JAPAN Trends and Developments Contributed by: Hajime Ueno, Masaru Shibahara and Takahiro Kato, Nishimura & Asahi (Gaikokuho Kyodo Jigyo)
If unanimous consent is not obtained, but the pro - posed resolution is passed, court approval is neces - sary for the modification to become effective. Court approval of the resolution adopted at the creditors’ meeting The court, acting in a supervisory capacity, deter - mines whether to approve or disapprove the resolu - tion after examining whether there are any defects, such as procedural violations of laws and regulations or any elements that undermine the fairness of the resolution, and whether the liquidation value test is satisfied, while hearing the opinions of the Designated Organisation and the creditors. The Act on the Promotion of Cash Flow-Based The goal of this law is to promote the ability of busi - ness operators to receive financing based on actual business conditions and future cash flow in lieu of financing based on real estate collateral or personal guarantees. The law introduces the concept of an Enterprise Value Charge (EVC) as one of the measures by which to achieve this goal. More specifically, EVC was introduced to facilitate financing for start-ups with limited tangible assets, and for business operators hesitant to undertake busi - ness succession or business expansion due to the need to provide personal guarantees. EVC can also be used for rescue loans (DIP financing) and exit loans in a business restructuring context. Summary Establishment and perfection EVC is a collateral system that covers all of a busi - ness’s assets, including intangible assets and good - will. In other words, the entire corporate value serves as collateral. The use of personal guarantees is restricted when using EVC unless the borrower com - mits accounting fraud or other specified acts. Lending Purpose In order to ensure appropriate use of an EVC, the EVC must be established via a trust agreement and the security interest holder must be licensed to engage in trust business. The security interest holder is a dif - ferent entity from the lender (or lenders), but could be
the same if the lender is authorised to act as a security holder. A bank is deemed to be licensed to serve as a security holder after filing a specified notification. Only entities defined as “companies” under the Com - panies Act (joint stock companies, general partner - ships, limited partnerships, or limited liability compa - nies) can be debtors (settlors). There are no particular restrictions on the entities that can serve as lenders for loans secured by an EVC (“Specified Secured Creditors”). Separately, the concept of Unspecified Secured Creditors is also introduced in order to protect the benefit of general creditors in the subsequent liquidation or bankruptcy proceedings. The acquisition, loss, or modification of an EVC is not effective unless registered in the commercial reg - ister at the location of the debtor’s head office. The priority ranking relative to statutory liens for sales of immovables, pledges, or mortgages is determined by the order in which the requirements for perfection of The borrower may continue to use, derive benefits from, and dispose of the collateral even after the establishment of the EVC. This is a natural conse - quence given that the security interest covers all of the business assets, including future acquisitions, and seeks to recover from future cash flow generated by business activities using those assets. each security interest are satisfied. Borrower’s authority and monitoring However, actions in excess of, or outside, the scope of normal business activities, as defined by the entity’s articles of incorporation and prevailing business prac - tices (eg, disposal of significant assets, transfer of all or a significant part of the entity’s business, or supply of goods or services at below-market prices without justifiable reasons) cannot be performed without the consent of EVC holders. In addition to these statutory requirements, ongo - ing management of the EVC should be carried out through the establishment of appropriate covenants and implementation of effective monitoring mecha - nisms.
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