There are three types of reorganization laws in Japan: the Corporate Reorganization Law (Kaisya Kosei Ho), the Civil Rehabilitation Law (Minji Saisei Ho) and the Corporate Arrangement under the Commercial Code (Kaisya Seiri). The Civil Rehabilitation Law (Minji Saisei Ho) is a new type of insolvency procedure introduced in 1999 and has been in effect since April 1, 2000. This is a debtor-in-possession (DIP)type of procedure under the supervision of the court that has been very popular among distressed Japanese debtors. Almost 1,300 cases were filed between April 2000 and September 2001. The Corporate Arrangement was introduced in 1938 to allow courts to formulate private workouts. Since it requires the corporate arrangement plan to be approved by all creditors, few debtors now file under this procedure. The Corporate Reorganization Law, which was enacted in 1952 and reformed in 1972, has now been reformed again and will become effective on April 1, 2003.

Purpose of Revising the Corporate Reorganization Law

One of the main reasons for revising the Corporate Reorganization Law (Law) was to make it easy to use both for debtors and creditors. The strongest advantage of a petition under the Law is that it binds secured creditors as well as unsecured creditors in the procedure. Other procedures, even under the Civil Rehabilitation Law, cannot bind secured creditors. The number of filings under the Law, however, ranged from as few as four to at most 57 in each year over the last 20 years. The reason for this relatively small number of filings is said to be that the procedure under the Law is too slow, inefficient and inflexible. In addition, the bankruptcy courts tended to restrict the debtors' filings: Debtors were obliged, not legally but practically, to consult the bankruptcy court before filing a petition under the Law (pre-counsel). The purpose of the pre-counsel was to explore feasible reorganization options. For that reason, the court carefully scrutinized filing documents before a debtor filed a petition. Sometimes, the court would refuse to accept a filing because the debtor, in the view of the bankruptcy judge, seemed to lack the ability to reorganize. The newly reformed Law eases some of the legal requirements for filing a petition, and makes the procedure more efficient and flexible (as discussed below). Whether the bankruptcy courts will continue the practice of conducting the pre-counsel remains unknown at this stage.

Methods to Streamline the Procedure

The reformed Law relaxes the requirements for commencing cases—i.e., the court's orders for relief.² Under the prior Law, the possibility of a successful reorganization was required. The reformed Law allows the court to issue an order for relief³ even when it is apparent that the debtor either may not be able to formulate a reorganization plan that includes the continuation of its business, obtain acceptance of the plan or get a confirmation of the plan. These changes facilitate an earlier filling. The Law also shortens the period for filing a reorganization plan to a maximum of one year from the order for relief. In addition, it restricts the period for installment payments to no more than 15 years after the confirmation of the plan.⁴ Finally, the reformed Law also makes it possible to shorten the case by closing the case after the debtor has paid at least two-thirds of the allowed claims under the confirmed plan.⁵ The shorter the term, the smoother the debtor-creditor relationship will be.

Ways to Utilize Corporate Reorganization Procedures

Almost all the cases under the Law have been filed either with the Tokyo District Court or with the Osaka District Court. These courts have accumulated considerable know-how in cases filed under the Law. To facilitate the filing of a petition, the Law allows the debtor to file a petition in either court as well as the court in the district in which the debtor's headquarters are located.⁶ The court, upon the request of the parties interested or by its own motion, may order a comprehensive injunction.⁷ This comprehensive injunction prohibits creditors, including tax authorities, from executing on any of the debtor's assets during the period from the filing of the petition for the commencement of the case until the entry by the court of the order for relief. The comprehensive injunction functions similarly to the automatic stay in the U.S. Bankruptcy Code §362 and relieves the debtor of the burden of having to seek individual injunctions in various courts within Japan.

To protect against the depletion of the debtor's assets, and to facilitate the reorganization of the debtor, the court can allow the debtor to sell all or part of its business before the plan is confirmed.⁸ However, the court cannot allow the sale if more than one-third of the amount of the equities object to the sale.

The Law accepts the concept of "current value," instead of "going-concern value," to value the debtor's assets.⁹ This eliminates the vagueness of the going-concern value concept and establishes a clear financial basis for the debtor's reorganization. In the reformed Law, the debtor's demand for the extinguishment of security interests is established as it is in the Civil Rehabilitation Law.¹⁰ The court may allow the filing for extinguishment before the confirmation of the plan if it is required to reorganize the debtor.

