JAPAN Trends and Developments Contributed by: Daniel Jarrett and Hirofumi Kaji, Atsumi & Sakai
Accompanying Support and Expansion of Underlying Assets Accompanying support The type of accompanying support that is now expected of financial institutions is an arrange - ment whereby a financial institution provides financial support to a company while also mak - ing a commitment in connection with the com - pany’s business. This type of financing is based on providing unsecured and unguaranteed loans, or unsecured loans with guarantees by credit guarantee associations, mainly to start- up companies and small to medium-sized enter - prises that do not have tangible fixed assets but nevertheless need access to finance. Loan receivables generated by such loans could, in the future, become the underlying assets in a securitisation transaction. Asset-based lending Another notable area of development is asset- based lending (ABL), whereby current assets such as inventory and accounts receivable are used as collateral for lending. However, under Japanese law, there are no explicit provisions regarding security interests by way of assign - ment, which represents a commonly utilised method for collateralising current assets. The lack of clarity as to the legal effect of such assignments has posed an obstacle to the use of ABL by investors and banks. A review of collateral regulations has been con - sidered by the Collateral Legislation Subcommit - tee of the Ministry of Justice’s Legislative Coun - cil. In addition, the Interim Proposal for Review of Collateral Law, published on 20 January 2023, recommends codifying security interests by way of assignment for movable assets and receiva - bles, which would allow multiple security inter - ests (security interests of secondary or lower pri -
ority) to be created over the same movable asset or receivable, enabling financing from multiple financial institutions and in turn allowing secu - rity interests by way of assignment of revolving security interests (security interests for unspeci - fied receivables). An interim proposal was submitted for public comment in March 2023. Since then, the Leg - islative Council has been studying and deliber - ating on the legislation. No final legislation has been tabled at the time of writing. Promotion of cash flow-based lending On 14 June 2024, the Act on the Promotion of Cash Flow-Based Lending was enacted in Japan. The Act will establish a new security interest known as an enterprise value charge (EVC). This newly created EVC is a security trust-style security interest taken over the total assets and all future cash flows of an enterprise. Secured claims constitute all claims of the company as a borrower under the Companies Act, and there are no restrictions in relation to the creditors or the attributes of the claims. The settlor under this charge is limited to the borrower company, and no third-party pledgors are permitted to be the settlor. In addition, the security interest holder is limited to the EVC trust company and not the creditor. The perfection requirement for the EVC is registration in the commercial register of the company. It has also been proposed that a cash flow- based lending promotion headquarters should be established at the Financial Services Agency in order to promote the EVC (cash flow-based lending) (Articles 5 and 243 of the Act on the Promotion of Cash-Flow Based Lending).
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