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t Lnited States Bankruptcy Judge, Central District of California; Nomura lectureron tnw. Harvard L"w School (winter 100S). J.D., Uni""r,ity nf Mirhig:m, 1C/71: PhD..Umvers1ty of Texas, 1969.

Tt Associate. Nishimll1'2 &. Partners; LL.B.. Meiji UniverSIty Faculty of Law, 1996;LLM.. \Vaseda Cniversity Graduate School of Law, 1999; LL.M., Harvard Law School,2003

39 CUKm.L b:T'L LJ. 1 (2006)

Japan's Revised Laws on BusinessReorganization: An Analysis

Hon. Samuel L. Buffordr & Kazuhiro Yanagidatt

Introduction ..1. Differences Between the eRA and the RA .....

A /eligihility .B Faster Procedures .C The Trustee or Debtor in Possession .

1. Debtor in Possession Under the eRA .2. Trustee Under the RA , .3. Comparison ~f the eRA and the RA .

D Treatment of Secured Creditors .....1. Treatmcnr of SCl:ured Cn:diwn Undt:r lht: CRA .

3.) "Separation Rights". . . . . . . . . .b) Suspension Order ..c) Redemption and Termination of Se<:urity

Interest .2. RA Treatment ". . .

a) Stay Taking Effect at Time of Case Opening.b) Provisional Stay Pending a Decision on Case

Opening. . .c) Redemption and Termination of Security

1ntcrest . . . .3 Appraisal of Property Value .

a) Bifurcation .1) Standard [or Valuation .

E. Treatment of Taxes and Wages .1. ii/age Clairns .. . ,.

g) Trp::lrmpnt lJndn the eRA .b) Treatment Under the RA .

2. Tax Claims. . . . . . . . . . . . . . . . . . . ,a) Treatment Under the CRA , .b) Treatment Under the RA.. . , .

F Treatment of Shareholders and Fundamental Changesin the Debtor's Structure. . . . . . . . . . .1. Shareholder Voting Righl~ . .

36667799

1010

1010

111111

11

1213131314141414151515

1616

2 Comdl 11ltcnwtionLll Low Journal vbl. .39

III.

2. [ulldUlIlcnlul Changes i/1 the Debtor's 5tnlLtwc

a) Reduction of Capital, Reverse Stock split, andStock Redemption .. , , . . . . . , . , , . , , .

b) issuance of New Stocl< , ... ",.

c) Mergers, Splits, and l\ew Company formationG. Plan Approval.

1. CRA Requirements for Plan ApprowI12. RA Requirements for plan Approval. . .3. Bondholder Voting Rights . ...4. Comparison of the eRA and the RA.

II. eRA vs, RA, , , , , , , . , .. , , , , , . , , .. , ..A. !'vIyea] CaseB Tanaka CaseC. Rdacionship Between the CM and the R..4.. ..D. Factors that Influence Which law to Unl1ze

l. Debtors' Incentives _ , .. __ . _2. Size of Debtor - .3 Cooperation oj Secured Creditors _. . . . _. _... _.4. Tax Claims. . .. _. _... _.S Numbers oj lJnseu.il"NI CI"N]itn}"S and Bondholders ..

6. M:ed for Mergers or New Stach !SSlIWtCe.

1. Necessary Time for Restructuring _8. AppOIntment oj L) Truslee _ .

E. Conclusion. _. . . . . _. __ . _. __ .

Effectiveness of the eRA and the RA .. _ .A Incentive for a Debtor to file Early . __ . __ .

1. Reqwrements for Filing and Opening oj Cases2 Prr.servativf Jnjullcti(}Ils and Slay _ _.

a) Preservative Injunction Pending a Decision onOpening a Case .. _. _. _. . .... __ .. __ . __ .

b) Trearment of Unsecured Creditors3. Postpetitioll Financing .

;J) PhoriTy Cbims _ .

b) No Priming lien Protection4. Analysis of Incentives for a Debtor . ..

B. Achievement of Rapid Restructuring .. __ .1. Claim Examination. _". _. _.. _ _.2. Sale of a Bu\iness _ _ , .

a) Sale at an Early Stage in the Case .b) Shareholders' Right to Veto a Salec) Effectiveness of Early Business Sale _... _. _

J. The Reorganizatio1l Planil) Deadline for Plim Subll1is::;iuJ/ ..b) Contents of the Reorganization Planc) Plan Confirmation. _. .d) Prpp,wbgpr1 Plans _ ,

4. Analysis of Rapid Restructuring _.

16

16If

1818191921222J2.3!~~::>

26272727282828293030]1

31323233

3"t

3637383940404142424343444444451648

2006 Japan's Revised Laws on Business Reoyganizatiol1 }

C Debtor's Leverage in the Bankruptcy Process. . 491. Exewtory Contracts 492. Avoidance Actiol1S. ". . . . . . . . . . 50J. Anulysis of Debtor's Lel'erage . . . . 53

D. Credibility of Reorganization Procedures. . . . 53I Plan Performance and Completion of Proceedings 54:) TfltenwtifJnfl) Tn~{))W'nry. 553 Transparency . . . . . . . . . 58

Conclusion . . . . .. ' , . . . . . . . . 58

Introduction

The world of ]apam:se bankruptcy law has changed dramatically overtbe pa:;l fivc- year", This mm'Cmcnt began in 1909 with the en:J,~trnent of aIlew set of insolvency laws. To begin, the Civil Rehabilitation Act (CRA)replaced the Composition Act on December 22, 1999. I The former Com­position Act, enacted in 1922 and based on the Austrian composition law,L

was rarely used, mainly because it had no system to ensure performance ofthe plan.3 The enactment of the CRA has prompted a boom in rehabilita­tion filings. 4 Furthermore, the Corporate Reorganization Act (RA), whichprovi.des for the reorgamzation of large companies, was substanti.allyamended on December 13, 2002.5 The original version of the RA wasinspired by Chapter 10 of the United States Bankruptcy Act of 1898 (asamended by the ChanJ.lel Au of 1938).6 The new RA adopte.d some. of the

elements of the eRA so that it would attract more filings. Lastly, the Bank­ruptcy Act (BA), which provides for the liquidation of any kind of entity,was also substantially amended on Ma,ch 25, 2004. 7 \Vh)]p thl" 0Tieinal

1. Sec :Vlm)i SalseihO [Civil Rehabilitation Act], Law No. 255 of 1999, amended bylaws No. 80 & 129 of 2001, Laws No. 45,98 & 100 of 2002, and Law ND. 76 of 2004.for an overvlew of lhe eRA, ,eto iYt"'d[UllLl Kuuau,a, Th< Nov J"I'"n<5< Rro";';o.l11i>:atiol1

Procedures, 20 AJ>,L BANKR. ["ST.). lS (Oct. 2001); Kent Anderson, Small Businesses Reor­ganizations: An Examination of Japan's Civil Rehabilitation Act Conside.ring U.S. PolicyImplications and Foreign Creditors' Practical Interests, 75 AM. BANKR. L.j. 355 (2001). Ford.iJ UIf'Ci ~'it:."" of tht.:: old Rcor,l';~nizati()n 41n.d the Cornpo~ition Act.s, .sec Patrie:h She~ &'Kaori Miyake, Insolvency-Related RWfgani;:ation Procedures in Japan: The Fatlr Corner­stones, 14 UCLA PAC. BAStN L.j. 243 (1996).

2. M,:,sANO"C ASi'J<AMI &' YASC'HCI TAN!GL:CHI, CHI)!0U VVAGIHC) [A;" A ..NOMTIOD EDI.

TIQl'-~ ()l- nH~_ C~'j/vIPo'::,nlO).J ACTJ 16 (lQQ3J3 SH1NJlRO TAKAGI, SHI" T()SANHc>srl No KAnAl To SH01W [CtiALLfl'iGE5 MD FCTUKf.

OF THE NEW !"<SOLVlO'lCY LAWS] 65 (2002) [hereinafter TAKAGI, CHALLL'iGEs AND fun;Rf

OPIKE C'l1:W [NSOLVENcY LAWS] Fe)[ empirical studies on the caSe5 filed under rhe Com·position and old Reorgalllzation Acts. see Theodore Eisenberg & ShOlChi Tagashira,Should We Abolish Chapter 1I? The Evidence from Japan, 23 J LEGAL STUD. ill (1994).

4. Kodama, SUPTQ noLe 1, at 18.5. See Kaisha K6seih6 [Colporate Reorganization Act], Law No. 154 of 2002,

amended by Law :"0 76 of 2004 (amending Law No. 172 of 1952). For a brief oVE'rviewof lhe amendment, ,ICe Shinichiro Abe, The Japanese Corporate Reor;l:;anizatian Re}armLaw oj 2002, 22 A>vl BANKR. hoiST l 36 (Mar. 2003). .

6. Shinjiro Takagi, Restruclunng in Japan 6 Gan. 28, 2003), http://v,-v.rw4.worldbank.org/legal/leg,ps/Papers/Takagi]apan.pdf (paper presented at the Global Forum onInsolvency Risk, Washington, D.C.. Jan. 28-1Y, lOUJ,!.

7. See Hasanho (Bankruptcy An], Law No. 7'5 of 2004

4 Comell International Law Journal Vol. 39

BA, enacted in 1922 and based on the German bankruptcy law,t' had beenfrequemly used, the new amendment was intended to provide faster, fairer,and more effective liquidations 9

These legislatlve changes to Japan's insolvency laws were adopted pn­marily because the previous insolvency laws were inadequate to providequick and effective reorganizations or liqUidatIOns for the spiraling numberof failed and fmling entities resulting from the massive collapse of Japan's"bubble economy" in the fall of 1990. 1u

These changes have ushered m new bankruptcy practlces. i I Forexample, most Japanese COUTtS have received more rehabilitation or reor­ganization proceedings and are processing them much faster than in thepastI2 According to empirical data, there were 1,306 CRA filings in theTokyo District Coun during the first four years after the CRA revisionstook e!tect on April 1, 2000. U While most at the restructmings in Japanup to the late 19905 were settled out of comt,14 many more troubled firms

8. YOSlll\\lTSU AOYA:vIA ET AL, HASA"HCl GAISHSC lBA'","RljPTCY LAYvj ~ (11)1)6).9. In addition to these statutes, voluntary guidelines tor out-okourt workouts were

introduced on Seplember 19, 2001 by the committee eSlablished by the japanese Bank­ers Association, the Federation of Economic Organizations and other relevant organiza­tions associated WIth the Financial Services Agency, Ministry of Finance, Ministry of theEconomy, Trade and Industry, Bank of japan, and DepOSit Insurance Corporation.Inspired by the Principles for a Global Approach to Multi·Creditor w'orkouts developedby the International Association of Restructuring, Insolvency & Bankruptcy Profession­als (INSOL), the. guidclinc.5 'were intended 'to cre.at(; an c.nvironmc.nt cn(;tn.trctging expc.­

diled prebankruptcy negotiations by creditors and debtors. Takagi, supra note 6, at 2.For the guidelines and INSOL Pnncip!es, see Japanese: Bankers As:,'n, Sllltekiseirini Kan­suru Guideline [Guidelines for the Out-of-Court WorkoutL http://www.zenginkyo.orjp/newo/13/pdl/GLOlOCJl<J.pdf (la~t Yi"ited Oct. 4, 2005): INSOL 1';TEI";ArlOh,'L, ST,'TI:'"'l'NT Ol' PRINCIPLES fOR A GLOBAL APPRO.,\CH TO MULTI-CREDITOR ViORKOUTS (2000), http:!/wv..'W,msoLorg/pdf/Lenders pdf

10: Anderson, supra note 1, at 360-6111 See T"\h':AGI, CHALLENGES A.:-~D FUTURE OF l'Tj,-:},\ b;saL"\.:~i'-;CY LA..'--vS supra note 3, at

64-99 (explaining the operation of the CRA, problems resulting from its implement3­tion, and pO$sihle solutions thereto). For a general overview of business recovery mea­sures in Japan, see generally SHl:"JIRO TAKAGI, K'GYO SAISEl "10 KrsoCHI5H1KI [BASICK"OW1.FDGE. OF Bt:SII'ESS RecovCRY] (2003); SHIN.llRO TAKAGI &: RAPID Bcsl~[SS Rl'COVERYRESEARCli C()M~lnTH, SOKI JIGYOSAISEI No SUSUME [RECOM""",DATION fOR RAPID BUSI"ESS

RECOVERY] (2003) Ihereinafter TAKAGi, RECOMMENDATlO" FOR RAPlD BU>INESS RECOVERY].12 Patrick L Mears &: Hideyuki Sakai, PaCific Ovenurcs: Acquisitions of Financially

Distressed Company Assets in Japan, 23 Ay[ BANKR. INsr. J 34, 34 (Oct 2004); ShinjiroTakagi, Changing Bankruptcy PractIce and Laws in]apan, Its Future Effects 2-3, http://\\'WW.iiiglobaLorg/country/japan/changing.pdf (last visiteu Jan 6, 2006)

13. Takashi Ohtake, Tokyo Chisai Ni Okem Minjisaiselletsujuki No CenJy6 To Kadm[Current Status and Challenges of Civil Rehabilitation Procedures in Tokyo District Court],LV) jlGYOSAlSF.l To ~AIKl:'iKANRl lfcRNARUUNU !:s£ CREDIT M,,~n.] )2., )j (2.UV'f).

14. Tomoo Tasaku, Latest Insolvency Issues in Japan 3 (Feb. 2, 2004), http://WWW.iiig!obal.org/coumry/japan/lnso!vency_tasaku.pJf !t should be nored rhal,although many people may still believe that the so-called "main hanks" rescued troubledcompames outSIde of bankrt\plcy proceedmgs until the late .!9YUs, a detaIled empmcalstudy does not suppon the existence of such a rescue practice by the Jap3nese tn3inbanks. See Yoshiro Miwa & J Mark Ramseyer, Conflicts of Interest in Japanese Insolven­cies: The Problem of Bank Reswes 11 (Harvard Law and Economics, Discussion PaperNu. '+35, 200J), available at http://wwwJawharvanLedu/programs/ulill_cemer/papersjpdf/435.pdf.

2006 Japan's Revised Laws on Business Reorganization 5

have sLaned filing for bankrupLcy pruLecLiu[l.15 In aclclilion, new reSlruc­tming methods such as debt-to-equity swaps and postpetition financinghave became quite popular, 16

VI"hilE Japam:::,c; Ext:l.utivt::> u:>t;d LIJ see bankl upLcy <J.o. a Ji;,mal awJ

humiliating failure, more executlVes today view bankruptcy as a substantialbusiness opportunity, In)apan, many financial groups, merger and acqui­sition firms, and privne equity funds whose main targets are distressed

corporations have recently emerged,17 Tn addition, a number of restructur­ing advisory firms established by banks, security houses, and accountingfirms have developed in the past five years,18 Although such changes haveenormous implications for the Japanese economy and could greatly impactthe global business community, very little research hilS been done on Japa~

nese insolvency laws ourside of Japan.

