JAPAN Law and Practice Contributed by: Hiroki Aoyama, Yuki Matsuda and Shuhei Takaishi, Mori Hamada
7.4 Rescue or Reorganisation Procedures Other Than Insolvency In addition to judicial insolvency proceedings, private restructuring processes are very important. They are initiated by the borrower’s lawyer and sometimes involve a third-party organisation specialising in pri- vate turnaround situations. This type of process is chosen by a financially dis- tressed debtor who would like to avoid the damage that would be caused by the public announcement of the commencement of statutory insolvency proceed- ings. Given the private nature of this process, creditors’ rights are not involuntarily impaired and unanimous agreement among major creditors is required in order for the debtor to implement its restructuring plan. On June 6 2025, the Diet enacted legislation aimed at expediting the recovery process for businesses facing financial distress. This law permits the restructuring of debt obligations through a majority vote by pertinent creditors, subject to certain conditions. 7.5 Risk Areas for Lenders One of the notable risk areas for lenders in statutory insolvency proceedings is the risk of avoidance. The creation of a security interest by a financially dis- tressed borrower may be invalidated (by the insolven - cy trustee or the debtor-in-possession) if the security interest was created to secure existing debt: • after the filing of an insolvency petition against the borrower (and the creditor knew that the petition had been filed); • during the period when the borrower is “unable to pay” (ie, unable to pay its debts generally when they fall due) and the creditor knew that the bor- rower was unable to pay – or that the borrower did not pay – its debts generally when they fell due; or • 30 days or less before the borrower became “una- ble to pay” and the borrower voluntarily created the security interest in favour of a specific creditor, and the creditor knew that the creation of the security would prejudice other creditors. The perfection of a security interest may also be avoided even where the creation of a security inter-
security interests where the collateral is essential for the continuance of the debtor’s business. However, in order for the extinguishment to be utilised, the debtor is required to pay off the fair value of the collateral to the security-holder. The fair value will be determined by the court, and the secured creditor may request an expert appraisal if it is not satisfied with the Unsecured loans, including any unsecured portions of partially secured loans, are usually treated as general claims in Japanese insolvency proceedings. General claims are subordinated to common benefit claims, such as fees to the bankruptcy trustee, and preferred general claims, such as wages for employ- ees and certain tax claims. value proposed by the court. 7.2 Waterfall of Payments However, general claims have priority over certain subordinated claims, such as accrued interest arising after the commencement of insolvency proceedings. Regarding secured claims, see 7.1 Impact of Insol- vency Processes . 7.3 Length of Insolvency Process and Recoveries Civil rehabilitation proceedings take approximately five months for the entire process, based on the standard schedule of the Tokyo District Court of Japan. A standard corporate reorganisation (where the insol- vency trustee is appointed from outside the current management of the debtor) takes approximately eight to 11 months, while DIP-type corporate reorganisa- tions typically take around five months. That said, the actual length may significantly vary depending on the complexity and circumstances of each case. Corporate insolvency cases involving many creditors and a large amount of debt may take a longer time than the standard schedule mentioned above. For the recoveries to creditors, see 7.1 Impact of Insolvency Processes and 7.2 Waterfall of Payments .
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