a formal objection to the sale in Japanese proceedings.
Credit-bidding is prohibited under Japanese insolvency
proceedings because it can constitute the set-off between
pre-filing claims and post-filing obligations (in view of the
fact that buyers' obligations to pay the purchase price
typically accrue post filing). Although so-called stalking
horse bids are not expressly prohibited under Japanese law,
there are no precedents of such bids in Japanese insolvency
2.6 What are the duties of directors of a company in
The directors do not have to file insolvency proceedings
when the company faces financial difficulty, because they have
broad discretion on the company's management. However, the
creditor may pursue the directors' personal liability under a
special provision in the Companies Act: if the creditor proves
that the directors permitted the company to enter into a
transaction that they knew or should have known that the
company subsequently would be unable to perform due to the
company's financial difficulty.
2.7 How can any of a debtor's transactions be challenged on
The trustee in the corporate reorganisation and the
supervisor in the civil rehabilitation have the power to avoid
the debtor's transactions if they satisfy the conditions to be
deemed as fraudulent transfers or preferences.
Executory contracts can be rejected by the trustee or the
DIP. In principle, the counter party's claims to recover the
consideration can be qualified as administrative claims but the
damages due to the rejection is treated as pre-petition claims
which can be modified by the plan.
2.8 What priority claims are there and is protection
available for post-petition credit?
Post-petition credits qualify as administrative claims that
must be paid in full in accordance with the contractual terms.
However, where proceedings transition from corporate
reorganisation or civil rehabilitation to bankruptcy,
administrative claims can be paid only on a pro rata basis if
the estate does not have enough funds to satisfy all
administrative claims. There is no equivalent of the US Chapter
11 priming lien or super priority systems in Japan.
2.9 Is there a different regime for banks and other
The Deposit Insurance Act of Japan was amended in 2014 to
introduce a system for the orderly resolution of financial
institutions based on the Key Attributes published by the FSB
in 2011. This system enables the transfer of the critical
functions to bridge institutions and temporary stays against
the termination of derivative agreements through the power of
the resolution authorities. Where insolvency proceedings are
commenced in respect of financial institutions, the
Reorganization Special Measures Act (Kosei Tokurei Ho)
will be triggered to facilitate handling of the vast number of
depositors and policyholders who are deemed creditors. The
Deposit Insurance Bank of Japan (DICJ) and the Life Insurance
Policyholders Protection Corporation of Japan provide financial
protection of insured deposits and insurance benefits, and will
also establish bridge institutions if time is required to
locate a buyer for the businesses or assets of the financial
institution in question.
SECTION 3: International/cross-border issues
3.1 Can bankruptcy or reorganisation proceedings be opened
in respect of a foreign debtor?
Yes. A foreign debtor with business premises in Japan has
the right to file for civil rehabilitation or bankruptcy in
Japan. Corporate reorganisation is also an available option for
a foreign debtor that is similar in nature to a Japanese stock
3.2 Can recognition and assistance be given to foreign
insolvency or reorganisation proceedings?
Yes. Under the Law on Recognition of and Assistance in
Foreign Insolvency Proceedings (Shonin Enjo Ho), which
is modelled on the United Nations Commission on International
Trade Law (UNCITRAL) Model Law, the TDC has the power to
recognise and assist foreign bankruptcy and reorganisation
SECTION 4: Other material considerations
4.1 What other major stakeholders could have a material
impact on the outcome of the reorganisation?
Governmental and regulatory institutions in principle are
not required to be materially involved in the reorganisation of
private enterprises unless the reorganisation relates to a
financial institution. Nevertheless, their involvement may
sometimes be necessary for continuation of the debtor's
business. For example, if a debtor needs a certain regulatory
licence to conduct its business, and such licensing is
conditional upon the debtor having good financial health, close
or prior consultation with the relevant regulator would be
essential for the debtor to retain its licence, smoothly
conduct its business and remain saleable to a sponsor.
Also, some large Japanese corporations have been rescued
with the support of government-backed funds, which helped to
secure the cooperation and coordinate the response of
creditors, thereby preserving the enterprise value of the
debtor. One of the largest governmental funds of this kind is
the Innovation Network Corporation of Japan, which played a
significant role in the shoring up of Japan Display and Renesas
SECTION 5: Outlook 2017
5.1 What are your predictions for the next 12 months in the
corporate reorganisation and insolvency space and how do you
expect legal practice to respond?
Out-of-court workouts are increasingly preferred over
corporate reorganisation and civil rehabilitation. There are
several out-of-court workout schemes available in Japan, such
as the Turnaround ADR (Jigyo Saisei ADR), the process
of which is supervised by a mediator, and the scheme
administered by the REVIC (a state-owned organisation which
facilitates workouts by coordinating the activities of lenders
and provides financing to the debtor).
The key differences between workouts and court proceedings
are the level of protection for trade creditors and the extent
of creditors' consents required for successful restructuring.
Trade creditors are paid in full in out-of-court workouts. Such
protection is not guaranteed in court proceedings. However, in
recent cases, the protection of trade claims in court
proceedings has been expanded to preserve the value of the
debtor's business. Regarding the creditors' consents, the
unanimous consent of affected financial creditors is required
to settle in out-of-court workouts, while the plans can be
approved by majority creditors in the court proceedings. Some
new legislation or changes in practice to facilitate
out-of-court workouts that lack the consent of a small number
of creditors is under consideration.
Partner, Anderson Mori & Tomotsune
T: +81 3 6894 1075
F: +81 3 6894 1076
Yuri Ide is a partner at Anderson Mori &
Tomotsune, and has been principally involved in
cross-border insolvency and restructuring cases, in
which she represents debtors, investors and creditors
in various industries. Her recent work includes the
representation of Japanese banks and international ad
hoc bondholders groups in corporate reorganisation
cases and the representation of debtors' out-of-court
workouts and civil rehabilitation. She has extensive
experience in M&A, litigation and crisis management
matters, especially in an international context.
Ide has served as the co-chair of the Japan chapter
of the International Women's Insolvency and
Restructuring Confederation (IWIRC) since 2012 and is a
frequent speaker on the cross border insolvency issues
at the IBA, Tokyo Bar Association and others. Before
joining Anderson Mori & Tomotsune in April 2015,
Ide was a partner at Bingham Sakai Mimura Aizawa.
Partner, Anderson Mori & Tomotsune
T: +81 3 6894 2003
F: +81 3 6894 2004
Zentaro Nihei is a partner at Anderson Mori &
Tomotsune. His practice focuses on financial
restructuring and workouts, representing a wide range
of debtors, creditors and distressed investors
globally. He has advised major financial institutions
on some of the largest restructuring deals, whether in
the context of cross-border M&A, crisis management
or otherwise. Some of his representative work include
acting for a secured lenders committee in a large scale
civil rehabilitation proceeding, supporting prominent
financial institutions and funds in cross-border
insolvency proceedings, and assisting foreign lenders
against Japanese debtors. He also has extensive
experience in representing and advising sponsors on a
broad range of matters in distressed M&A.
Nihei has several years of experience working in New
York and London at the Boston-based international law
firm Bingham McCutchen, and at Sumitomo Mitsui Banking
Corporation Europe, where he advised on the legal
aspects of debt restructuring. He is a Japan and New
York qualified lawyer.