This paper focuses on two Japanese insolvency statutes, the eRA andthe RA It compares the two laws, analyzes their effectiveness, and eXam­ines how companles and couns decide which law better applies to varioustypes of cases. 19J he LRA IS deSIgned for small- and meL1mITl-slZed busi­nesses, which constitute 99.7% of Japanese companies 2o However, itsdehtor-friendly provisions have attracted large corporations such as theSogo Department Store and its affiliates with outstanding debts exceedingJPYY3A trillion (equivalent to USD $28.3 billion at $1=Y120pl The RA,which was designed to assist reorganization of large corporations, has anumber of provisions similar to the eRA.,

Part 1 of this article explores the differences between the eRA and theRA. Based on this analYSiS, Part II considers how companies decide whichlaw to use. examining the Mycal and Tanaka cases as examples of casesthat \vere converted from a rehabilitation procedure under the eRA. to areorganization procedure under the RA These cases provide importantInSights into the instances where each statutory framework is most effec­tive. Part III explores the similarities ot the laws and examines theueffectiveness,

15. Peng Xu, Bankruptcy ResolutlOn in Japan: Ovj/ Rehabilitation vs, Corporate Reor­ganization, (RESEarch Institute of Economy, Trade and IndusLry, Discussion Paper No,04-E-010, 2004), available at http://www,riettgojp/jp/publications/dp/04eOl opdf

16, Tasaku, supra note 14. at 4~5. See also .1rOY05"15<':r No NINMTE 10 SWHO [lMOLVeNey PROfESSlONALS Al'iD BUS1~ESSRECOVERY METHODS] 6 Oapauese Ass'n for Bus, Recov­ery cd., 2003) (noting the recent diversification of financing techniques in Japan).

17, Tasaku, supra note 14, at 5-6,19 Id. at 6.19, For comparison purpOSES, the footnotes also refer to comparable provisions in

US bankruptcy law,20 Abe, supra note 5, at 5Zl reikoku Uatabank, Dankruptcy information In lUOU, hLtp://WViw,tdb,coJPI

Losan/syukei/OOnendo.h1ml (last \isited OCL 5, 2005), There are some arguments thatJapan should adopt deblOr~[riendlyinsolvency laws, See Keiichiro Kobay~slu, Tosal1 Tet­suzuhiwa Keizai Seisaflllde Aru [Banhruptcy Proceeding as an EconomlC Pn[icy], inKA!SHAKOSEl KIGYO 5o;\oGO [REORGANlZED COMPA;,Y AFTERWARDS] 22-27 (TatSuya TO'­asawa et aL eds" 2002),

6 Cornell Intematiollal Law Jounral ~01 39

L Differences Between the CR..~ and the RA

In order to answer the question of how courts and firms decide whIchof the CRA and the RA La apply to their cases, it is necessary to clarify theuifferences between the two statutes. This pan discusses the main issueson which the CRA and the RA differ

A. Eligibility

All types of businesses and individuals are eligible for rehabilitationunder the CRA.22 Although the CRA was originally designed for small- andmedium-sized enterprises,23 its debtor-friendly features have also attractedlarge companies such as the Sogo Depanment Stores. H

Under the RA, on the other hand, only a stock corpOratiOn IS eligiblefor reorgani4ation2 ] Therefore, busmess entitles such as a close corpora­tion, an incorporated partially limited liability partnership, and an incor­porated unlimited liability partnership would have to use the CR/I.. 26 Manycuses qualif)· for filing under both the CR.J!,. Clnd the RA, however, becCluse

stock corporations are eligible for filing not only under the RA but alsounder the CRA. Data shows that 74.7% of the 1,306 CRA filings made inthe Tokyo District Court within four yeaTS of the April I, 2000 enactmentof the CRA involved stock corporations. 27

B. Faster Procedures

Although both the CRA and the RA. provide for rather qmck reorgani­zation procedures, the procedure under the CRA is much faster than theone under the RA Under the CRA, a debtor must suhmit a draft of therehabilitation plan by a deadline set by the court subsequent to the claimsbar date. 28 This deadline can vary from one month to approximately eightmonths after the court-issued commencement urder29 Under the RA, onthe Other hand, a dralt ot the reorganization plan must generally be submit-

22. Sa Minji SaiseihO [Civil Rehabilitation Act], Law No. 255 of 1999, arts 1-3,"mended by L"ws No. 80 &: 129 of 2001, Laws 1'-;0.45,98 &: iOO of 2002, "nd Law No.76 of 2004

23. TAKAGI, RFCOev'MFNDATlONS FOR RAL'llJ Br;SlNESS RECOVERY supra note II, at 137;Hideyuki Sakai, Japan, in COIi.IEI< bn'L BLS. INSOLVENCY GelDf' ~[ 29.06[1] (Richard F.Bnude et aJ. cds. 2002.1

24. Takashi Sonoo, Minjisaiseiho Scko Nincnlwnn No Unyo To Kigyo 5aIsei No ]itsuma[Two and a Half Years' PractLce oj the Civil Rehabilitalion Act and CorpuraLe Re vItalization],98 SAIKEN KA.'JRI [CREDlT MAtiAGEMENTl 50, 57 (2002) [hereinafter Sanaa, Two and a HalfYeaTS']

25, See Kalsha Koselho [Corporate Reorganizauon Act], Law No. 154 of 2002, arts.I, 17, amfnded by Law No, 76 of 2004.

26. See Sakal, supra note 23, '1 29.02[21[e] (listing four types of incorporated busi­ness entit.ies under Japanese law).

27. Ohtake. supra note 13. at. 5228. See Minji Saiseiho ICivi! Rehabi]uutioll Act), Law No. 155 of 1999, art 163

amended by Laws No. 80 &: 129 of2001, Laws No. 45, 98 &: 100 of 2002, and Law No.76 of 2004.

29. JOKAL MINJISAISElHO [A'J A:,NOTATW EDITlO" Of 1KE CLvtL KEHAllILlIAIION ACT]

§ 163-3(1), at 650 (Takashi SanDo &: Hideyuki Kobayashi eds, 2003)

2006 Japan '5 Rn'lscd Laws on Business Reorganization 7

ted withm one yea.f of the commencement order. 30

Furthermore, many district courts in major cities have published sub­stantially similar detailed timetables for both eRA. and Rc.\ cases. Althoughthese time framt>s art> not binding, the panies arp expecrrd TO ohsprwthem. A comparison of the timetables demonstrates that a eRA proceedingis implemented at a faster pace than an RA proceeding. For example, theTo1:yo District Court's CRA timetable contemplates the issuance of a com­mencement order wlthin fifteen days of the petition filing, submission of arehabilitation plan \'dthin three months, and confirmation of the planwithin five months31 Since a debtor filing under the eRA is generallyexpeCled to submit a rehabilitation plan vv1thin three months of Hllngunless the court permits an extension, the eRA is not the ideal choice for acomplex bankruptcy case that requires a longer period of time for thedebtor to prepare u rehabilitation phn and to restructure iIS business.

The timetables that courts have set for the RA are tess expedited thanthose for the eRA For example, the Tokyo District Coun's reorganizationproceeding timetable contemplates issuance of a commencpmpnt nrdf'rwithin approximately one month of the filing for reorganization protection,submission by the debtor of a reorganization plan within eleven to twelvemonths, and confirmation of the plan within thirteen to fourteenmonths32 Consequently, the RA time frame accommodates complex casesin which the debtor may require more time to diagnose its problems, pre­pare a reorgamzatlOn plan, and rectify its operations.

C. The Trustee Of Debtor in Possession

1. Debto r in Possessio 11 U /lda the eRA

Perhaps the mosi important addition that the eRA introduced to Japa­nese insolvency law was the feature of the debtor in possession (DlP)33Under the eReA.-, the DiP has the power to man...ge the debtor's business anddisflose of its assets after the rehabilitation proceeding cornmences,34 sub­ject to certain fiduciary duties to the company's creditors.35 The DIP sys­tem makes the CRA more attractive to a debtor because it enables thedebtor's current officers to remain in charge after the filing.

30. Corporate Reorganization Aet art. 1843.j L HII)Er<I MATSUSHI'vrA, MI:--:JISAISFTHO NYLJMO",' lL'iTROl)I.) (,;T!O;-'; To THE C'VIL RcHAlJILl­

TATION ACTI 256 (2002) In. 2002, in approximately 67% Df the eRA cases fikd andconfirmed in the Tokyo District (Durt, the rehabilitation plan was confirmed within sixmonths of the bankruptcy fdIng Ohtake, supra nQte 13, at '54.

32. Sadao Oya, 5aiban}Usumu Kara Mira Kaisei KalshakOseihO No Unyo [ReVised Reor­ganizatlOn Act, A View from the Hench], 100 SAIKEN KA,-";RI [CREDIT MANAGc:.lE:-;T] 122, 135(2003)

33. CS. bankruptcy Law provldes for the debtor's management to remain in place inil rcorgi:.lniz::a.tion C~5C. in most circum.5taI1ccs, Sec) c.g. ~ 7 COl.Ll.ER ON Di\j"\;KRUPTC"Y 1U01.01 (Alan N R~snick & Henry J Sommer eds., 15th cd. 2005),

34, Minji Saiseih6 [CIvil Rehabilitation Act], Law No. 255 of 1999, art. 38.1,amended by Laws No. 80 & 129 of 2001, Laws No 45, 98 &: 100 of 2002, and Law No.76 of 2004.

35, Id art. 382 (lItlposmg a duty of impartiality and faithfulness on the DIP).

]j

Cornell International Law Journal VoL 39

The conn may appOint a trustee, however, when it issues the order to

open a eRA case or at any point during the case if it finds that the debtor'smanagement is inept, that a management decision to dispose of the com~

pany's assets 1S inappropriate, or that having a trustee is critical for therehabililation of the debtor 36 Once appoi.nled, a trustee can exercise theexclusive right to manage the debtor's business and dispose of its assets. 37

Nevertheless, courts rarely appoint a trustee in eRA cases. In fact, as ofAugust 31, 2004, the Tokyo District Court had not appOinted a trustee in asingle case38

Generally, a DIP is monitored by a court-appointed supervisor3 '! Tnfact. the Tokyo District Coun appoints a supervisor for most CRA casesimmediately upon filing. Although appointing a supervisor may he a disin­centive for a debtor to file under the CRA, the coun considers it necessaryto prevent bad faith fllmgs.-to \V11en appomtmg a supervisor, a court Wlllissue an order specifying which DIP actions require the superViSor's con­sent, and any DIP actions taken in violation of this requirement are void.4t

The e;upcevbor may request reporte; hom the DIP or its director,; on the

debtor's business operations and financial condition and inspect the DIP'sbooks, accounts, documents, and address other matters of concern 42 Thesupervisor must report the findings of such an investigation to the court:+3To avoid fraudulent transfers, the coun may authorize the supervisor tobring actions in the course of exercising its supervisory authority++ Oncethe court confirms the debtor's rehabilltation plan, the supervisor isreqUlred to oversee the DIP's performance of the plan.'"

The court may also create a committee of unsecured creditors46 to pro­vide the coun, the DIP. and the supervisor with its opinions regarding therehabilitation proceeding." Where the coun has established such a com­mittee, it must seek the committee's opinion before authorizing a transferof the DIP's business. 48 The eRA does not mandate the establishment of acreditors' committee, however, and, unlike the unsecured creditors commit-

36. fd art. 64. q: 11 U SeA. § 1104 (2005) (authorizing the court to appomt atrustee or examiner in certain circumstances1.

37. Civil Rehabilitation Act art. 66.38 MATSUSHIMA, supra notc 31, at 53.39. See Civil Rehahilitation Act art. 54 (authorizing the court to appOInt a supervisor

if necessary).40. Takashi Sonoo, Minjisaiseih6 Yonen Ni Yosete 1Civil Rehabilitation Act in its Fourth

Ye(w], 105 ]IGYOSAISFr To 5AIKENKANRf [T[JR~AROU"'D & CR~orr MGMT.] 32, 34 (2004)[hereinafter Sanaa, eRA in its Fourth Year].

41 Civil Rehabilitation Act arts. 54.2, 544.42. Icl. art )943 ld. art. 125.3.++ lcl. arts. 56, 13545. ld. art. 186.241; Jd. art. ! U. Cf. 11 U..).LA !i 1102 (200'5 j (providmg for tile appoirlUnent of a

commHte:e: of unsecured credjtms).47. tVlinJi SaISeih6 iCivil Rehabilitation Act], Law No. 255 of 1999, art. 1173,

amended by Laws No 80 & 129 of 2001, Laws No. 45, 98 & 100 of 2002, and Law No.76 of 2004

48. ld, art. 42.2.

2006 Japan's Revised Laws on Business Reorganization 9

lee ill LlIe ullilt.::d Slatt.::S' ChaptEr 11 proC<:5S, ..q a committee of unsecured

creditors appointed pursuant to the CR~ does not have the power to investi­gate the DlP's busIness or property or request an appointment of a trusteeor an examiner5'J Bec:Jl1sE' of rhpsf' limir:H;nns, thl" appoinrmf'nt of a crf'di­

tors' committee is very rare in Japan.

2. Trustee Under the RA

Under the Rl,., a court must appoint a trustee 51 with the exclusivepmvEf to manage the debtor's business and property under the court'ssupervision.52 AlLhough the RA does not h"w' " nIP pmvision, it. llnlikethe preamendment Reorganization ACT, permits appointment of thedebtor's officer or management team as a trustee unless the officer is poten­tially subject to an officer liability investigation. 53 In addition, in an FAcase, the court may appoint a provisional trustee to manage the debtor'sbusiness and property pending a decision to open a case.54 A proVlsion21ltrustee has the exclusive power to manage the debtor's business and to dis­pose of its property. 55 However, the provisional truscee must receive thecourt's permission to take action outside the ordinary course of thedebtor's business. 56

3. Comparison oj the eRA and the RA

Clearly, the DIP system provides a strong incentive for a debtor to filefor CR.l\. protection. In faet, CRA filings in the Tokyo District Court haveincreased almost ten-fold since the CRA replaced the Composition Act in2000.51 The trustee system under the old Reorganization Act had discour­aged debwfs [rom filillb [UJ [JlUtl:ction becaUSE it did not allow the debtor's

management to remain til power after initiating a reorganization case As aresult, distressed companies often waited to file for reorganization until itWU:i too lute to reorgl1nize successfully, and they had to be liql.lidated. 58 In

order to solve this problem, the new R-'\ allows the court to appoint thedebtor's current management or officer as a trustee. 59

49. See 11 LSCA § 1103(c) (2005) (authorizing a committee established undersection ll02 to investigate the acts and financJal cundllion of the debtor, the debLOr'sbusiness, and any other matter concerning the case or the development of a plan).

