JAPAN Trends and Developments Contributed by: Hajime Ueno, Masaru Shibahara and Takahiro Kato, Nishimura & Asahi (Gaikokuho Kyodo Jigyo)
The Act on Security Transfer Agreements and Title Retention Agreements Purpose Traditionally, real estate collateral and personal guar - antees have been widely used as collateral for corpo - rate financing in Japan. However, due to the increase in companies without real estate (primarily venture companies and start-ups) and the need to reduce the burden on guarantors, it has become necessary to promote financing using movable property (machinery, equipment, inventory, etc) and receivables (accounts receivable, etc) as collateral. However, Japan has no stipulated collateral system that allows a debtor to continue using and benefiting from movable property subject to a security interest. In addition, the existing regulations governing the estab - lishment of security interests over large numbers of assets with fluctuating components were insufficient. In practice, security transfer agreements, which trans - fer title to a subject for security purposes only, are commonly employed where movable property and receivables are used as collateral, and these arrange - ments are recognised in customs and case law. How - ever, the precedents are not always clear, and there are situations and issues in which precedents did not establish appropriate rules with regard to the rights established in security transfer agreements (“Title Transfer Security”). Therefore, it was necessary to clarify the rules gov - erning security transfer agreements and Title Transfer Security, and to make the rules more rational. Summary Codification and clarification The following are some key points relating to codifica - tion and clarification. First, the new law expressly states that the grantor can use and enjoy the movable property subject to the security interest. Second, the new law clarifies that it is possible to establish Title Transfer Security for collective movable property (specified by types, location, etc) and collec - tive claims (specified by time of occurrence, cause,
Enforcement If the EVC-secured lender urges management to sell the business to someone else in order to turn the busi- ness around, and management agrees to do so, the sale of the business and obtaining proceeds to repay the debt can move forward on a consent basis. How - ever, if the parties disagree, but the EVC-secured lend - er thinks the business must be sold in order to collect the debt, the EVC holder can file a petition to com - mence enforcement proceedings (unlike title transfer security, private execution is expressly prohibited). If the court accepts the petition and the required proof, it issues an order commencing enforcement proceed - ings, and simultaneously appoints a trustee. After the commencement of proceedings, the right to manage the debtor’s business and to administer and dispose of the collateral is vested exclusively in the trustee. The trustee has a duty of care, which, if breached, renders the trustee liable for damages to all interested parties. In principle, the liquidation of collateral is to be performed via a business transfer, subject to court approval. Approval by a shareholders’ meeting con - vened under the Companies Act is not required, but the opinions of dividend creditors and labour unions must be heard. As an exception, the trustee may also realise the collateral via individual disposition, with court permission. To ensure that the corporate value is not impaired when the security interests are exercised, payments essential to the continuation of ongoing business (such as commercial transaction receivables and labour claims) are paid on a priority basis. While enforcement procedures liquidate all of the debtor’s assets, if specified secured creditors recover all of the liquidation proceeds, the debtor may be una - ble to cover costs of a subsequent liquidation or bank - ruptcy proceedings. Therefore, the amount reserved for Unspecified Secured Creditors, who conceptually are also beneficiaries of the EVC trust along with the Specified Secured Creditors, is set aside to cover those expenses for general creditors.
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