JAPAN Law and Practice Contributed by: Hiroaki Takahashi, Kaoru Sato, Kenji Miyagawa and Koji Kawamura, Anderson Mori & Tomotsune
Commingling risks Where an SPC holds a claim for collected cash against an originator (who is also a collection service provider) and the originator subsequent - ly becomes bankrupt, the claim will be consid - ered a bankruptcy claim and, as such, may not be satisfied in large part. To mitigate any such loss, a service agreement generally contains provisions that enable the SPC to terminate the agreement in situations where the originator is likely to become bankrupt or insolvent. In prac - tice, however, it is sometimes difficult to know when the originator’s bankruptcy or insolvency is imminent, such that the SPC may not be able to terminate the agreement in time. Accordingly, the cash reserve is structured to cover the loss and enable an SPC to pay its investors as con - tracted. 6.2 SPEs The essence of securitisation is finance, based not on an entity owning assets but on cash flow from specific assets themselves. Therefore, the financial assets must be transferred to an SPE, or they will be treated as assets of the origina - tor and be included in the insolvency estate and exposed to the financial risk of the originator. Therefore, it is usual to utilise an SPE structure. See 6.1 Insolvency Laws (Bankruptcy Remote - ness) regarding the required or desirable aspects of an SPE. Available legal formalities or entities for SPEs under Japanese law are corporations (ie, KK, GK, and TMK) and trusts. Under Japanese law, the most common type of entity for conducting business is a KK. However, generally speaking, a KK is not deemed to be an appropriate form of entity for securitisation because:
• KKs are subject to the Corporate Reor - ganisation Act where secured creditors must exercise their rights in accordance with the corporate reorganisation procedures; and • a KK’s compliance costs are higher in terms of its: (a) obligation to publish financial statements; (b) limitation on the term of directors; and (c) requirement to appoint accounting audi - tors, statutory auditors, etc, and establish a specified internal control system, if the KK’s total debts are JPY20 billion or more. A GK is a relatively new form of corporation introduced by the Companies Act of 2005 and is generally deemed a more appropriate form of entity for securitisation than a KK, since it is not subject to the Corporate Reorganisation Act nor to the onerous limitations or requirements in rela- tion to management and financial compliance applicable to a KK, as previously described. Since GKs are subject to corporate tax, equity investments in the form of a TK, similar to a lim - ited partnership, are frequently used for profit distribution to TK investors to be deducted as expenses for GKs’ corporate tax purposes (see 7.2 Taxes on Profit and 1.2 Structures Relating to Financial Assets ). A TMK is an entity introduced by the Act Con - cerning Asset Securitisation of 1998 (the SPC Act) specifically to facilitate asset securitisation. A TMK is required to file ( todokede ) the com - mencement of business with government authorities, and is not authorised to conduct any acts outside those set out in the asset liquidation plan (ALP). A TMK is subject to the supervision of the Finan - cial Services Agency of Japan (FSA) by way of various measures such as an on-site investi -
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