:;0. 5t.t::: Civil Rehabilitation /\ct urt. 62. (authorizing the court to order one or morecourt-appvinted investigators LO conduct an investigation, if necessary).

Sl Kaisha K6seiho [Corporate Reorganization Act], Law 1\0. 154 of 2002, art 67,amended by Law No. 76 of 2004.

52. Id. arts. 68, n53. lei. arts. 67.3, 10054. Id. art 30155. Id. an. 32.1.56. Id.57. Sonoe, Two and a Ha~ Yeal's', supra note 24, at 5058. Yasuyukl Miyushi, DIP-Gata Kosel Tetsuzuki (Reorganization Pmcedure under the

DIP Systeml, 70 NBL Pu;s 23, 24-26 (2002).J9. The Rl\.lJiiS IlUL iiUUtJU:;U llL\:; Dlr ~PlU" fVi fc., of "bu~e by om"ll- "nd LDedium­

sized companies. Id. at 23-25

10 Cornell International Law Journal VOl. 39

HOWCVCI~, it is unclear under >vhat circum5tunccs court" wlll permit

old management to stay in power as a trustee. Due to this uncertainty,many firms facing financial difficulties choose not to file for early reorgani­zation under the RA. Empirical data show that the number of filings underthe RA has not increased since the substantial amendment of the Reorgani­zation Act on December 13, 2002; instead, it dropped from eighty-eight in2002 to sixty-three in 200360

D. Treatment of Secured Creditors

1. Treatment of Secured CrcditOl'G Under the CRA

a) "Separation Rights"

The eRA's treatment of secured claims is very differenl from that

found under the RA While the stay on execution applies to all securedcreditors under the RA, it does not apply to secured creditors under theeRA. A secured claim under the eRA is categorized as a "separation right"to the extent of the value of the collateral. -Secured creditors are free toproceed with debt enforcement rights against a debtor for whom a eRAcase has been opened61 A rehabilitation plan cannot modify securedclaims. To avoid enforcement by a secured creduor and to modify asecured claim, a eRA debtor needs [0 negotiate a deal with the securedcreditor.

b) Suspension Order

When a secured creditor does not sit at the negotiation table in a eRAcase and lllstead starts a foreclosure sale, the court may issue a provisionalorder to suspend the foreclosure sale for a "reasonable period of rime"62The court may grant a provisional order only if it finds (a) that suspendingLilt:: "die i" iu L1Le tjeue1dl i1LLt:re"L" u[ uu"eculed uediluD aud (L) that LlleL\::

is no likelihood that the suspension will cause unreasonable damage to thesecured creditor.63 The suspension must be limited to a reasonable periodof time, which is the length of time reasonably necessary for the eRAdebtor to negotiate with the secured creditor Generally, the courts grantapproximately three months for this negotiation.64 This suspension onlercan be issued either during the gap period between the eRA filing and thecase opening or after the order opening the case.

60. Masayukl Sugeno, Ho ScM Go 4 Nerthan No Mimji"lisei fillerl Mosflitate NoGaikyo Nada [Filing Under the Civil Rehabilitation Act: l'our Years aJter Its entry intoForce], 105 JIGYOSAISEI To SAlKI:NKANRl [TURNAROUND & CREOll MG:Vl].j 48, 49-50(200'1).

61. :Vlinji Saiseih6 [Civil Rehabilitanon ACl]' Law No. 255 of 1999, an. 53, amendedby l.aws No 80 &: 12\J of 2001, Laws No. 't), 91) Is! 100 of 2002. and Law !'io. ft! of2004

62. Id. art. 31.1 ~

63. Ie/.64. jOKAI!V[It'JISAL,UHO, supra note 29, § 31-4(1), at 121-22~

2006 Japan '5 Revised Laws Oil Business Reorganizatioll 11

c) Redemption and Termination of SccUl'ity lntErcst

A debtor may redeem propeny subject to a lien by paymg the emireamount of the debt owed to the creditor holding the security mterest. 65

Tll1S can pose a great burden on a debtor If the debt 15 undersecuredbecause the debtor must then pay the entire debt, induding the unsecuredportion, in order to redeem the property.

WheTe the property is indispensable for a debtor to contiTILle its busi­ness, a different redemption rule applies. The court may allow a debwr to

discharge an undersecured security interest upon payment of only theYalue of the collateral instead of the entire deht()6 If then' is a disagree­ment with regard to the property's value, the secured party can ask thecourt to determine the value 67 The discharge of such a security interesthas been rare in Japan, however, mamly' because such a security interestcannot be paid off in installment payments. In fact, empirical data showthat there were only eleven motions to terminate a security interest our ofthe 794 CR.A. cases filed between 2000 and 2002 m the Tokyo District( .ourt. b8

2. RA Treatment

a) Stay Taking Effect at Time of Case Opening

Upon issuance of a commencement order in an RA case, secured credi­tors are prohibIted from receiving payments and proceeding with debtenforcement nghts against the debtor69 Thus, a pending foreclosure or anexecution procedure on a secured debr or floaring charge will be stayed. 7o

If the court determines, however, that the collateral securing a claim is notnecessary tor the reorgamzatioD, it then may litt the stay with respect toforeclosure on such propeny 7 j

h) ProVisional Stay Pending a DecbiQIl on Case Opening

Since the RA restricts the rights of secured creditors, provisionalorders may apply CO secured and unsecured creditors during the periodpending the coun's decision on whether to open a case. A provisional sus­pension order suspends any [oreclosure or execution procedure on asecured debt or a floating charge, if the suspension will not cause. an undue

65. See Civil Rehabilitati.on Act arlo 41.1.9 (authorizing the court to require a debtorto obtain its approval before seeking to redeem property that is subject to a creditor'sseparatIOn rights).

66. rd. an. 14867. Id. arts 149-15068. Sanaa, Two and a Half Ywrs', supra note 24, at 50, 53.69 See Kai,ha Koseih6 (Corporate Reorganization Act], Law 1\0. 154 of 2002, art.

i7.1, amended b) Law No. 76 o[ 2004. CI 11 u.s, c.,",., 9 362 (2003) ("Ull!Ulal1C ~l~y

proVision).70. See Corporate Revrganization Act art 50 1.Il. ld, art. 50.7. Cj. 11 U.S.CA. § 362(d)(2) (2005) (authorizing the coun to grant

,did [101ll "ll ""LOWilli" :>lay with ""Vl:;ct Lv palltcular pLQpnty if dLto ,.kbrui b"s 110

equity in the property and the property is not necessary for an effective reorganization).

12 Cornell international Law Journal VoL 39

loss to the affELlEd uediLlJr. TO The su:;pt::nslOn order must specify any fore­closure or execution that is subject to the suspension~ Moreover, the courtmay prohibit the debtor from making any dr:ht payment or disposition ofprorerty~7J If the debtor makes a payment in violation of such an order,however, the creditor receiving the payment may retain the funds if thecreditor was unaware of the suspension order at the time of the paymenrT4

Also, with court approval, a debtor may demand that a secured creditorholding an undersecured pledge under the Japanese Commercial Code75

release the pledged property upon payment of its value in a situation \vherethe property IS essential to the business. 76

Additionally, the court m.ay issue a comprehensive injunction againstall of the debtor's creditors if a proVlsional suspension order is not suffi­cient to facilitate the reorganization. 77 A comprehensive injunction may beb:;ueu uuly ill CUflIleCliun with an oruer prohIbiting the dlSpOS1t1on ofproperty, appointing a provisional trustee, or appointing a supervisor. 78

Such an injunction prohibits all of the debtor's creditors from conductingmost kinds of legal enforcement actions.

c) Redemption and Termination of Security Interest

A trustee under the RA may redeem property from a lien with a credi­tor's consent by providing substitute collateral to secure the debt owed tothe secured creditor.79 Alternatively, the RA permits a debtor to terminatea lien on its property without a creditor's consent if they pay the lienholderthe value of the collatera1.8o Such a termination under the Ri\ is differentfrom that found under the CRA in several ways.

First, under the RA, a debtor may terminate a security interest whenthe court finds such action "necessary" for the reorganization of the busi­ness.8l Under the eRA, however, a court must find that the debtor's prop­erty be "indispensable" for a debtor to continue its business before it willterminate a security interest, which is apparently a higher hurdle.s:! Sec­ond, under the RA, a debtor may terminate a security interest only before a

7L See Corporate Reorganization Act art. 24.1.2.73~ ld. art. 28.1.74. Id. art. 28675. See SHOHO rCommercial Cude]. arts. 51. 521. 557.562. 589. 753(2). tramlmcd

in DOING BLSlNESS IN JAPAN (Statute Volume) app. 5a (Zemaro Kitagawa eeL, 2005).76. Corporate ReorganizatIOn Ac( an. 29"77 Ld. an. 257B. Ld" art. 25179. See jd. an. 71.2~9 (authorizing the court to require a trustee [0 obtain its approval

for a change of collateral), U.s. bankruptcy law only authorizes redemption uf propertysubject to a lien by an individual consumer in a liquidation case. See 11 USC.A. § 722(2005) (allowing un individual debtor to redeem certain tangible personal property froma lien by paying fhe lienholder the amount of the llenholder·s secured claIm).

80. Corporate Reorganization Act arts. 104-112.81. Id. art. 104.1.82. Minji S<liseih6 [Civil Rehabilitation Act], L~w No. 255 of 1999, ~rt 1481"

umwue:u by Law" No 50 &: 129 of 2001, Laws No. 'f5, 915 &: 100 of 2002, and law No.76 of 2004

2006 Japan's Revised Laws on Business ReorganL:atiol1 13

dratt ot the reorganization plan is submitted,8] while there is no suchrestriction under the eRA.8i Under the Rc.l" secured claims may be modi­fled by a reorganization plan, and termination of a security interest is notpermitted after the submission of the plan. Third, an RA debtor who wantsto terminate a security interest must pay the debt owing to the creditorthrough the plan,8~ Under the eRA., however, secured creditors can receiverhr funrh after the debtor pays thf' value of the property to the court 3TId do

not need to wait for the pIan confirmationi'l6

3. Appraisal of Pmperty Valuc

a) Bifurcation

Under both the eRA and the Ri\, a secured debt eXlsting prior 10 thecase commencement is treated a5 a secured claim to the extent of the valueof the collateral, and any deficiency is treated as an unsecured claim.sT

Under the eRA, the 'luluc of the 5CCl.Irity may be dEtt:rmin~dby a £01'::<.1v­

sure sale, redemption, or extinguishment of the security interest. The RA,on the other hand, only permits foreclosures or execution procedures on asecured debt.88 Thus, appraisal of the collateral is necessary under the RAin order for a coun to decide the value of the asset and the amount of theunsec:ured debt.

b) Standard for Valuation

endcr the former RA, collateral was appraised based on the going con­cern value.89 Under tlns valuation process, a trustee and creditors tendedto contest the collateral value based on the unpredictable future profits ofthe debtor, which delayed reorganization procedures. A trustee tended toundervalue the call a te.ral , while secured creditors tended to overvalue it.Under the amended RA, the value of the collateral is the "current price" ofthe collateral at the commencement of the case90 It is unclear, however,what exactly the "current price" means. Under thr npw RA, whpn thpl"p i" :1

dispute regarding the amount of a secured claim, the holder of such a claimmay make a motion for the court to determine the collateral value91

83. Corporate Reorganization Act an 104.2.84. Civil Rehabilitation Act art. 14885. See Corporale Reorganization Act art. 167.1.6 (requiring a reorganization plan to

<rwrify thp nlnonnt and use of the fund, to be distributed)

86 Civil Rehabihtauon Act art 133.87. Id. art. 88; Corporate Reorganization Act art. 2.10 Accord 11 US.CA. § 506(a)

(2005)HH c.orporatp. Rf:,organi7:::lt;on Art an:. 50 1,89 See Kaisha Koseih0 [Corporate Reorganization Law], Law No. 172 of 1952, arts.

12.4.2, 1772 (amended 2002), t.-ans!ated in 2 EHS LAW Buu Sm. no. 2350 (2000)(using the term "the value at the time of the commencement of reorganizationproceedings"). .

90. Corporale Reorganization Act an. 83.2,91 Ld ms. 153-]54,

14 Cornell International Law Journal VoL 39

E. Treatment of Taxes and \Vages

1. \-vage Claim.';

a) Treatment Under the eRABoth the eRA and the R.A. give priority to wages antI reliremenl bene­

fits over other unsecured claims because it is important for a distressedcompOlny to TI10tlVate Hs employees to continue to work 1-'nr pX;Jmple,

under the eRA, wages and retirement benefits prior to the opening of acase are treated as "ordinary priority claims."91 An ordinary priority claimis payable immediately, and the holder of such a claim is free to enforce theclaim outside the rehabilitation procedureY'

Nonetheless, the court may order a suspension or termination of suchan enforcement procedure if it poses a serious obstacle to the debtor's reha­bilitation and if the debtor has other sulTicient assets that the creditor canforecloseY4 The conditions for the suspemion or termination order areoften difficult to meet, however, and it is quite rare fOT a court to issue such,ill viller. OllCt: a case is npeued, any subsequent wag~5 and rcrirementbenefits are treated as common benefit claims95 that are paid promptlyoutside the rehabi.litation procedure96

b) Treatment Under the RA

The RA treats postopening and preopening wages from up to sixmonths before the commencement order as common benefit cbims 97 A

common benefit claim must be paId immediately and may not be deferreduntil approval of the reorganization plany8 Thus, employees are free La

demand payment of their back wages and to initiate execution procedures.While it rarely does so, the court may suspend or cancel such executionprocedures if these procedures could seriously impede the reorganizationprocess and If the debtor has other sufficient assets that the employees canforeclose.'lL) Preopening wage claims, other than those that become due

92. See Civil RehabilItatIOn Act art. 122; 1vhNP() [Civil Code], art. 306.2, translated inD'~l~l'';; B"L':;>lp:E$~ l~ JAP.~i'-: (St;'lt1.1t~ VohJ.n1.e.) app. 4A (Ze-nt:1.ro Kit}l8~I\hi~l !.J.d, 200':::;). (I 1 J

U.S.CA § 507(a)(3) (2005) (giving a distribution pnority for prepetition wages of up to510,000 per employee, but not providing for distribution before the payment of otherunsecured creditor claims).

en C"ivil Rehabilitation Act an 122294. rd. arts. 121.3, 122495. ld. art. 119.2. A "common ueuefJt claim" is similar to an admmistrative claim

under 11 USCA § 503 (2005), and must be paid when it becomes due notWIthstand­ing a pending rehabllnation or reorganization case Civil Rehabilitation Act art. 121;Corporate Reorganization Act an. 132. Upon default, a postpetition creditor holding acommon benefit claim is free to initiate an enforcement procedure, provisional attach­ment, or disposition. II a debtor in an RA case does not have enough assets to pay allcommon benefit claims, the creditors share pro rata. Corporate Reorganizarion An art.133,1. Even in such a case, a COlllmon benefit claimant may loreclose on its lien. rd.

