JAPAN Law and Practice Contributed by: Jumpei Osada, Masaaki Sasaki, Takuto Kobayashi and Hiroshi Ideyama, TMI Associates
pledge, share pledge and manager’s undertakings may also be required by the lenders. 2.2 Ship Leasing Ship leasing transactions have steadily increased in Japan over the past decade, particularly in the form of operating leases, finance leases, and sale and lease - back structures. This trend has been driven by several factors, including ship-owners’ intentions to reduce balance sheet leverage, regulatory capital constraints on banks and the availability of long-term funding from leasing companies with lower cost of capital. Japanese leasing companies, often affiliated with major financial institutions or trading houses, play a significant role in this market. In addition, leasing structures are frequently used in combination with tax- driven investment schemes, such as TK–GK struc - tures, which have long been familiar to the Japanese market. There has been a partial shift away from sole reli - ance on bank loans towards a more diversified fund - ing landscape. Japanese banks remain conservative and influential lenders, and leasing transactions are often structured to coexist with or refinance bank debt rather than fully replace it. Chinese leasing houses are more active in cross-border transactions involving non-Japanese operators or offshore structures rather than purely domestic Japanese deals. The main difference between the lessor/lessee rela - tionship and the lender/borrower relationship lies in the attribution of vessel ownership. In the lessor/ lessee relationship, where ownership of the vessel is attributed to the lessor, tighter operational and redelivery conditions are often imposed under the lease agreement and the lessor may, depending on the structure, enjoy the off-balance-sheet treatment and tax efficiencies. On the other hand, in the lender/ borrower relationship, where the ownership of the vessel is attributed to the borrower, the loan agree - ment emphasises financial covenants rather than tight operative covenants. From the treatment/enforcement perspective, the les - sor may seek repossession and redelivery of the ship as the remedies for lease defaults; this is different from
the mortgage, which requires judicial attachment and court-led auction for the enforcement, as above. Sale and leaseback transactions are relatively com - mon in Japan, particularly as a refinancing tool for existing fleets or as a means of releasing capital from owned vessels. These structures are used by both domestic and international ship-owners and are espe - cially prevalent in transactions involving Japanese leasing companies and foreign operators. 3. Marine Casualties and Owners’ Liability 3.1 International Conventions: Pollution and Wreck Removal Japan has ratified major maritime conventions cov - ering pollution, such as the 1992 CLC Convention and the Fund Convention, MARPOL 73/78 with its Annexes, the International Convention for the Safety of Life at Sea (SOLAS), the Bunker Pollution Conven - tion 2001 and other relevant rules and regulations, as well as conventions covering wreck removal, such as the Nairobi Convention. These conventions are incor - porated into or codified by Japanese local laws and regulations. In 2020, the Nairobi Convention and the Bunker Pol - lution Convention 2001 were ratified, resulting in amendments to the Act on Liability for Oil Pollution Damage and other related domestic laws, which came into force on 1 October 2020. The amendments to the Act on Liability for Oil Pollution Damage mainly purport to bring this legislation into line with the con - ventions. The gist of the amendments lies in: • expanding the scope of the vessels which are required to obtain compulsory insurance; • admitting a direct claim against an insurer for com - pensation for loss and damage arising from bunker oil or wrecks; • limiting the defence arguments which may be made by the insurer, other than the defences which that owner may have been entitled to invoke against the claimant; and
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