JAPAN Law and Practice Contributed by: Hajime Ueno, Nishimura & Asahi (Gaikokuho Kyodo Jigyo)
3. Out-of-Court Restructuring 3.1 Out-of-Court Restructuring Process There are a variety of processes, from purely con - sensual, negotiation-based workouts among mostly financial creditors, to more formal, rules-based out- of-court workouts. The most popular in recent times (especially for larger-sized debtors) is the turnaround alternative dispute resolution process sponsored by the Japanese Association of Turnaround Profession - als. Despite its title, this is not a dispute resolution procedure in the traditional sense; rather, it is a frame - work that enables debtors to adjust or restructure their obligations to participating creditors, typically limited to financial creditors, through mutual agreement. The major rules-based out-of-court workouts are: • the Guidelines for Out-of-Court Workouts ( Shiteki- seiri Guidelines ); • the Guidelines for Restructuring of Small and Medium-Sized Enterprises ( Chusho-kigyo no Jigyo- saisei-tou ni-kansuru Guidelines ); • Turnaround ADR ( Jigyo-saisei ADR ); and • SME Vitalisation Councils ( Chusho-kigyo Kasseika Kyogikai ). Rules-based out-of-court restructuring processes are, in most cases, based on a statute allowing specific entities to set a rule for a process offered to debtors through which a debt adjustment or restructuring can be achieved on a consensus basis with the partici - pating creditors. These processes do not entail any court supervision or approval of the resulting workout plan and are therefore entirely out-of-court in nature. Moreover, the rules themselves do not form part of the statutes, meaning the process is rules-based rather than statutory. In out-of-court workouts, unanimous consent from all participating financial creditors (ie, trade credi - tors are not included, unless they are made part of the process, which is a rarity) is required to achieve restructuring. There is no requirement for mandatory out-of-court workouts before the commencement of in-court insol - vency proceedings.
Since the process and timeline of a rules-based out- of-court workout differ depending on which procedure is adopted, the following will explain the process and timeline of a Turnaround ADR (TADR), which is the most commonly used procedure. Filing of Application and Standstill Notice The debtor files an application with the TADR operator authorised by the Minister of Justice, and the debtor prepares an outline of its proposed business revitali - sation plan (the “TADR Plan”). First, the application is pre-assessed. The key points are: • the potential to provide greater repayment than that in bankruptcy; • the feasibility of the proposed TADR Plan; and • the likelihood of obtaining unanimous consent from participating financial creditors. Upon the pre-assessment and its passing, a TADR will commence by sending a standstill notice to the creditors under the joint names of the TADR operator and the debtor. The standstill notice requests that the creditors refrain from collecting claims, taking collat - eral and/or guarantees, foreclosing on collateral, or filing petitions to commence any in-court insolvency proceedings. Creditors’ Meetings Creditors’ meetings are expected to be held three times in a TADR. Duties on Creditors There are no specific rules regarding the duties of the creditors during a TADR or other out-of-court work - outs. As a general principle of civil law, the principle of acting in good faith may apply to creditors, and general tort doctrines can give rise to certain tortious misstatements or fraud. New Money When the debtor borrows funds necessary to continue business from third parties during the period between the commencement and the end of the TADR (“Pre- DIP financing”), the Pre-DIP financing can have repay - ment priority over the other creditors in the TADR, but
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