The commonly used term "bankruptcy" is actually not a Japanese legal term in its true meaning. Usually, the term is defined as "a company that is experiencing difficulties in its management and that can no longer discharge liabilities it must pay off". TDB defines "bankruptcy" in the event that a company is recognized as corresponding to any of the following 6 cases.
(1) Drawing unpaid notes two times and transaction with banks is suspended.
(2) Dissolution of the company (when the representative admits being bankrupt).
(3) Applying for the application of the Corporate Rehabilitation Law to the court.
(4) Applying for the commencement of the procedure based on the Civil Rehabilitation Law to the court.
(5) Applying for liquidation to the court.
(6) Applying for the commencement of special liquidation to the court.
The above can be classified broadly into "voluntary liquidation" consisting of (1) and (2), and "legal liquidation" consisting of (3) to (6).
In addition, bankruptcy is divided into the "bankruptcy for liquidation purposes" aimed at company liquidation (extinction) and the "bankruptcy for reconstruction purposes" whereby the company pays off its debts while remaining in business.
- Bankruptcy for liquidation purposes: "liquidation", "special liquidation"; most cases of voluntary liquidation
- Bankruptcy for reconstruction purposes: "Corporate Rehabilitation Law" and "Civil Rehabilitation Law", on rare occasions part of the voluntary liquidation
Company's assets and liabilities are liquidated through voluntary discussion between the bankrupt company and creditors, and it is not legally binding by the court.
Liquidation is done by participation and supervision of the court.
Corporate Rehabilitation Law
Only joint stock companies may apply for the Corporate Rehabilitation Law. In a majority of the cases, the Corporate Rehabilitation Law is applied to the bankruptcy of a listed company or a large company because the complete disappearance of that company would have a major social effect. The former management is not able to be involved in subsequent management. This may not apply, however, if the former management is not considered responsible for the management issues.
A court will appoint a rehabilitation administrator with the decision to commence a rehabilitation procedure. A rehabilitation plan will be prepared under the supervision of the rehabilitation administrator while business continues. The selection and appointment of a business administrator (sponsor in substance) is key to a successful rehabilitation procedure. It is a major point in the subsequent rehabilitation procedure. In the past, it took a long time to complete the procedure because it was carried out strictly. However, in April 2003, the amended Corporate Rehabilitation Law was enforced to speed up and rationalize the procedure in light of the Civil Rehabilitation Law.
Civil Rehabilitation Law
The Civil Rehabilitation Law was introduced in April 2000, replacing the Composition Law. The Civil Rehabilitation Law may be applied to all corporations and individuals, including joint stock companies, limited liability companies, medical corporations and educational corporations. The purpose of the Civil Rehabilitation Law is rapid rehabilitation before a corporate failure becomes more serious. The party applying the Law is normally an obligor. A creditor may also apply, however. The management rights rest with the former management in principle. However, there are cases in which a supervision order (supervision committee members are selected and given guardianship over a business owner) or an administration order (an administrator is selected and appointed and manages the business in place of the business owner) may be issued based on an application of an interested person or the official power of a court. The approval of a rehabilitation plan requires the approval of a majority of creditors present owed half or more of the amount of reported credits. If the approval of creditors with three fifths or more of reported credits is obtained, a procedure to investigate and determine credits may be omitted (simple rehabilitation). If approved by all of notified creditors, approval for a plan can be obtained immediately (approved rehabilitation).
Liquidation is a compulsory execution procedure to convert all assets of a bankrupt company into cash and make disbursements according to the order of priority of creditors and the amounts involved. Liquidations may be classified into three: voluntary bankruptcy, in which a bankrupt company, the obligor, applies for bankruptcy itself; quasi voluntary bankruptcy, in which a director of a bankrupt company applies for the bankruptcy of the company; and third party bankruptcy, in which a creditor (third party) applies for bankruptcy. When a decision is made to commence a liquidation procedure, a court will appoint a receiver in bankruptcy (normally an attorney). Thereafter, the receiver will manage a bankrupt company. The receiver will manage the assets of the bankrupt company, convert the assets into cash by selling them and collect trade accounts receivable, and use the converted cash as funds for disbursements to creditors.
Only joint stock companies may apply for special liquidation. Special liquidation is premised on the registration of dissolution of a company. If it is extremely difficult to complete liquidation due to negative net worth, etc., a liquidation procedure will be carried out under the control of a court. A liquidator who is appointed through the registration of dissolution will carry out a procedure for winding-up and prepare a draft agreement to determine the amount, time and method, etc. for the repayment of debts. Special liquidation differs markedly from the liquidation procedure. A procedure to investigate and determine credits is not required. A liquidator may convert assets into cash at the liquidator's own discretion, up to a certain amount. Payments to creditors involving small amounts may be made outside an agreement with the approval of a court.
The database accumulates information on thousands of bankruptcies which is monthly updated. The Bankruptcy Report created from this database is circulated via email and mail as soon as it is released. As a bankruptcy professional, it is important to stay up-to-date of the latest trends and developments in the Japanese corporate bankruptcy especially during unpredictable times.
Highlights and outstanding features also give you a better understanding of corporate bankruptcy trends. Corporate bankruptcies represent Japanese economic activities and are potentially significant indicators for conducting business in Japan.