JAPAN Law and Practice Contributed by: Hajime Ueno, Nishimura & Asahi (Gaikokuho Kyodo Jigyo)
1. Overview of Legal and Regulatory System for Insolvency/Restructuring/ Liquidation 1.1 Legal Framework As is the case in many jurisdictions, Japan offers in-court insolvency proceedings and out-of-court restructuring processes to business entities. While out-of-court restructuring processes is left to 3. Out- of-Court Restructuring , in-court insolvency/restruc - turing/liquidation can be classified into two types: • the liquidating-type insolvency proceedings (similar to US Chapter 7), namely bankruptcy ( hasan ) and special liquidation ( tokubetsu-seisan ); and • the restructuring-type insolvency proceedings (similar to US Chapter 11), namely civil rehabilita - tion ( minji-saisei ) and corporate reorganisation ( kaisha-kousei ). There is also a new special conciliation ( tokutei-chotei ) procedure which is a hybrid between an in-court insol - vency proceeding and an out-of-court process in that it is a non-public insolvency/restructuring procedure involving a court as an independent third party but where the court will be involved only if and when an agreement is unlikely to be reached between a debtor and a creditor, in which case the court may issue a necessary order to resolve the case. Such order will have the same effect as a successful conciliation if no parties object within a certain period of time. On the other hand, available options are limited for partnerships, as civil rehabilitation, corporate reor - ganisation and special liquidation are not available to them, and bankruptcy would be applied to each of the partners rather than the partnership itself (save for limited liability partnerships to which bankruptcy would be applicable). 1.2 Types of Insolvency Restructuring Proceedings Restructuring proceedings include civil rehabilitation and corporate reorganisation. Civil rehabilitation Civil rehabilitation is a restructuring-type insolvency proceeding under the Civil Rehabilitation Act. The
basic form of civil rehabilitation proceeding is a “debt - or-in-possession” type, where the debtor’s manage - ment will remain in control, albeit with and under the supervision of the competent court. While civil rehabil - itation was introduced under the statute modelled at least partially after Chapter 11, there are certain deci - sive differences between the two, as outlined below. • Civil rehabilitation proceedings bind only unse - cured claims, leaving secured creditors free to fore - close and otherwise enforce their security interest on the relevant collateral, and shareholders will retain their rights as shareholders unless and until a rehabilitation plan deprives them of those rights. • There is no automatic stay (although courts are usually willing to grant umbrella stay on unsecured creditors). • Courts are more open to having, and frankly expecting to have, periodical and frequent ex parte meetings with the debtor’s counsels. • Creditors will continue to be allowed to enforce set-off rights (albeit with certain restrictions). The court has the power to appoint a trustee who would take over the powers and authority to manage the debtor company, at which point the civil rehabili - tation proceeding will convert into a “trustee” type proceeding. Corporate reorganisation Corporate reorganisation is a restructuring-type insol - vency proceeding under the Corporate Reorganisa - tion Act, available only to stock companies ( kabushiki kaisha ). It is a “trustee”-type proceeding, where the competent court will appoint a third-party trustee (or trustees, for larger cases), most typically a practising lawyer who is equipped with knowledge and exper - tise in the field, upon the commencement of the pro - ceeding. The management of the debtor company will thereafter be deprived of the power and authority to manage the debtor company. As the corporate reor - ganisation act was modelled after Chapter 11, despite it being a “trustee”-type proceeding, there are many similarities with Chapter 11. However, in the same manner as civil rehabilitation, (i) there is no automatic stay, and (ii) courts are more open to having, and frank - ly expecting to have, periodical and frequent ex parte meetings with the trustee(s) and their team members.
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