96. See Civil Rehahiliralion Act art. 121.1-.2.97. Corporate Reorganization Act arts. 127.2, 130. for a defminon of common ben­

efit claims, see supra note 95.98. Corporate Reorganization ,\ct mL 132,1.99. Id. arL 1323.

2006 Japan'5 Revised Laws 0/1 BLlsiness Reorgalli::ation 15

within the six-month window before the case openmg, are treated as prior­ity unsecured clallns loo that must be paid according to the reorganizationplan These claims take priority over other unsecured claims, 101

Retirement benefits payable before plan confirmation are treated ascommon benefit claims, Such payments are limited to the larger amount ofeither six months' \vages or one-third of the retirement benefit amount. 102

The remaining amounts of prpc:nnfirmnrinn retirement benefits are treatedas priority unsecured claims, 103 However, where a debtor dismissesemployees after the case opening, the entire amount of retirelnent benefitsis treated as a common benefit claim 104

2. lax Clmms

,,) Treatment Cndcr the eRA,

The eRA and the Ril" treat tax claims differently, Lnder the CRA, pre­opemng tax claims are treated as ordinary priority claims, and postopen­ing tax claims as common benefit claims, 1 05 Since a coun does llUl

generally issue a suspension or cancellation order against an ordmary pri"ority claim or common benefit claim, a debtor must negotiate '-"ith the laxcollection agency to suspend the collection of taxes and to modify a taxclaim

b) Trp;\tmf:nt Undr.r the RA

\Vhile the RA treats postopening tax claims as common benefltdaims,106 it treats preopening tax claims very differently from the CRArreujJt:llillg lal\. clalm,;:> arc tr<:i1ted a;:> unsecured c!ulm;:;,lD7 ThcrdoTe, upon

the opemng of a case, collecting preopening taxes is prohibited. In addi­tion, a preopening tax claim may be modified by an RA plan,

Given thelt tax collection is ::In important sour,,, of n<1ticmn] govern­ment funding, the RA treats preopening tax claims somewhat differentlythan ordinary unsecured claims, For example, the moratorium agamst col­lecting preopenmg tax claims is limited to just one year following the open­ing of a case, 108 A provisional injunction against the collection ofpreopening taxes may be issued during the waiting period for case open­ing, but only after the court consults with the appropriate tax collection

100, ld, art 168 12. See also MINPO, an. 3062.101. Corporale Reorgani.zation Act art. 168,1.2,102. Jd, an, 130 2,103. )/X](1 an, 168,1.104 See id 3rl 127.1.2,105 MinJi Saiseiho [(iv1] Rehabilitation Act], Law \'\0, 255 of 19Y9, am, 119.1.2,

122, ((mended bv Laws No, 80 &. 129 of 2001, Laws No, 45, 98 &. 100 of 2002, and LawNo 76 of 200{ C/' 11 USCA § 507(a)(8) (2005) (giving most tax claims an eighthpriority aht:ad of general unsecured creditors but generally lawn than olher priorityclaims).

106 Corporate Reorganizalion ACl art, 127,2,107 Ld, arls. 2.8, 2,16108. Id, art ')0,2,

16 Cornetl International Law Journal Vol 39

agencyl09 In addition, the provisional injunclion prevents collection ofpreopening taxes only for two months.u° A preopening tax claimant doesnor have the right to vote on the plan of reorganization, but the debtor mustullLain UJll"elll Ly die Lax Lullt:Llluu ageucy ill uHln LO mouify a prEupen­ing tax claim in its plan. lll In some C<.1ses, consulting with the tax agencymay be deemed enough. For example, consultation is sufficient where thereorganization plan provIdes for deferred payments over less than threeyears, suspension of the collection of preopening taxes, or modification ofinterest on the preopemng tax claim arising Wlthin a year of rhe opening ofa case. l \ 2

F Treatment of Shareholders and Fundamental Changes in the Debtor'sStructure

1. Shareholder Voting Rights

Since the CRA can be used to modify only creditors' rights, sharehold­ers do not have the right to vote on a eRA plan. In contrast, the RA givesshareholders voting rights unless the debtor is insolvent. Il3 Because adebtor involved in a reorganization procedure is usually insolvent in]apan,its shareholders do not generally have voting rights on the plan undereither the CRA or the RA

2. Fundamental Changes in the Debtor's Structure

a) Reduction of Capital, Reverse Stock Split, and Stock Redemption

Under both the CRA and the RA, a reorganization plan may providefor a reduction of capitaL reverse stock spitt, or stock redemption. 114 Sincethe RA is intended to modify shareholders' rights, an RA plan may includesuch changes. The CRA, on the other hand, is designed to modify only therights of unsecured creditors and not the rights of shareholders. However,the CRA grants the authority to make a fundamental change in sharehold­ers' rights for the benefit of the debtor.

Without such a provision, a rehabilitation plan that changes share­holders' nghts would require approval at a general shareholders' meetingin accordance with the Japanese Commercial Code. lls In order for a share-

109. ld. o.rt. 24.2.110. ld. 3rt. 24.3, It should be noted that, when Lax collection is not sLayed, nothing

prohibits payment of such tax claims, Id. art. 47. 7.Ill. ld. art 1691.112. Ld.l13 ld. arL 166.lL4. MinJ! Saiseih6 [Civil Rehabilitation Act], Law N\). 255 of 1999, ans. 154.3, 161,

amended by Laws No. 80 & 129 of 2001, Laws No 45,98 & 100 of 2002, and Law No76 of 2004; Corporate Reorganization Act arts. 45.1.1, 45.1.5.

115. See, e.g., SHOHO [Commercial Code], arts. 2141 (requiring a resolution for con­solidation of shares), 3751 (reqUiring 3 resolution for reduction of Slated capital).Please note that Section 2 of SH(JHO was replaced by MISHA /-/0 [Corporation Act], LawNo. 86 of 2005, which will become effective in May 2006. For an overview of KAlSH.~ \la,

see Tetsu Aizawa, Shin Kaisha Ho No Gaiyo [Overview of the New Corporation ActJ, 110)lGYOSAlSEJ To SAlKEN~"iRl jTljR'iAROUND 1St CRWlT MGMT.] 4 (2005). Except under

2006 Japan's Revised Laws on Business Reorganization 17

holder resolution to be approved, one-half or more of the voting riglu;, lllU:>t

be represented at the shareholders' meeting and two-thirds of the votingrights represented must vote in favor of the resolution1t6 However, it istliHilull [UI must di:;tressed firms to meet these requirements. Also, it doesnot seem fair that shareholders can retain their rights while the claims ofunsecured creditors may be modified by the rehabilitation plan.

Therefore, the eRA allows ;l firm to craft a rehabilitation plan thatmodlfies shareholders' rights by reducing the firm's capItal, conducting areverse stock split, or redeeming its stock. Since the adoption of the rele­vam prmisions, the number of reorganization plans filed with the TokyoDistrict Court and providing for a reduction of capital increased fromtwenty-seven in 2000 to forty-three in 200 1, fifty-five in 2002, and forty­three in 2003117

b) Issuance of Nev.' Stock

A distressed company frequently needs to issue new stock or to con­vert debt to equity (DES) in order to obtam fmanelal support from mhercompanies1l8 The CRA, however, does not generally permit a company toissue new shares pursuant to a reorganization plan. Thus, a company inLhe eRA jJl\J(XSS generally must follow the Conuuercial Code proceduresin order to issue new stock.

For issuance of new stock, the Commercial Code requires only anaffirmative board resolution119 For a firm to issue new shares to entitiesother than current shareholders at a "specially reduced issue price"120 orrestrict the transfer of shares, however, it must obtain a two-thirds majorityvote at a general shareholders' meeting where holders of a majority of theoutstanding shares arc present121 Because obtaining such approval at ashareholders' meeting can be costly and time consuming, the CRA proVidesthat a firm with a restriction on the transfer of shares may formulate arehabilitation plan that authorizes issuance of new shares Lu t:lltilies otherthan current shareholders, subject to COUIt approval. l22 Such approval,

,)UILlt: Lircun1~t,),ncc31 the KAl:;JHA HO rcqunement for t'und:arnenI::;:ll ("h~ng.f"'''' in Ilw tll--:htrn·'s

structure is generally the :;amc as the ones under SHOH(). For the details of Ine require­ment for shareholder resolution, see Hiroshi Kondo el aI., Shin Kaisha H6 Q &A [Q &Aon the New Corporatiun Ad], liO ]lGYOSMSEI To SAIKEC'KANRI [T1;RNAHOUC'D &- CREDiT

MGM"T.j 30, 106 (2005).116. SHISH(\ art 343.117 Ohtake, supra note 13, at 57.118. Debt-la-equity swaps (DES) have gained popularity in Japan becallse banks want

to "voir! Tisky decisions about how much debt they should forgive and to earn upsideprofit whm the debtor successfully recovers from a financial crisis. Tasaku, supra note14, at 4.

119. SHOW'), art. 280-2.1.120. ld. art. 2RO-2.1(8). It is difficult to define what a "specially reduced issue price"

is. hut It is generally understood that a price that is 10% less than the fair issue price(i.e. the current market price) is not a speciaHy reduced issue price. Sce HlDEKl K\NDA.

KAISHAHO ICORPORAII, LAW] § 2.63(2). at 214 (2004).121 SHaHO, art. 343122. Minji Saiseiho ICivil Rehabilitation Act!, Law No. 255 of 1999. an 134.'+.

amended by Laws No 80 &" 129 of 2001, Laws No. 45. 98 &: 100 of 2002, and Law ~o.

18 Cornell International Law Journal Vol. 39

hOWC:YCL i5 only an"Hable for a finn that rEstrict.., the transfej of 5hart:5, 15

insolvent, and absolutely needs to issue new shares to keep its businessafloat. l23 In addition, a court-appointed inspector must examine the valueof the debts before a DES can be undenaken. 1H This, too, may be costlyand time consuming.

The RA, on the other hand, provides that if a company wants to issuenE,\' stock, preemptive rights, or bonds, it may include such provisions inthe reorganization plan,125 Therefore, the RA does not require a debtor tofollow the Commercial Code procedure, and the debtor can seek financialsupport from other companies or pedorm a DES in an easier, less costlymanner than in a eRA procedure.

c) ~'[ergers, Splits, and New Company Formation

The CRA. and the RA differ in their treatmem of mergers, splits, andthe formation of new companies. Since the CRA is intended for Simplecases with no need for a merger, split, or new company formation, it con~

tains no proVIsions on these subjects. If a merger oj subsidiaries, split at acompany, or formation of a new company is necessary to restructure abusiness, a firm in a eRA case must foHow relevant procedures under theCommercial Code. To authorize a merger or split of a company, forinstance, the Commercial Code requires an affirmative board resolutionand a shareholder resolution. 126 In order for a shareholder resolution for amerger or split of a company to be approved, one-half or more of the votingrights must be represented at the shareholders' meeting, and two-thirds ofthe voting rights represented there musl approve the resolutionJ27

The RA, on the other hand, was intended to address more complexcases where mergers, splits or new company formations are necessary.Thus, a company in an RA reorganization procedure may Simply incorpo­rate provisions on a merger, spIlt, or formation of a new company in itsreorgamzatlOn plan and not sattsfy the requuemems of the CommercialCode. I 2.8 Because of this simplicity, the RA is attractive for a distressedcompany with a complex structure that may need to seek a merger, splitthe company, or form a new company.

G Plan Approval

After a draft of the reorganization plan is submitted to the court andother conditions are met (e,g., required reports 011 the debror's husinessand properties are submitted), the court will authorize distribution of the

76 of 2004 See also ld. art. 162 (requiring a debtor utilizing Article 1')4.4 to speCIfy thetypes and number of such new shares in the reorganizatIOn. plall).

123 fd art. 166.2.3.12't. 5BOHt\ art 2506.125. Kaisha K6seihO (Corporate Reorganization Actj, Law No. 154 of 2002. arts.

45.1.2,175-177, amended by Law No 76 of 2004.126. SHl"JHO, arts. 260.2. 408.1.127. rd. art~. 313, 108.1.128. Corporate Reorganization Act arts. 45.14. 180:'181, 183.

2006 Japan's Revised Lents on Business Reorganization 19

plan for the approval of the panies emitled IO vO[e_ 129 In a eRA case, theTokyo High Court has ruled that a court may decide detailed proceduresfor approval of the plan. DO

The: CR.\ and the: RA have different provisions on the parties entitled

to VOle on a plan. Since the CR.'\. allows a plan to modify or change onlythe rights of unsecured creditors,131 unsecured creditors alone have a rightto vote on the plan132 Under the RA. on the other hand, the plan maymodify rights of secured creditors, unsecured creditors, and sharehold­ers 133 Therefore, all of these parties generally have a right to vote on areorganization plan_ lJ4 Shareholders, however, do not have voting rightswhen a reorganizing company is insolvent at the time of the opening of theproceeding_ 135 In addition, when the plan does not affect the rights ofparticular parnes, these parties do not have voting rights under the RA,136

1. eRA Requirements for Plan Approval

Under the eRA, all unsecured credilOrs are c3tegonzed into a singlegroup for purposes ofvonug on the plan_ They may vote on the plan eitherby ballot or at a creditors' meeting1J7 In order to approve a plan, one-halfor more of the unsecured crediwrs who are present at the meeting or whovote by ballot must vote in favor of the plan, und those voter:> must

represent at least one-half of the aggregate claim amounts< 138 Since thisrequirement IS relanve1y relaxed, eRA cases have a high plan approval rate,Empirical data show that in the CRA cases filed in the Tokyo District Courtfrom April 1, 2000 to August 31,2002,73% of reorganization plans wereapproved by creditors at the creditors' meetings 139

2_ RA ReqUirements jor Plan Approval

The RA, on the other hand, divides voters into several different classes:secured creditors, priority claim holders, general unsecured creditors, pre-

129 Id, art. 189; Minji Saiseih6 [Civil Rehabilitation Act]' Law No. 255 of 1999, art.169, (lmendnl by Laws No, 80 & 129 of 2001, Laws No, 45, 98 & 100 of 2002, and LawN.--.. 76 "f )[1[14_ CJ 11 I.: "C A § 11 'J'; ()n!)'») (~t"tihg ~imihT TP(l'llTPrnpnt~ I'm- cli,r1".sure and solicitatIOn of votes on reorganization plans)_

130_ See In re Undisclosed Parties, 1138 KlNYl; HANREl 45 (Tokyo High Ct., Dec. 5,2001).

