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The provision of finance without collateral, or with insufficient collateral, is considered a breach of trust under the Company Act. However, it may be permissible to provide urgently needed finance to a company in difficulty in order prevent the finance provider's existing claims from becoming uncollectable as a result of the company's insolvency. A Supreme Court ruling offers guidance on the financing available to troubled companies.

Until recently, Japan's corporate reorganisation procedure has rarely been used, despite its advantages. However, the Tokyo District Court has recently become more willing to appoint the debtor's management as a trustee on certain condititions. The court's new approach could allow corporate reorganisations to work in much the same way as
debtor-in-possession procedures.

A foreign debtor or its representative has standing to file a petition for recognition of foreign proceedings with the Tokyo District Court. However, recognition itself has no automatic effect. Thus, a court order must be obtained where certain relief is necessary. In considering discretionary relief, the court has a number of options.

The Japanese courts may issue a decision recognizing a foreign insolvency proceeding upon the filing of a petition by the debtor or its trustee or receiver. Although the courts have little or no discretion regarding recognition if the filed petition satisfies the requirements of the Law on Recognition and Relief of Foreign Insolvency Proceedings, they have greater freedom in terms of the effects of such recognition.

A decision by the Osaka High Court clarifies the scope of the restrictions on set-offs under the Bankruptcy Law. Specifically, it provides guidance on the treatment of a reimbursement claim acquired by the performance of a guarantee obligation which is not based on a prior entrustment by the bankrupt entity.

The Bankruptcy Law contains provisions to prevent an insolvent debtor from ceding or transferring its assets without consideration, selling assets at an unreasonably low price or taking steps to pay debts only to a specific creditor. The right of avoidance operates to invalidate such acts, restore the assets to the bankruptcy estate and enable fair distribution to creditors through the liquidation process.

In a civil rehabilitation process a secured creditor may foreclose on its collateral outside proceedings. However, in addition to an order of stay, the Civil Rehabilitation Law allows a debtor to invoke a statutory redemption procedure for assets that are vital to its ongoing business. In a recent case the Supreme Court attempted to strike a balance between the interests of the debtor, the secured creditors and the general creditors.

In civil rehabilitation proceedings a secured creditor may foreclose on its collateral outside the proceedings. Therefore, if a debtor wishes to continue to use assets provided as collateral for its business, it must reach an agreement with the secured creditor. Where agreement is difficult, the Civil Rehabilitation Law allows the debtor to redeem the collateral by paying the fair market value to the secured creditor.

A recent Osaka High Court decision is the first to establish that a creditor has priority over a real surety that provided full payment for some but not all of a number of claims which were secured by a fixed mortgage that the real surety established on its real property.

The Bankruptcy Law provides that a bankruptcy trustee is liable to pay compensation if he or she is negligent in the performance of his or her duty of diligence and thereby causes damages to the interested party. However, as a rule, the trustee is not personally liable because a claim arising from a trustee's actions is treated as a claim attributable to common benefits and is paid out of the bankruptcy estate.

A finance lease contract incorporating a full-payout formula is not treated as an executory contract. Therefore, the leasing company's claim on the unpaid leasing charge is treated not as a claim attributable to common benefits, but as a reorganization claim which is paid subject to the corporate reorganization plan.

A civil rehabilitation plan must be approved by over half of the attending or voting rehabilitation creditors representing at least half of the total rehabilitation claims. However, a court may reject the plan if it finds that approval has been obtained by illicit means; a recent decision sheds light on the scope of this provision.

The Fukuoka High Court has rejected the appeal of a bankrupt against the Oita District Court decision which rejected the bankrupt's petition for an extension of 'free property' or exemption from the bankruptcy estate. This decision provides guidance on the application of Article 34(4) of the Bankruptcy Law, which was recently introduced into the law.

The Takamatsu High Court has annulled a decision for commencement of a civil rehabilitation procedure issued by the Matsuyama District Court. The high court found that the petition filed by the debtor - a joint stock corporation - should be dismissed under Article 25, Item 4 of the Civil Rehabilitation Law as it had not been filed in good faith.

The corporate reorganization procedure under the Corporate Reorganization Law is designed to restructure insolvent joint stock corporations by formulating a reorganization plan. The corporate reorganization procedure is characterized as a trustee type of procedure: a court-appointed reorganization trustee administers the business and manages and disposes of the assets of the corporation.

The procedures under the Civil Rehabilitation Law are applicable to legal entities and private individuals without distinction. Civil rehabilitation is primarily aimed at rehabilitating small and medium-sized companies and is characterized as a debtor-in-possession type of procedure. This update outlines the main stages of the civil rehabilitation procedure.

Joint stock corporations may be liquidated by using the special liquidation procedure under the Commercial Code. This update reviews the key features of special liquidations, as well as the different stages of the procedure. A recent major amendment to the code - which is scheduled to become effective in May 2006 - has made several changes to the special liquidation procedure.

More than half of all liquidation and rehabilitation procedures are conducted through a private arrangement procedure as this type of procedure has several advantages compared with statutory procedures. In the past five years, important developments have influenced the private arrangement practice. Among other things, a study group issued the Guidelines on Private Arrangements.

Since October 1996 the Ministry of Justice has been implementing a reform of the entire insolvency regime. The revision of the Bankruptcy Law was the final step in the series of reforms. The law was thus amended in May 25 2004, effective as of January 1 2005.