JAPAN Law and Practice Contributed by: Hiroaki Takahashi, Kaoru Sato, Kenji Miyagawa and Koji Kawamura, Anderson Mori & Tomotsune
Asset isolation Certain requirements have to be fulfilled to iso - late an asset from an originator’s bankruptcy or insolvency estate. First, there must be a mutual agreement between the transacting parties for the legal and valid “transfer” of the asset, as opposed to a pledge of the asset. Secondly, the asset transfer must be perfected against third persons (ie, certain procedural steps have to be taken to make the acquisition of the asset effective against third persons). For this purpose, it should be noted that the origi - nator’s receiver is regarded as a “third person” under Section 177 of the Civil Code. An SPC that fails to perfect promptly faces certain risks, such as being unable to effect perfection if the SPC subsequently goes bankrupt, or having that perfection voided by a receiver in bankruptcy proceedings if the date of perfection falls too close to the date of the bankruptcy of the SPC. Thirdly, the asset transfer must fulfil true-sale requirements and must not be voided in bank- ruptcy proceedings in respect of the relevant originator. Other Insolvency Issues The following issues in respect of an originator’s insolvency should also be considered. Defence against right of avoidance The right of avoidance ( hinin-ken ) under insol - vency proceedings is a right of the trustee/ supervisor in an insolvency proceeding, which is similar to the right to demand rescission of a fraudulent act ( sagai-koi-torikeshi-ken ) of a creditor under the Civil Code. If the requirements under the insolvency law are satisfied, the acts of the bankrupt may be avoided in the interest of the insolvency estate in an insolvency pro - ceeding. As such claims are difficult to defend
against, it is important in practice to ensure that the originator is in good financial health at the time of completion of the transfer, in order to avoid any such claims of fraudulence. “Piercing the corporate veil” doctrine (hojinkaku hinin no hori) Japanese courts have affirmed the doctrine of piercing the corporate veil; specifically, they have disregarded corporate entities in certain situations where it is unfair to deem a corpo - rate entity independent from its members. In determining whether an asset has been prop - erly transferred to an SPC from the originator, it is necessary to examine whether the doctrine of piercing the corporate veil will apply. Termination of the service agreement and replacement of service providers An originator usually acts as a debt collection service provider through a service agreement with the SPC. The SPC should ensure that the service agreement is terminated on a timely basis and that an alternative service provider can begin debt collection services in respect of the underlying assets, in order to enable the SPC to avoid any interruption in the collection of debts (and in turn enable the SPC to pay the investors in a timely manner) should the originator become bankrupt or insolvent. Service agreements gen - erally contain cancellation or termination pro - visions. It should be noted, however, that the validity of such provisions can be challenged by a receiver under Japanese bankruptcy laws, on the basis that Japanese laws allow a receiver to choose between terminating an agreement and demanding its specific performance, if the agree - ment is a bilateral contract and neither party has fulfilled its contractual obligations thereunder.
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