It is common practice to elect a sponsor to finance a failing business and in many insolvency cases, such election is necessary for a successful restructuring. As the traditionally conservative approach has made it hard for some companies to elect sponsors, a new approach to determining the appropriateness of an election procedure has been suggested, under which a breach of the approach will not necessarily mean that an election procedure is illegal.
Discussions recently took place between government authorities and restructuring experts regarding the potential introduction of cram-down rules into business turnaround alternative dispute resolution, an out-of-court workout procedure where a restructuring plan becomes binding on all relevant creditors once a majority of them agree to it. Three options are being discussed for the introduction of the rules, but no conclusions have been reached as yet.
Under the Companies Act, a company split is often used when reorganising a company in Japan. However, in recent years, abusive use of the company split has been problematic. The Supreme Court handed down its first judgment in this area of law, indicating that an obligee may demand the court to rescind a company split regarding the transfer of rights in accordance with the Civil Code.
The Supreme Court has ruled on the actions that a bank may take where it has both a claim against a company and a right of retention with regard to the company under the Commercial Code over a promissory note that the company has entrusted to the bank to collect, and where an order has been issued for the commencement of civil rehabilitation proceedings in respect of the company.
A Supreme Court decision clarifies the treatment of a claim for reimbursement in respect of a salary payment made by a third party before the commencement of bankruptcy proceedings. The court ruled that a third party which makes salary payments to employees of a bankrupt debtor may enjoy priority in respect of its reimbursement claim in subsequent proceedings.
A Tokyo District Court decision is a useful example of the application of the avoidance rules in the context of group company financing. In this case, a debtor company had settled a mortgage for a financing company as the real gurantor of its parent company, and the parent company had provided no consideration to the debtor company in the settlement.
The Tokyo District Court has issued an order for the avoidance of a business transfer that was made by a bankrupt company before its filing. The transferee was ordered to restore the transferred assets that could still be identified and make payment for those that could not; the fact that it had jointly assumed part of the company's debts and had paid some of the debt did not affect the restoration or payment.
A lawyer who represents a debtor in the latter's petition for bankruptcy and has notified such representation to the creditors must not only file the petition as soon as possible, but also take necessary measures to prevent the dispersal or loss of the debtor's assets before the trustee assumes control. Failure to do so may make the lawyer liable in tort for damages to the bankruptcy estate.
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
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.