131. Civil Rehabilitation Ad arts 21.3. 154132 Jd_ arts. 169 -171133_ Corporale Reorgani2illJon ;\ct arts_ 2.13, 2_2­134_ Id_ arts. 189.2, 196,5.135_ Id art. 166.2. CJ 11 U.SCA. § 1126(g) (2005) (stating that a class of credltors

is deemed to have rejected a plan if the plan does not pro"ide for the class to receive orretain any property on account 01' the creditors' claims)_

136 Corporate Reorganization Act art. 195_ q 11 U5CA. § 1126(f) (2005) (statingthat a class that is unimpaired under a reorganization plan is conclusively presumed tohave accepted the plan, and no voting by members of that class IS reqUired).

137_ Minji SaiseiM [Civil Rehabilitation Act], Law No, 255 of 1999, arts 169-171,amended by Laws [\;0_ 80 & 129 of 2001, Laws No. 45, 98 & 100 of 2002, and Law No.76 of 2004

138_ T(1. art, 172-3, l.

139. Sonoo, Two an.d a Half Ywrs', supra note 24. at 54

20 Corne[l International Law JOllrlwl lio/. 39

ferred shareholders, and ordinary shareholdtTs. I ~o The plan may combmetwo or more categories of the above vorers into one class or divide onecategory into two or more classes, provided that unsecured creditors,seLuted cn:diLors, and shan:holders arc categorized in differcnt das3cs. 141

In practice, however, the plan does not generally divide one category ofvoters into two or more classes because such division may complicate vot­ing procedures "nrl del,,)' the rE'org~nintinll pmce~s T42

Plan approval under the RA requires the approval of the unsecuredcreditors, secured creditors, and shareholders. 14j If a company 1S insol­vent. only unsecured and secured creditors need to approve the plan.! H

For approval by unsecured creditors, a plan must receive support fromthose \vho hold at least one-half of the total value of the unsecureddaims. 145 for approval by secured creditors, a plan must meet the follow~

ing vote requirements: (1) votes representing at least two-thirds at the totalvalue of the secured daims if the plan alters the maturity dares of lhelrclaims, (2) Votes representing at least three-fourths of the lotal value of theclaim;; if Lhe plan includes a dbcllO.rge of d<lllU5 ur change other Lhan a

mere alteration of the maturity dates, and (3) voles representing at leastnine-tenths of the value of the claims in the event the pInn contemplatesliquidation of the debtor's bus:ine5s146 Finally for approval by ,harehold­ers, those voting in favor of the plan must hold at least one-half of the tOtaloutstanding shares147 Unlike the eRA, the R.A. docs not require approvalby it majority of creditDTs who are present at the creditors' meeting,

--~-~----~~-----------------_..----140, Corporate Reorganization Act arts. i96.1, 168,1. in contrast, Chapter 11 of the

1.:.5. Bankruptcy Code only requires that members of a special class have "substantially5imil<ll" dailll~ or iJjl~l~~l~. s~" 11 U.S.CA. § l122(a) (20().5) (pccmitting dassific"uoneomhining claims or interests only if "such claim 0, interest is substantwlJy srmilar tothe other claims or interests of such class"). Case law requires, however, that securedcreditors be classified separately [rom unsecured credilllrs and generally thal each~ccurcd creditor have it5 o.....vn clo.3~. COLUI:[!. o,;:.~ S.....NI{ClUPTCy, sup"'!. note 33~ 9ri112.03[4Ilcj.

141 Corporate Reorganization Act art. 196.2.142. Ken Yamamoto, Kosei Keihahu Ni Oheru Koser I(;l/lpo!<en Oyobi KOSel Sail/en No

Kunnw'lhe [Classification of S~;;.;'t.Lred cY\:.. J'itC:llr~ 'lnd T}11S"'·("J1n·J Cn,rll!I1H. in (J RjJ()t"l}f!nh;r:iir111

Plan], in K,)sEl KElKAK\J No ]nsuMu To Rlll.oN [PRACTICE ""D THEORY 0" RF.QRGAi'VATIOl'

PLAe<1 531.,531 Oapanese Ass'n for Bus. Re~overy ed., 2004).143. US. law silUilarly requires that ench class (unk~s the class is unimpair<;d)

~pprnvp " rpms,nization plan. unless the cram down provision is invoked, 11 U.S,c.A.§§ 1129(a)(S), 1129(b) (2005).

144. Corpor<lle Reorganization ACt lin 166.2145. lei, art. 196.51. The old Reorganization Act required two-thtrds approval by

unsecured creditors_ but the new RA relaxed this requirement. In contrast, U.S. lawprovides that a class accepts a plan of reorganization if al least half of Lhe voting classmembers accept the plan and if these voters hold at least lwo-thirds of the value of theclaims represented. 11 U5.C.A. § 1126(b)-(r) (2005). U.S. law applies the S<lme[ormuht to every creditor and shareholder class Because case law requires that everysecured creditor be separately classified in most circumstances, see supra no\e 140. ineffecl it reqUires the unanimous approval of secured creditors (;lbsent cram down).However, under u.s. Jaw, nonvoting creditors nrt: ignoH'.d in these calcula\ions See. eg.,.Heins v. Ruli-Sweetwater (Ill re Sweetwater), 57 BR. 748, 750 (D, Ctah 1985).

146. Corporate Reorganization Act art 19652147. Id. arts. 166, 196.5,3.

2006 Japan's Revised Laws on Business Reorganization 21

Il is worth noting that only the RA has a "cram down" provision. l4fl

That is, when the approval requirements specified above have not beenmet, the court may confirm a plan under the R-A by arm:nuwg it to protectthe rights of a dissc:nting class (ie., a class that does not provide sufficientyates in favor of the plan). For a class of secured claims, an amended planmay provide that the claimants retain the liens securing their claims to the<,xrl'm of rhe allO\ved amounts of such daims.l-ty Alternatively, an amend­ment [or secured claims may provide for the sale of the property securingthe claims, free and clear of liens, at a price at least equal to the fair trans­action value prescribed by the court. Net proceeds can either be given to

the secured creditors or deposited pending further court order,150 For aclass of unsecured claims or a class of shareholder claims, the court mayamend a plan to grant each claimant at least as much as the claimanr wouldreceive 1f the company \vas liqUidated under the BA 151 In addition. <lIt

amended plan may provide that the dissenting class will receive the fairtransaction value of its rights as determined by the COUn. 152 Finally, thecourt may also amend the plan to protect the holders of itnpllired rights

fairly and equitably in another similar fashion. t53

3. Bondholder Voting Rights

Under the Japanese Commercial Code, bondholders of a reorganizingcompany generally must authorize their trustee to vote on a plan. 154 Suchauthorization must be approved by bondholders holding at least two-thirdsof the total amount of issued bonds at a bondholders' meeting where atleast one-third of the bondholders are presenl. lSS Because individual

148. ld. art. 200 Cf J 1 U.':>.C.A § 1129(b) (2005) (authorizing the court to confirma reorganization plan provided that the plan "does nol discriminaie unfairly, and is fairand equitabl~" with respect to each dissenting class).

149. Corporate Reorganization Act art. 200 1.1. CJ 11 U sc.A. § 1129(b)(2)(.'\)(i)(200J) (applyIng thl: saml: rule a, Ll1l': RA, ",ad fUl Lt.", l~quiTing the p"ymc:nt of interestwhen a secured claim 15 given this treatment)

150 Corporate Reorganization Act an 200.1 1. Accord, 11 L'.S.CA.§ l129(b)(2)(A)(ii) (2005)

151. Corporate R<:or!;anization ll.et £In. 200.1.2. Cf Jl eSCA 5 1119(a)(7)(A)(li)(2005) (requiring, for a phm to be confirmed, that it provide at least as much as theclaimant would rectlve in a Chapter 7 liquidation case).

152 Corporate Reorganization Act arL 200.1.31.53. ld. art. 20014. The RA does not speCify what constitutes "fair and eqUitable

protection" of tne rights of creditors in a fashion similar to the prescribed methods, andthis remains to be worked Olt!. This language appears to have come lrom the u.s. Bank­ruptcy Code, which provides, in addition to the alternatives speCified in articles200.1.1-3 of thL RA, that the "lair and equitahle" requirement may be satisfied as fol­lows: (a) for secured claimants, by providing "for the realization of the indubitablee.quivalent of such claims:" (b) for an unsecured claimant, by applying the "absolutepriority rule" 50 that a more junior claimant receives nothing unless that claimant ispaid in full: and (c) for a senior or preferred shareholder, by applying the "absoluteprioril y rule' so that no shareholder whose interest is junior to lhe shareholder's intereSlreceives allY thing unless the senior or preferred shareholder receivcs the highest of (1)the shareholder's fLxed lIquidation preference, (ii) the fixed [l:demptiotJ price, or (iii) thevalue of the shareholder's interest 11 eSCA. § 1129(b)(2) (2005).

154. SlIOHO, art. 309-21 (2).155. Id arts. 324, 3092.l.2.

22. Comell International Law Journal Vol. 39

bondholders generally are not greatly interested in a company's restructur­ing plan, bondholders' meetings organized for such a resolution tend tolack the reqmred quorum. [f bondholders fail to reach a resolution, theymust vote on the plan individually.156

For an affirmative vote in favor of a plan, the CRA. requires approval byone-half or more of the eredirors present at the meeting. Because bond­holders generally outnumber other unsecured crediwJs, a eRA debtor mayhave difficulty in meeting this requirement when many bondholders disa­gree to the plan Given that the claims of bondholders are generally smallcumpared to those of other unsecured creditors, it is not lair that bond­holders have the power to veto a plan against the will of other unsecuredcreditors with larger claims.

The RA on the othn hand, due:> llul IE4uire approval by one-half ofthe creditors. Instead, it only reqUires approval by creditors holding a des­ignated percentage of claims measured by the value o! the claims Thus,when a debtor has many small bonciholrll'r~, it m<lY find it easier to obtainapproval of a plan under the RA rather than under the CR,'t.

4. Comparison of the eRA. and the RA

Although the C~A. and the RA have similarly relaxed voting require­ments for a reorganization plan, these laws are designed for very differenttypes of cases. On the one hand, the CRA anticipates cases where most ofthe parties are eager to cooperate wilh the debtor. for example, since theCRA re4uires the approval of a majority of unsecured creditors who arepresent at the creditors' meeting, it assumes cases where most of theunsecured creditors will wanl to cooperate with the debtor and agree to theplan. However, because a rehabilitation plan cannot affect the rights ofsecured creditors, the debtor must negotiate with each secured creditor andobtain lOn~f'nt to morHfy the creditor's rights. Unless secured creditorsconsent, the debtor may not effectively rehabilitate its business under theCRA. Thus, the CRA. is intended for cases where either the secured credi­tors are not important for purposes of a reorganizati.on plan or whPrf' mnstof the secured creditors agree to the proposed modIfIcatIOn of their rights.

The RA, On the other hand, does not require cooperation of credi.torsto the same extent. First, it does not require the approval of a majority ofthe unsecured creditors who attend the meetmg. Therefore, even when amajority of the voting unsecured creditors disapprove a plan, the court mayconfirm the plan if unsecured creditors holding more than half of theaggregale cluim amounts favor th~ plan. 5t:Luwl, t:Vt:Il when some securedcreditors disagree to a plan, the plan may modify their rights if securedcreditors with a certain percentage of the aggregate voting rights approve

156. l\ote that the eRA and the RA give speCial treatment to bondholders' votingrights That is, bondholders may have voting rights on the plan only when they submittheir claim to \'ote on the plan to the court. Minji SaiseihrJ [Civil Rehabilitation Act].Law No. 255 of 19QQ, art 1f)Cl-2.1.2, ame,,""" by Laws No. 80 &: L20 of 2001, Laws No,45, 98 & 100 of 2002, and Law No. 76 of 2004: Corporate Reorganization Act art.1901.2.

2006 Japan's Revised Laws 011 Business Reorganization 23

the plan. furthermore, the RA has a cram down provision whereby thecourt. may confirm a plan even when some classes vote against it. To con­clude, the R~ i:; designee! for cases with U11C001-'cldli\e parLies or wherethere is some opposition to the reorganization plan.

II. eRA vs. R.~

Thus far, this paper has examined the differences between the CRAand the RA. The next key question is how companies or courts decidewhich bw bcst applies La their cases. To answer this questlon and showimportant faclors which influence such decisions, it is helpful to examine,in addition to the differences between the t\VO laws, cases \\··here a firm hasinitiated a rehabilitation procedure under the eRe\ but liltC.l "vv ildu:J tv dreorganization procedure under the RA 157

A l'vlycal Case

The Mycal case is a transition casc. It was filed under the CRA afterthe CRA revisions took effect but before the RA.. revisions were enacted.Thus, Mycal tried to take advantage of the eRA's DIP and (plick TPorg;1nin­

tion provisions. During this transition period, a reorganization under thenew RA was not available The Mycal case is t.he first and principal casethat questions the relationship between the CRA and the old R.,\.158

Mycal was japall's major supermarket chain and its fourth largest.retailer. 1~9 1t expanded and diversified its business enormously during theJapanese nubble economy of the late 1980s. Mycal's numerous facilitiescllld <:xl.:essive debts became a heavy burden after the collapse of Japan'sbubble economy in early 1990s. As a result of a downgrade of the com­pany's bond rating in June 2001, Mycal was unable to obtain financingfrom banks and other lenders and fuiled to come up with the JPY Y40 bil­lion (USD $333 million at $1=Y120) it needed to pay creditors by its dead­Ime of September 17. 2001 160 Mycal then hIed for rehabilitationprotect.ion under the eRA. on Sept.ember 14. 2001 with a tmill rlphl nr JPY¥13 trillion (U5D $10.8 billion at $1 ='(120)J (,1 A rehabilitation proce­dure was opened on Sept.ember 18, 200 I. This was one of the largest bank­rupt.cies of a retailer in Japanese hist.ory, second only to the case of SagoDepartment Store which tiled an insolvency case in July 2000 vrith a totaldebt. of nearly JPY Y1.9 lrillion.l61

157 The Tokyo District Court handled twenty such cases between 2000 and August2002. Eiiehi Kobata, Tosan Slio,'! TetsUZtlhi Kan No rho [ConverSIOn Among insolvencyLaws], 105 ]IGYOSAlSEI To SAIKEC'KANRI [TURNAROUND &" CREDIT MCM1.] 134, 134 (2004).