How the Procedure Has Been Made Easier

Contrary to the prior Law, the reformed Law automatically allows debts incurred before the order for relief but after the filing (in the "gap period"¹¹) to be treated as administrative claims. These claims take priority over other claims.¹² Even if the reorganizing debtor converts to the liquidation procedure under the Japanese bankruptcy law, these debts keep their first priority position under the title of "estate claims."¹³ These revisions are expected to facilitate DIP financing in Japan. Before the revision of the Law, the debtor's management was always ousted, which explains, in practical terms, the relatively low number of filings under the Law. It is natural for the management of the debtor to be reluctant to be fired after it decides to file a petition.¹⁴ The reformed Law allows the court to appoint a member of the debtor's management to be the trustee as long as he or she is free of any future claims by the debtor. This is similar to a DIP procedure and encourages the debtor's management to file a petition earlier under the Law. The Law has also relaxed the vote requirements on reorganization plans.¹⁵

Providing Information for Interested Parties

In order for the procedure to be transparent for interested parties, the Law provides an efficient procedure for the access of documents relating to the cases that are filed in the court.¹⁶ The debtor should inform its creditors of the reason for its filing, about its business, its financial condition and so on.¹⁷ The court, upon request of the party interested, may allow the formation of an unsecured creditor's committee.¹⁸

The reformed Law also provides a procedure for bondholders to vote for or against the plan.¹⁹ The debtor's union is also entitled to give its opinion in connection with the court issuing the order for relief and appointing a trustee.²⁰

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Footnotes

¹ Mr. Abe is an attorney working at Tokiwa Sogo Law Offices located in Tokyo and may be reached at [email protected]. Return to article

² The procedure under the Law is quite different from that of chapter 11 of the U.S. Bankruptcy Code. After filing a petition but before the order for relief (we call this a "gap period"), an interim trustee (a bankruptcy lawyer) is designated by the bankruptcy court. This person examines the debtor's business and financial condition and continues to run its business. The Law does not include an automatic stay. If the bankruptcy court is convinced that the requirements of the order for relief are met, the court will order the relief, which will allow the debtor to advance the procedure under the Law. Return to article

³ See Art. 41. Return to article

⁴ See Art. 168. The prior Law allowed a debtor to take up to 20 years to carry out a plan. Return to article

⁵ See Art. 239. Under the prior Law, the debtor was able to close the case only after the plan had been completely performed or was about to be completely performed. For this reason, a period of between 10 and 15 years was said to be necessary to close the case after the confirmation of the plan. This was too long a time for both a debtor and the creditors to endure. Return to article

⁶ See Art. 5. Return to article

⁷ See Art. 25-27. Return to article

⁸ See Art. 46. The prior Law only allowed the sale of a business through a reorganization plan. Return to article

⁹ See Art. 83. There was a long dispute about the concept of going-concern value under the prior Law. The current value means the fair value of the assets. Depending on what the assets are, the fair value will be measured by their current cost, their net realizable value or the present value of their future cash flow. Return to article

¹⁰ See Art. 104. The purposes of the demand seem to be different. With no ability to bind secured creditors under the Civil Rehabilitation Law, debtors are obliged to negotiate with those creditors not to enforce their rights. However, secured creditors, such as banks and insurance companies, are reluctant to give this concession, given the existing economic recession in Japan. The debtor may demand that secured creditors release their security interests by paying them the value of the secured assets—i.e., not the amount of their claim. This is especially effective for the debtor when the value of the asset has declined. The court allows the release of security interests if the debtor's assets are indispensable to the continuation of the debtor's business. In contrast, under the Corporate Reorganization Law, secured creditors are bound by the procedure. They can enforce their secured interests only through the procedure as under chapter 11 of the U.S. Bankruptcy Code. One of the main reasons to establish this system was to reduce the administrative costs of retaining unnecessary assets as early as possible. This is why the requirements under either of the procedures are different. Return to article

¹¹ See footnote 1. Return to article

¹² See Art. 128. Return to article

¹³ See Art. 11. The Japanese Bankruptcy Law (Hasan Ho) only deals with liquidation cases. Return to article

¹⁴ The Civil Rehabilitation Law is a DIP type of procedure. This is why many debtors decide to file a petition under the procedure, not under the Corporate Reorganization Law. Return to article

¹⁵ See Art.196. Requirements for acceptance of the plan are (1) a majority in value of the allowed unsecured claims, (2) more than two-thirds in value of the allowed secured claims if the plan only extends the payment terms of the claims, (3) more than three-fourths in value of the allowed secured claims if the plan includes reduction and/or exemption of the claims, (4) nine-tenths in value of the allowed secured claims if the plan includes discontinuance of the debtor's business, and (5) the majority in value of the equities. Return to article

¹⁶ See Art. 14, 15. Return to article

¹⁷ See Art. 85. Return to article

¹⁸ See Art. 117. Return to article

¹⁹ See Art. 43, 190. Return to article

²⁰ See Art. 22, 85. Return to article