JAPAN Law and Practice Contributed by: Hajime Ueno, Nishimura & Asahi (Gaikokuho Kyodo Jigyo)
Post-commencement Payment of a pre-petition obligation is generally pro - hibited. In a civil rehabilitation, since a security holder can exercise its right outside the proceedings, the debtor needs to obtain a “post-commencement stay order” to prohibit such action by a security holder. In a corporate reorganisation, a security holder is pro - hibited from exercising its security interest against secured property by virtue of statute as a result of the commencement of the reorganisation proceeding. Once a civil rehabilitation or a corporate reorganisation commences, existing pre-judgment attachments are automatically suspended or extinguished. Between the petition for commencement of these proceedings and the order to commence, pre-judgment attach - ments are not automatically suspended, so a separate court order must be obtained to prohibit or suspend pre-judgment attachments. Rights and Remedies of Secured Creditors As noted above, secured creditors would still enjoy legal rights to enforce and foreclose on collateral in civil rehabilitation proceedings, whereas in corporate reorganisation, secured creditors too will be bound by the proceedings and therefore will not be able to enforce or foreclose outside the corporate reorgani - sation. However, even in civil rehabilitation, they may separately be subject to a court’s discretionary stay order in certain circumstances. When secured creditors are allowed to enforce/fore - close outside the insolvency proceedings, they would remain subject to contractual intercreditor covenants. In a corporate reorganisation where secured credi - tors are bound by the proceedings, secured credi - tors would be in a class separate from unsecured creditors, and, therefore, would be able to veto the approval of the reorganisation plan, thus effectively blocking the conclusion of proceedings. In practice, such ability would mean that they have practical rights to disrupt the proceedings in the process up to the creditors’ vote as well. As for civil rehabilitation, secured creditors would only have indirect powers to influence the proceedings in their decision whether or not to enforce/foreclose their rights. While there is no automatic stay in Japan, secured creditors would be
stayed from enforcement and foreclosure actions in corporate reorganisation, as a result of a discretionary but comprehensive day-one stay order by a court, but in civil rehabilitation proceedings they typically would not be (until and unless a separate discretionary stay order is granted by the court). Rights and Remedies for Unsecured Creditors An unsecured creditor who is opposed to a civil reha - bilitation proceeding may, as a party having a “legal interest” in the case, immediately appeal against the commencement order. In addition, the creditors who prefer a corporate reorganisation may file a petition for a corporate reorganisation as a countermeasure to civil rehabilitation. After the proceedings are com - menced appropriately, unsecured creditors have the right to participate in the proceeding by filing their claims and to vote on whether to give consent to a Plan, and be repaid pursuant to the approved Plan. Unsecured Trade Creditors There is no Japanese equivalent of a critical vendor regime and, in general, unsecured creditors’ claims can only be repaid on a pro rata basis, regardless of whether or not they are trade claims. However, in a civil rehabilitation or corporate reorganisation, unsecured pre-petition claims that are required to be repaid for the continuation of the debtor’s business are allowed to be repaid with the court’s permission. It is practically expected that the court would give permission if the conditions below are met. • The trade claim is a small amount. • The continuation of the trade is essential for the continuation of the debtor’s business activities. • There is a high possibility that the other party to the trade will refuse to continue the trade if the debtor does not repay the trade claim, and it is difficult to find an alternative trade partner. • If the debtor repays such trade claim, the trade creditor commits to continue the trade on the same terms. Trading of Claims Against a Company A creditor can trade its claims against the debtor. No disclosures and approvals by the court are required, but a successor needs to submit a notice to the court
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