158. for an overview of the Mycal case, see Hideo Sew, Case Study: Mycal, in KOSEl

KF,lKAKI' Nn JITC;U~t1, Tu RIO,"". 'IJpra note 142, at 467, 468~97; Eric Grouse, Banhs,Bonds and Risk: The Myral Bankruptcy and Its Repercu~~ions for the]apanese: Bond Ma,.het,n DeKE J COMP & hr'] L 571, 573~83 (2002).

159. Grouse, supra note 158. at 573.160, 1<1"1 sn~75

161. Teikoku Databank, Bankruptcy Information in 2001, http://v.,,,,w.tdb.co.jp/tosan/syukei/Olnendo.html (last visited Oct. 12, 2005),

162. What's News: international, GLOBE &" MAIL, Sept. 17, 2001, at B9.

24 Cornet! International law.JottrnaI Va!. 39

0" LILe day Lefore Mycal filed 101- C~A. protection, it dismissed itsCEO, Osamu Shikata, and replaced him \vith Kozo Yamashita, <1 direcror\vho favored the eRA filing, Shikata and the company's mam lemler, theDai~ichj Kangyo Bank (DKB), had originally been planning to file for pro­tection under the RA, provided that DKB would support Mycal through therf:organizatlOn proceedings. Mycal's board of directors, however, opposedthe RA filing plan, replaced Shikata ,v:ith Yamashita, and fIled for protec­tion under the eRA 1I-Jycal's board of directors chose to We under the eRAinstead of the RA. because it "vould allow the management to maintain con­trol of the company and enable a faster restructuring process than theRAiDJ

Although Yamashita, the new CEO, sought a quick n:structuring ofI\lycal under the eRA procedure without the help of its mam bank, twoweeks ",Ilo::L lilt:: filillg lit: [UUIlJ that he was unable to secure any substantial

financing, Moreover, many trade creditors refused to continue supplyingMycal with products without the help of its main bank Yamashna had toresign on September 28, 2001, ~nd the bo:m1 rhpn :.lppnintpc! K:.l71l0 1:r>lnn

as the new CEO,164After Mycal conducted a substannal search for a company to take over

us failed business, Aeon, a Japanese supermarket chain, announced that itwould acquire Mycal on condition that Mycal switch from the CRi\ proce­dure to the RA, procedure in order to gain support from its main bank,DKR 165 On November 22, 2001, Mycal filed for protecnon under the for­mer R.A.., and the case was opened on uecember 31, 200l,lGC, Mycalbecame the fIrst company in Japanese history to transfer from the CRAprocedure to the RA. procedure,167

Mycars board of direCtorS decided [Q switch 11\)1(1 dlt:: eRA LU the RAprocedure for several reasons, First, although Mycal had tried to rehabili­tate its business without assistance from its main bank, the company real­ized that it could not maintain its Qper',;.tions witholl! th,' h;lnk'..; hplpSecond, because Mycal had sold bonds to more than 38,000 individualinvestors, 168 it appeared that it would be very difficult to meet the quorumrequirement and obtain majority approval of the rehabilitation plan fromunsecured creditors,169 Third, Mycal and its subsidiaries had complicatedcross-debt holdings and thus had to consolidate these debts by merging thesubsidiaries 170 Given that the CRA does not permit mergers via a reorgan-

163 Grouse, supra note 158, at 576-78; HideD 5eto, Mycal )iken Wo Sozaini Shite[Considering rhe Myu.d Case], 103 )IGYOSA15El To SAlKENKANRJ [TLR,,-,,,ROLND {;[ CREDIT

MG:YIT! 126,127-28 (2001'),164 Grouse, supra note 15t>, at YI~-Il)

16'5, Id. at 580-81166 Since the fiiing was made before the substantial amendment of the old Reorgani­

zation Act un December 13, 2002, the old Reorganizarion Act was applied to the Mycalcase, Seta, supra note Ib3, at 129.

167 Grouse, supra note 158, at 582,168, Seta, supra note 163, al 131,16~), Jd at 129.170. ld. :'leither (he CRA, nor LiLt: R<". iL~~" plOvisiou ",uul", Lv 5ub5tanuve con,olicb

tion under the US BankrupLcy Code. See, e,g, III re Owens Corning, 419 F3d 195,

2006 Japan's Revised Laws Ol! Business ReorJSClnization 25

izu.tion pInn as the R;\, does, debLOrs seeking restrucluring undcr the CIl.1\need to meet Commercial Code requirements if they wam to merge.1vlycal's leaders assessed the situation and thought it would he costly anddifficult to get the required majority shareholder approval for thesemergers.

After the RA case was opened, lVlycal received financIal support fromAeon, and its reorganization plan was approved by the parties and subse­quently confirmed by the court on September 30, 2003. Mycal merged Itseight subsidiaries anc! has since been paying its debts according t.o the plan(as of]une 18,2004).1/1

B. T:m:.J1·(3 Case

In the Tanaka case, the firm initiated a rehabilit<ltion procedut~ under

the CR.A., but a credltor later forced it into a reorganization procedureunder the new RA 17;: Tanaka International managed three golf courses inYamaguchi Prefecture in lapan, and ItS two affiliated comparm:s ownedseveral real properties and managed a racing circuit course, 11 CircuitAida Although their annual revenue was JPY Y26 billion (USD $21.6 mil­lion at SI=¥120) in 1996, it dropped to JPY ¥1.3 billion (USD 510.8 mil­lion at $J=¥120) in 2001 as a consequence of a decrease in its gal! coursemembers caused by the long-term recession in Japan. In addition, lltf:

failed development of a fourth golf course and the opening of unprofitableformula Onc c,-cnts caused excessive debts and imposed a heavy Financial

burden on the companies. Tanaka International and its affiliated compa­nies (collectively "Tanaka") had been negoliating for debt forgiveness withtheir m<1jor upc!itor, rhe Rpsol\lfinn <lnd CnlJeeriotl Corporation (ReC), <l

government O\\iIled entity incorporated to collect bad debts [lnd to restruc­ture distressed businesses. l73

Tanaka filed for rehabilitation protection in the Tokyo District Courtunder the CRA on March 31, 2003 when illearned that RCC was contem-

205-16 (3d Cir. 2005) (stating principles [or substantive consolidatlOn, and adoptinglhe test that substannve consolidation is appropriate, absf:nl consent, only where prepe­filion creditors lreated entities as single legal entlty or where pOStpeUllOll assets andliabilities are so scrambled that sepuranng them is prohiblnve and hurts all crediturs).

171. Sa: Sew, supra note 163, at 132 (nOling thar Mye"l carried out mergers and madethe first debt repaymenl by December 2003).

172. for an overview of the T;Jnaka case, sec GQruluj6 Keiei Tanak~ 1nt~rnational

Kubushiki Kaisha Minjisaisei H6 0 Shinsei [Golf Course Owner Tanaka Internationalfiles for Proceeding Under the CRA], http://www.mmjp.or.jp/tubakl-golf/newsfall/new,lO't-talwkain.luLUl (la" vi,i[n.! OLl, 12, 200]) [herEiIlafln Golf N!:'w,]. Sec" ubuKaiinni Saihenhoushin 0 SetSllmei Tanana Ga Saihensha Shukai [Tanaka ExplainS ItsRehabilitation Plan at Creditors Meeting], A~AHI SHINl3L:N (Tokyo\ Apr 06, 2003, at 32;RCC No Koseiho 0 Shinsei, Tokyo Chisai Ca Hazen Me[rei [RCC Filed an Involuntary Reor­gl.lUlZ'ltiuJJ Procct:U1llg ogain:;.L Tunaha}, 1vL'\J~'ICt11 5t1.1N~L'1-": (Yanw.~ut:lH.Jd.pan), A1JI. 17,2003, at 19: Tanaka International.'.Ji Koseiho Ni 1>fotozuhi Meiret [Provisional Trustee forTanaka InternaUonal), As,u·u SHt="BC"f (Tokyo), Apr. 17, 2003, at 29; Kosei TetsH2uhichuNo Tanaka Shien E Unimat Group [UninIal Group Gives financial SUppDrt to Tanaha in theReorsan.1zation PI'Qcedun:jr /\.5Arn SlU,..... UGN (TokYD), Nov. .1~ .2003, at 26

173. Golf News, supm nore 172.

26 Cornell International Law Journal Vol 39

platlng fllmg a reorganization case against it under Ihe R.t.... 17 + Tanaka fileu

under the C&-\ so that its management team would remain in place. Tointerrupt the rehabilitation procedure under the CRA, RCC filed an invol­untary reorganization proceeding against Tanaka in the Tokyo DistrictCourt under the RA a week later. 175 RCC chose a reorganization proce­dure under the RA because It had serious doubts as to the credibility andfairness of the Tanaka management team. RCC did not believe that it wasappropriate for the current management team to remain in controL

i\lthough the Tanaka matter was a relatively small case with a totalgroup debt of JPY ¥37 billion (USD $308.3 million at Sl=¥120), the TokyoDistrict Court appointed a provisional trustee under the RA on Apnl 17,2003 and later opened a reorganization case under the Ri\. The court sub­sequently rejected Tanaka's CRA case Under the RA proceedings, Tanakareceived a fmanclal package from Unimat Holding ami proceedell LU

restructure its business.

C. Relotion~hip Between the CPA zmd the P.A

The Mycal and Tanaka caSes highlight the rdationship between theCRA and the RA and underscore the Issues that companies need to COll­

sider when choosing vvhich law to utilize This part discusses how the CRAand the Rf\ are related and how a Hrm can s'.vitch from a eRA procedure toan RA.. procedure.

Debtors or creditors are flot prohibited from filing for protection underthe RA even alter a rehabilitation proceeding is opened under the eRA. I 76

Thus, the DIP and its creditors may file for protection under the RA. evenafter a CR.A. rehabilitation case is opened. Even if a CRA proceeding isunderway. the court may permit a trustee to file for protection under theRA, provided that the RA is more suitable for the general interests of credi­tors. I77 Under the CRA, however, the court has no power to convert a caseto a reorganizatiOn procedure unller lhe RA. Thu~, the party filing the cast:makes the initial choice as to which statute will govern the reorganization.

Once an RA case is filed, the court will open the case unless (1) thefiling fcc is not paid, (2) a pending bankruptcy liquido.tion or eRA. rehabili­tation would better serve the creditors' general interests, (3) it is fairly clearthat an R'i reorganization plan will not be submitted, approved, or con-

174 rd.175. Gorufujo CircUltJo Tl Circuit Aida Keiei Tanaka International Kabushiki Kaisha

Hoka t>;lsha RCC Yon Kaisha Koseih6 0 Moushi Taterare, Hazen Meirei Ukeru [Preser­vative Injunction Issued Against Tanaka International and Two Olher Operators of GolfCourses and Circuit Race CQurse TI Circuit Aida as RCC Fiies lor an RA Proceeding],http://www.mmJp.or.Jp/tubaki-golf/newsfail/newsI04-tanakain.htmI(last visited Oct.12, 2005).

176. On the other hand, when the commencem(:nt order for a reorganization proce­dure \s issued, parties are prohibIted from filing for a new bankruptcy, rehabIlitation, orreorganization procedure. In addition. the commem:ement order tor reorganization 5llS­

pemb "ny existing rehabilitation or reorganization procedure. Kaisha K6seih6 [Corpo­rate ReorganIZation Act], Law No. 154 of 2002, art. 50.1, amended by Law No. 76 of2004.

177 la. art. 248.

r;

2006 Jupan's Rnised Laws on BlLsiness Reorganization 27

i

t,1i}~,

firmed, or ('t) the flling was not made in g()od faith. 178 Tu dtal ex-leul, tilt:

court examines the party's choice to determine wb.ether the CR~ or the RAwill better serve creditors' interests. When the court proceeds with an RA.case, a previously filed eRA case is stayed.1 79

D. Factors that Influence 'v'/hich Law to Utilize

The key r:J.(ll)r~ that debtors and courts should con.oidcr in decidingwhich laY" should govern are influenced by a central question: "vhen is theRA more suitable [or a reorgamzation proceeding than the CRA?

1. Debtors' Incentives

Dehtors generally prefer the CRA. to the RA because of its debtor­friendly features :illch ;15 the DIP feature. 1HO In bo, both Myc;JI ;JnrJTanaka filed under the CRA 111 order to take advantage of the DIP provi­sion. The trustee feature of the Ro4.. generally requires that the debtor'smanagement be replaced unless the court permits its officers to serve asthe trustee. I H! Debtors also prefer the CR.A process because it is faster andless costly than the RA processJR2

Given that such debtor incentives favor the CRA, it is important toldentify the cases that are better handled by the R.A.. The following factorsprovide some gUldance for making such a determination183

2. 5i::./: oj D~btul

While the eRA was originaliy designed for the rehabihtation of smaH­or medlum-sized businesses, larger companies such as Sago DepartmentStore have filed under the eRA to w.ke <lUV<lllldge of its benefits. For exam­ple, a number of large companies listed on the Tokyo Stock Exchange havefiled for rehabilitation protection under the CR.:\" in the Tokyo DistrictCourt; five in 2000, six in 2001, thirteen in 2002, six in 2003. ;mll threp in2004. 11:14 In fact, between 2000 and 2004, large companies with more thana thousand creditors filed more than ten percent of all the CRA filings inthe Tokyo District Court. 185 Given this increased use of the CRA by largercorporations, it is acceptable for large firms to use the CRA.

The RA does not har small- or medium-sized corporations from apply­ing for RA relief. Although a reorganization case under the RA is generally

178. iii art. 41.1179 Id. art 50.1.IRQ. 5/:1' 51lpra leXl accompanying notes 32-50.181 See supra text accompanying notes 51-56.182. See supra text accompanying notes 28-32.183. See Hloeki Matsushima, Kaisha Koseihd To Minji Saiseih6 No Sl.lmiwake To

Kanzainin No Yahllwuri [Scope of the RA and the eRA and /he Role of the Trustee], in SHtN

K-\ISHAKOS"IHlJ '-;0 jrTsu,R [PRACTlU. C:NDcR THi; NtW CORPORATE REORG,U1ZAflON ACTJ

59-73 Uapanesc Ass'n for Bus. ReCOVEry ed., 2003) (analyzing the selection criteriabased on lhree case studies); Sonoo, supra note 24, at 60-61 (listing SEveral selection(ritenal·

184. Ohtake, supra notiO U. at jL185 lei al 53.

28 Cornell Intrrnational Law JOLlrnal Vol. 39

morc expcnsive than a eRA Cilse, a stnall- or medium-sized comp!lny l1Wy

be able to use the R'\ if it has enough resources for such a procedure. A.case in point is the Tanaka case where the Tokyo District Court opened anRi-l. reorganization procedure even though it was a relatively small Case.This illuswncs that the size of the business is not a major factor in deciding\vhich statuLe to use.1 80

.3 Cooperation of SCllired Creditors

UndE'[ the CR.:\' secured creditors may exercise thelr rightsun hindered by the rehabilitation case. The eRA. expects a debtor to cometo an agreement with secured creditors in order to modiil' their securedclaims. ls7 Thus, a debtor may not reorganize its business without securedcreditors' cooperation. If obtaining the cooperation of secured creditor isdIfficult a debtor should use the RA. because the RA prohibil~ :>ec.:uretl ued­itars from exercising their rights without court approval and permits areorganization plan to modify secured creditors' rights188

4. lax Claims

Under the CR./\., a debtor generally cannot suspend tax collection pro­eEdun:s, and it must negotiate a deal with u tax collection agency to modifya tax claim 189 Thus, if the amount of a tax claim is substantial and theclaim holder does not agree to modify its claim, the rehabilitation may faiLThe RA, on the other hand, gives a debtor stronger tools to deal with a taxclaim because a debtor may suspend a preopening tax collection procedurefor a limited penod of time through a suspension order. 190 In addition, areorganization plan under the RA may modify a preopening tax claim with­out the approval of the tax collection agency as long as the plan deferspayments for not longer than three years and the tax collection agency hashad an opportunity to be heard.1 9J Therefore, the RA is more suitable forcases ....\l1th large wx claims amI Halt: prospects fur all agreement \,ith the

tax collection agency.

5. l\!llmhn', oj TTn'Prl/TPri tr"ditnr, and Rnndhn/ders

For the confirmation of a rehabilitation plan, the eRA requIres that amajority of the unsecured creditors who are present at the meeting vote [orthe plun unci that those creditors represent :<t least one-half of the toc;;tl

186. 50noo, Two and a Half Years', st'pra note 24, at 61187. See sHpra text accompanying notes 61-68.188 See sHpm Lt:xl accompanying noles 69-86; Sonoo. Two and a HuU rears', supra

note 24. at 6]189. See supm texl accompanying notes 105-112190. [d.; Kaisha Koseiho [Corporate Reorganization ACT], Law No. 154 of 2002, arts.

24.2,24.), 502, amended by La'" No. 76 of 200419] Corporalt: Reorganization Act art. 169.1. Cf 11 U.s.CA. § 1129(a)(9)(C)

(2005) (providing that a reorganization plan must provide lor dderred payments of taxclaims over a period of up to five years from the date of the order for relief, and requiringtreatmEnt at ka:1t as favor-able as the lno;:;;t favoTed nQnprioJ;'ity un~ccuTcd cbiITl (ap::ut

from convenience class claimants)).

2006 Japan's Revised Laws 011 Business Reorganization 29

claim amounts. 1 QJ Even though this is not a high barrin, if many

unsecured creditors disagree to the proposed plan, it may be difficult to getthe number of votes reqUired for approval of the plan 193 In facl, the ~'1ycal

case suggests that the presence of a large number of bondholders can hin­der the approval of a plan under the CRA.

Such a problem does not occur in an RA case because the RA does notrequire appro,'al by a majority vote of the unsecured creditors present atthe creditors' meeting. Instead, it only requires approval from creditors andshareholders who represent at least one-half of the aggregate claimamounts or the total number of shares with voting rights, respectively.194In addition, the cram down provlslDn provldes a strong lncemive for par­ties to vote in favor of the plan. 195

6. Need for I\ft:rgcrs 0'- Nov Stach I:;suallcc

A distressed business may need to merge affiliated entities for variousreasons. For example, Mycal needed to merge with its eight subsidiaries to

termmate a comphcated cross-debt holdmg structure. In cases where asubSidiary is not a wholly independent company, its creditors may haverelied on the assets of its parent company in extending credit. To aceorn­modale :meh a 3itu<ltiou, a parent compuuy may ,vant the reorganization

plan to proVide for a merger with us subsidiaries. In other cases, a mergerv'lith unrelated entities may be necessary 10 bring valuable and needed syn­ergy to a distressed company to overcome operational difficulties.

Despite these pOSSible needs, hovvever, the eRA. does not provide forthe merger of debtor entities. The]apanese Commercial Code reqUires thata company obtain afflrmative resolutions from its board of directors andshareholders in order to effect any merger. 196 To altain approval of ashareholder resolution, one-half or more of the voting rights must be repre­sented at the shareholders' meeting, and two-thirds of the voting rights rep­resented must vote In favor of the resolution. 107 Meeting suchreqUIrements is cumbersome and sometimes difficult if shareholdersoppose a merger. 19R Thus, a eRA process may not be SUitable for caseswhere i1 ITlcrger is neCeS5ll.ry for the reh:J.bilitatiou of a business.

A merger under the RA, on the other hand, is much easier (0 achieve.There is no need to comply with Commercial Code provisions, and a firmrequires only the confirmation of a reorganization plan that provides for amerger.

192. Minji Saiseiho (Civil Rehabilitation Act], Linv No 255 of 1999, <lrt. J72-3.Lamended by Laws No. 80 & 129 of 2001, Laws No. 45, SJii & 100 of 2002, and Law No.76 of 2004

193. See supra text accompanying notes 137 ~139.

194. Corporate Reorganization Act art. 196.5.195. la. art. 200.196 See SHOHO, arts. 260-1 (requIring the board to make a collective decision on

important corporate matters), 408.1 (requiring a shareholders' resolution in order toeffect a merger agreement).

191 rd. ~HlS. 343, 408.3198. See ,l.lpra text accompanying notes 126-128.

30 Cornell International Law Journal vol. 39

Similarly, the issuance of new shares could be difficult and costlyunder the CR.'\ because a distressed company generally must meet theCommercial Code requirements unless the court grants the company anexemptiQnl~~ Depending on the situation, a company may need a tvVQ­third majority resolution at a shareholders' meeting where holders of themajority of the outstanding shares are present, and a court-appointedinspector may be required to examine the company's debts in a DEScase. 200 Meeting such reqmrements IS costly, time-consuming, and some­times very difficult. The RA provides a much cheaper and faster way to

issue new shares) however, because it allows a restructuring plan to providefor the b:ou,illce of new s(oc1<.201

7. Necessary Time for Restructuring

The amount of tIme reqmred for a restructuring under the eRA andthe RA is quite diff;;rent. Under the eRA, a reorganization plan is proposedapproximately three months after the eRA filing, and confirmation gener­ally foHmv5 approximately five months thercaftcr202 This faster restructunng process is generally beneficial for an ailing business because it canavoid the collapse of the busmess by reducing transaction costs of theinsolvency case and quickly show interested panies the henefits of its n'Of­

ganization plan,In some circumstances, however, this timetable is too short for a suc,

cessful rehabilitation; some complicated cases may take more than threemonths just to develop a plan. In addition, some cases reyyire more timefor negotiation with secured creditors. Generally, it takes more time torestructure a company's operations than simply to revise its financial stTUC­ture. Some bUSinesses, especially retail businesses, are seasonal and needto complete an annual business cycle before they can determine the feasi­bility of reorganization. In such cases, the rehabilitation timeline underthe eRA. may be too short to attain a business restructuring.

Under the RA, a company may take more time. reorganizing its busi­ness. Once a company files for RA protection, it has eleven to twelvemonrhs to suhmit :1 (IT:1ft TPorE,:1ni7:1tion phn :mcl 2f'nnally ohtains planconfirmation within thirteen to fourteen months of filing 203 Thus, the RAis more suitable for a company that reqUires more time to restructure ltS

business,

8. Appointment of a Trustee

Under the CRA, the prefiling management may continue to run thedebtor company's business as a DIP, and the appointment of a trustee is

199. SHI)H(J, art. 280-2; Min]i Saiseiho [Civil RehabiliLalion Act], Law No. 255 of]999, ans. 154.1-, 162, 166-2.3, UI!I~lId<d by Laws No. 80 & 129 of 2001, Law, No. 1-5,98 & 100 of 2002, and Law No. 76 of 2004.

200. See supra text accompanying notes 118-124: SHOH(\ arts 280,2.2,343.201. See supra text accompanying note 125.202, See ~~upra text tlcCOfnpanylng notes 28 32.203 See supra text accompanying note 32.

2006 Japan's Revised Laws on Business Reorganization 31

very rare.:',J-l Allhough the DIP system is attractive for a debtor, it may not\vork well in some cases. For instance, if current management is incompe­tent or corrupt, or creditors or shareholders distrust current management,tin: DIP Ina)' find thar it is difficult or even imp033iblc to rehabilitate the

debtor's business The Tanaka case suggests that a creditor prefers thereorgamzation procedure under the RA \vhen it has serious doubts as tothe fairness and credibility of current management. In addition, if the cur­rent management is too closely tied to one of its creditors, the DIP may findit difficult to implement drastic restructuring measures without seriouslyaffecting the company's relationship with such a credItor In such a case,the rehabilitation of a business may tail.

In an involuntary hling, creditors do not expect cuoperation from thecurrent management and thus may seek to have a trustee lead the rehabili­tation process. Under the eRA, however, courts typi.cally exercise their dis­cretion not to appoint a trustee Thus, if the creditors want a trustee, theRA is the bener choice.2os

E Conclusion

This paper fIrst de::;i,;rib;;;::; Llle tliffueuce", uelween the CRA and the: RA.

\Vhile the two statutes have many similarities, thf'y arc very di.fferent in thefollowing respects: (1) the CRA provides a faster procedure than the Ri\; (2)while the RA always requires the appointment of a trustee, the CRA pro­vides a DIP system and does not. generally involve the appointment of atrustee; (3) the eRA allovl"s modification of unsecured claims only, whilethe RA also allows the debtor to modify secured claims, tax claims, andshareholder interests; (4) only the RA has a provision regarding mergers,spIns of a company, and new company formation; and (5) requirements forplan approval are less burdensome under the R\ than under the eRA.

These differences between the CRA. and the RA are important consid­erations when companies or couns decide which of these laws to use.There are no clear-cut answers to the question of which law is better, how­ever. in a sense, thIS lack of clarity is benefiCial in dtat the panic::; Illaychoose their procedures m a flexible manner, which provides incenuves forparties to negotiate for an effective reorganization.

Ill. Effectiveness of the eRA and the RA

This part examines the effectiveness of the CRiI,. and the RA by analyz­ing the two laws from four perspectives (l) the incentives for a debtor tofile for bankruptcy protection at an early stage (2) the achwvement of aquick reorganization, (3) the debtor's leverage in a reorgani::ation proce­dure, and (4) the credibility of bankruptcy proceedings

.LU'1. :See supra text accompanytng notes 33-38,

205 See mpra text accompanying notes 51-56.

32 Cornel! International Law Journal Vol. 39

A. ince.ntive for a De.btor to Fik Early

One of the most important problems that Japanese bankruptcy prac­tin: faced before the enactment of the eRA.. was that distressed companit'stended to lile tor bankruptcy protection when it was too late to achievesllccessful reorganization. The eRA and the RA aim to provide a debtorwith incentives to file for bankruptcy protection early enough to achieve a::,uLLo::.full t:vlg<J.HL.:.,nion. To illu::.u <Ilt: llli::. jJvim, P,u t II e,'i.<J.lllilieU lilt: DIP

system and the faster procedure under the CRAThere are other benefits that the two statutes provide to encourage

early bankruptcy filings. To highlight the effectiveness of the incentivestructures under the eRA and the RA, this part examines (a) the require­ments for filing and case opening, (b) stay and preservative injunctions,and (c) postpetition financing.

1. Requ.irements for Filing and Opening of Cases

Under the Composition and preamendment Reorganization Act:;,courts scrutinized each filing over a long period of time and opened caseson a selective basIs. 206 This created a disincentive for a debtor to file forprotection under these statutes. This section examines how the eRA andthe new RA approach this problem.

Under both the eRA and the RA, a qualifying debtor may file for reliefif bankruptcy is likely to occur or if the debtor cannot pay its debts as theybecome due without Significantly impairing its business operations. 207

This provision relaxes the filing requirements of the Composition Act,under which a debtor could not file for rehef unless it was already insolventO! ull"lJk bl:lIt:1"lly and contiHuou~ly LV pay Qut::;taudlub Iili:llULnl

debts. 208 By relaxing the requirements for filing. the CRA and the RAencourage early tHing for bankruptcy protection.

A 3inglc creditor may file an involuntary petition under cithcr the ClL-'\.or the RA only when bankruptcy is likely to OCCUr. 209 The eRA imposes

7.0fiSnnnn. rR A in its Fourth Y~ar. "'['fa note 40, "' "207. MmJi Saiseiho [Civil Rehabilitation Act], Law No 255 of 1999. art. 21.1,

amended by Laws No. 80 & 129 of 2001, Laws No. 45, 98 & 100 of 2002, and Law No.76 of 2004; Kaisha Koseihi) [Corporate. Reorganization Act]' Law No. 154 of 2002, art.17.1, amended by Law No. 76 of 2004. Unlike the japanese statutes, U.S. law has noinsolvency requirement for a voluntary bankruptcy case. See, e.g., In n; SGL Carbon,200 F.3d 154, 163-64 (3d Cir. 1999); In re Marshall. 300 R.R. 507. 516-17 (Bankr CDCal. 2003). However, a court may dismiss a case on good faith grounds if the debtor issolvent. See, €cg, In re SGL Carbon, 200 F.3d ~t 163-69; iv1"Tsch v. M"rsch (In reMarsch), 36 F.3d 825,828-29 (9th eir. 1994); In rE Liberate Technologies. 314 B.R.206,211-13 (Bankr N.D Cal. 2004).

208. Shea & Miyake, ,upra note I, at 260 (noting that under the Compositlon Act,relief was available when "a debtor is unable to pay its debts, has suspended payment ofIts debls, or has InsuffiCIent assets to fully perform its obliganons"').

209 Civil Rehabilittion Act an. 21; Corporate Reorganization Act art. 172 It shouldbe noted that a creditor may file an involuntary petition under Japanese law only whenan event of bankruptcy 15 likely to occur with respect to the debtor. Cf 11 USC.A.§ 303(b) (200') (reqUiring that at least three creditOrS JOin in an mvolumary pet1t1anunless the debtor has fewer than twelve unsecured, or partially unsecured, creditors).

2. Preservative Injunctions and Stay

Under the u.s. Bankruptcy Code, " petitifJll for h"nkrllptc'}' pn')t(>r1;()noperates as a stay of all creditors' debt collection activities. 217 The auto­matic stay provides a strong incentive for a debtor to file its bankruptcy

210. Civil RehabtlttatlOn Act art 21.2. cf 11 U.SCA. § 303(h) (2005) (requiringthat petitioners in an involumary case hold at least $12,300 in undisputed, noncontin­gent claims).

211. Corporate Reorganization Act ~rt. 17.2.1212. Id. art 17.2.2.213. Sugeno, supra note 60, at 51. This data for involuntary filings is based only on

completed cases. i\ total of 3806 cases were filed under the eRA between April 1,2000and 5"prember 30, 2003 As of September 30, 2003. 2620 cases remained pending, butthere was no data available on how many of these were ll1voluntary cases.

214. Civil Rehabilitation Act 3rt. 25; Corporate Reorganization Act ;;n. 41.1.215 See In rc Tokai Bank, 1089 H~"REI TACMczl' 295 (Yok.yo HIgh Ct.. Milr A. 2001)

(basing it, decision on Article 25 of the eRA).lib lJhtake, Stlpra note 13. at 54 (1,24:> out 011,306 cases).217. 11 1JSCA. 8 362(a) (2005).

no requiremem as to the aIlluuut or the !:'etitioning ere-dinK':, dailll.:110

Under the Ri\, on the other hand, a petitioning creditor must hold dai msequaling ten percent or more of the debtor's capital. 21] In addition, underthe RA, a shareholder holding ten percent or more of the debtor's outstand­ing shares may also file a petition when bankruptcy is likely to occur. 2!1

Involuntary bankruptcy hUngs under the CRA. or RA, however, are veryrare. Empirical data show that of the 1,186 cases completed under theeRA betvveen April 1, 2000 and September 30 2003, only twenty-oneCilses began as involuntary filings. 213

Both the CR.'-\. and the RA contemplate that the court will generallyauthorize the opening of a case once it is filed. Unlike cases under theComposition or old Reorganization Acts, couns no,v typically open a casefollowing the filing of a petition under either the CRA or the &\ unless theyfind one of the followlng: (1) iJ. proceuural fee ha~ !lut uem paiJ, (2) apending liquidation or rehabilitation proceeding may be more beneficial to

the creditors, (3) it is clear that a reorganization plan .,vill not be submitted,approved, or confirmed, or (4) the filing was not made in good faith. 2 L4 In

one case, the court declined to open a CR.A.. case that had little possibility ofplan approval because the majority of the creditors had initiated thedebtor's liqUidaTion under the Bankruptcy Act and strongly opposed theopening of aCRe'\. case215

In general, however, courts open Cases morc readily under the eRAand the RA than under the Composition or old Reorganization Acts. Infact, as of March 31, 2004, the Tokyo District Coun had opened about Y')%

of the cases filed under the CRA since April I, 200021 6 \Vhtle empiricaldata for the RA is not yet available, coutts are generally expected to openmany cases because the RA ,i\lupt~ tht': S;;i111E l"t':quin::mellt:s d::' the eRA.

Because of the eased requirements under the CR.'\ and the RA, a distressedcompany will likeiy have greater motivation to file early for bankruptcyprotection.

33Japan's Rn'ised Laws on Business Reorganization2006

It

Ii

itf

I

II

34 Cornell International Law Journal "\chi 39

Ca5~ e.ilrly. Cn1ik~ the. U.5. Dilnkruptcy Cudt:, llUlVl:Vt!', il ::>lily Ul!dl:l lht:

eRA or the RA takes effect only with the order to open the case, and not atthe time of the bankruptcy filing. 218 Therefore, creditors are generally freeto enforcf' rlwir rights lImil a casl' is 0pf'ned A qllf'stion tlms arisps' howdo the eRA and the RA. motivate debtors to file for bankruptcy early with­our an auromatic stay taking effect immediately upon the filing?

a) Preservative Injunction Pending a Decision on Opening a Case

While a bankruptcy filing under the CRA or the RA does not operateas a stay, it is important for a distressed firm to be able to TPstrict dphtenforcement by creditors while the court's decision on opening the case ispending, in order to protect the debtor's property and its reorganizationprospects. Thus, both the eRA and the RA authorize the following preser­vative injunctions during this period.

First, under both the CRA and the RA, the court may prohibit thedebtor from makmg any payments or transfers of property.219 If a debtormakes a payment or transfer in vlOlatLOn of such an order, the transactionis void unless the recipient was unaware of the prohibition order at thetime of the transaction.no

Second, under both the eRA and the RA, the court may issue an orcinto suspend execution procedures on all unsecured debts if the suspensionwill not cause any undue loss to the affected creditors. 221 Both the eRA,>lnd thp 'RA ;;ll1thori7P >I cnllrt tn i"<;llP >In ornpr to sll<;ppnn >I pending l"w­suit, a liquidation or special reorganization procedure under the Commer­cial Code, or a government agency action \vith respect to a debtor'sassets222 In addition, the RA authorizes a coun to suspend a proceedingto colleer outstanding taxes, provided that the tax collector has had anopportunity to be heard before the issuance of such an order223

The RA also permits a suspension order against an execution or fore­closure on a secured debt if the suspension will not cause an undue loss tothe creditor22+ The CRA, on the other hand, authorizes a slightly morelimited suspension order against an execution or foreclosure on a secureddebt. To grant such an order under the eRA, a court IT1U:>t bc sati:>ficd that

(a) suspending the sale is in the general interests of creditors and (b) thereis no likelihood that the suspension will cause an unreasonable loss to thesecured creditor. 225 Such a suspension under the CRA is limited t.o a "rea­sonable period of time,"226 which is the length of time reasonably neces-

218 Civil Rehabilitation Act arts. 39, 40, 40-2, 85, 93, 93-2; Corporate Reorganiza-tion Act arts. 47-57.

219. Civil Rehabilitation Act art. 30; Corporate Reorganization Act art. 28.1.220. Civil Rehabilitation Act an. 30_6; Corporate ReorganizatIOn Act art. 28.6.221. Civil Rehabilitation Act art. 26.1.2; Corporate Reorganization Act art. 241.2222. Civil Rehabilitation Act arts. 26.1.1, 26.1.3-.4; Corporate ReorganizatIOn Act

arts 24.U, 24.1.3-.5223. Corporate Reorganization Act art. 24.2.224. Ld. art 24.1.3.225. Civil RdldbilildliulL Au dlL 31.l.226. Id.

2006 Japan's Revised Laws on Business Reorganization 35

IIIIlI

iI

sary for negotiation with the secured crediwrs The amoum of tim~

generally granted is approximately three months221

Third, under both the CRA and the RA, the court may appoint a provi­:sional trustee to manage the debtor's business. 228 \Vhile a provisional trus­tee has exclusive power to manage the debtor's business and dispose of itsproperty, the trustee must obtain the court's permission to take actionoutside [he debLOr\ ordinary course of business229 In addition, the CR/\and the RA allow the court to appoint one or more supervisors to overseethe debtor's operations. :<30 The court determines which actions by thedebtor require the superVisors' consent,2Jl and any actions Violating sucha requirement are void to the extent that the annulment does not harm athird party who acted in good faith 232

Lastly, if a provisional suspension order is not sufficient Lo permitreorganization under the eRA or the AA, the court may lssue a comprehen­sive injunction against all creditors. 233 While a provisional suspensionorder must specify which procedures are to be suspended, a comprehen­:;i vc inj UllLllU!l i" articulaHcd in more general terms to suspend all pending

or potential enforcement of creditors' rights. \Vhlle the RA allows issuanceof a comprehensive injunction that affects tax collectors and secured credi­tors, an order under the eRA only affects unsecured creditors 23+

'vVhere the court can issue a comprehensive injunction that operateslike an automatic stay under the U.S Bankruptcy Code, a debtor h<J,sgreater incentive to file for bankruptcy early. Courts, however, do not gen­erally grant a comprehensive injunction in CRA cases. In fact, empiricaldata show that the To1.:yo District Court issued no comprehensive injunc­tion in the 529 cases filed in 2000 and 2001; it issued comprehensiveinjunctions in 4 out of J\}4 cases m 2002, l.Z out of 313 in 2003, and loutof 70 during the first quarter of 2004. 235

Courts usually make a decision on whether to open a eRA case WIthinlWll w<:<:k:> l)[ Wing. 1kcau~e this time: frame does not give enough time fora coun to conclude that a provisional suspension order is i.nadequate to

achieve the purpose of reorganization, courts rarely go so far as to issue acomprehenSive injunction 236 !-\pr;Jl1<;p of this limlTpo 11"1' of a comprehen­si.ve injunction, the CRA does not proVide the same incentive to a debtor for.an early bankruptcy filing as the automatic stay provision does under theU.S. Bankruptcy Code. 'vVhile empirical data are not yet available as to thefrequency of the use of a comprehensive injunction in RA cases, the courtin an RA case could more readily decide to issue one given that the waiting

227. JOKAI MIC-;JIS,IlSEIHO, supra note 29, at 121-2L228 Civil Rehabilitation ACl art. 79; Corporate Reorganization Act art. 30.229. Civil Reh"bilitation Act art 81; Corporate Reorganization Act art. 32.1.230. Civll Rehabilitation Act an. 54,1; Corporate Reorganization Act an. 35.231. Civil Rehabilitation Act an. 54.2; Corporale Reorganization Act an. 35.2"232. Civil Reh<lbilitallon ACl art. 54.4; Corporate Reorganization Act art. 35.3233. Civil R<;h"bilitation Act art. 27; Corporate Reorganization Act art. 25.234. Ia.ns. Ohtake. lupra note IJ, at 52, 58.236 Id <It 58.

1iHr''\I,~!t,,i

36 Cornell International Law Journal Vol. 39

period for a decision on opening an 1\.\ case gem:rally la::'b al leaSl amonth. Accordingly. the RA may provide a debtor with a stronger incentivethan the eRA to make an eady filing for hankruptcy

b) Treatment of Unsecured Creditors237

Upan a courL decision La open a rehabilitation or reorganization case,all execution procedures on unsecured debts are prohibited or sus­pended. 238 Any pending lawsuit on an unsecured claim is suspended aswelLZJ9

A trustee or DIP is generally not allowed to repay unsecured creditorsunless such a payment is made in accordance \Vilh the rehabilitation orreorganization plan. 240 The court may lift the stay \vith respect to enforce­ment procedure3 by un3ecured creditor3, however, if it determine::; thut

doing so will not impede the debtor's rehabilitation or reorganization. Hi

In addition, the court may allow the payment of all or pan of anlm<;prllTP,1 rbim if it ,-Iptprminp<; thM (1) :1 "m:111~ ilr m",clillm~~iz£(1 t.r",ditor

whose main business partner is the debtor \vould go bankrupt withoutsuch payment,242 (2) early repayment of a sma]] amount of unsecuredclaims would facilitate rehabilitation or reorganization.243 or (3) the reha­bilit:ltion or reorganization process would be impeded without such pay­ment of small unsecured c1aims H4

Both the eRA and the RA permit a preopening creditor to set off a debtwithout a court order under three conditions: (1) both the claim and thedebt existed at the time the case opened, (2) both the claim and the debtbecame due before the bar date for filing proofs of claIm, and (3) the setoffwas effected befol:e the bar date.245 Unless an exception "pplies, lhe CRi\.

and the RA prohibit setoffs where the debt was incurred (1) after the case

237. Unsecured claims under the CRc'\ "nd the RA include (1) preopening debt otherthan commQrr benefit claims, secured claims, and ordinary priority claims, (2) maturedinterest and damages incurred after the opening of a case, and (3) costs incurred by acreditor in filing a claim. Civil Rehabilitation Act art 84; Corporate Reorganization Actart. 2.8.1-.3. For unsecl,.\,ted d:J.i~ns u.n.der the RAJ see also COl:"P(W;.1t~ Rf""rirg;1.ni7::ltiI'l11 Artarts, 58.1, 91-2.2. It should be noted that unsecured claims for intereSl m"lured anddamages incurred after the opening of the case and costs in filmg a claIm are notincluded in the value of claims for the purpose ofvotmg on the plan and may be treateddifferently in the plan from the other unsecured claims. Civil Rehabilitation Act arts.87.2,155.1, Corporate Reorganization Act arts. 136.2, 168.1.

238. Civil Rehabilitation Act an. 39.1; Corporate Reorganizalion Act art. 50.1. Accord11 U.sCA § 362(a)(2) (2005).

239. Civil Rehabilitation Act art 40.1; Corporate Reorganization Act arl. 52.1. Accord11 U.sCA § 362(a)(1) (2005).

240. Civil Rehabilitation Act an. 85.1: Corporate Reorganization Act art. 47. L241. CiVlI RehabIlitation Act art. 39.2; Corporate Reorganization Act art. 50.5.1. CI

11 USCA § 362(d)-(g) (2005) (rehef from stay procedures)242. CIVIl Kehabll1tatlOn .!\.ct an. 85.2; Corporate ReorganizaUun Acr an. ,.72243. Civil Rehabilitation Act art. 85.5; Corporate Reorganization Act art. 47.5.244. ld245. Civil Rehabihtation Act aIL 92.1: Corporate Reorganization Act art. 48.1; ]OI<AJ

Ml(';J1SA1SEIHO, supra note 29, at 352.-55 CJ 11 esc)\. § 553 (2005) (recognizing acreditor's right of setoff except under certain circumstances).

2006 Japan's Revised Laws on Business Reorganization 37

opening, (2) after the creditor became awan: that the debtor had ceasedmaking paymenrs2+6 or flJed for insolvency prorecrion, or (3) after the cred­itor learned that the debtor was unable generally and contInuously to payoUtstanding mature debts where the debt was incurred through an agree­ment either to (a) purchase the debtor's asset \'lith the sole intent of effect­ing a setoff or to (h) aSS1.1me a third party's debt2 -f7 In addition, thestatutes generally prohibit a setoff when a daim against the debtor hasbeen acquired from a third party (1) after the case opening or (2) after thecreditor learned that Lhe debtor (a) had become unable generally and con­tinuously to pay outstanding mature debts, (b) had ceased making pay­ments, or (c) had med for msolvency ptotection,H8

The prohIbition or suspension of debt enforcement or setoff byunsecured creditors greatly benefits a debtoL Thus, tbese prov15LOHS give adebtor strong incentives to file early for bankruptcy protectlon, In audi­tion, deht enforcement by secured creditors is prohibited under the RAupon case opening and also possibly under the CR.A. if the court issues aprovisional order, This also creates a strong incentive for a debtor to fiIeearly tor bankruptcy protection,

3. Postpetition Financing

The U.S Bankruptcy Code offers sLrong protection for a postpetitionlender by authorizmg a superpriority or priming hen position in appropri­ate circumstances249 This has made postpetition financing very popuIarin the United States, and a debtor with very limited access to new financingbefore a bankruptcy filmg may find it easier to obtain financing while inbankruptcy. Such availability at new funds dUrIng a bankruptcy case pro­vides a debtor \'lith a strong incentive to file a bankruptcy petition early.The question arises as to whether the eRA and the RA protect a postpeti­tinn kndn to a similar d~grec 50 as to ~neourag~ an ~arly bankruptcy fil­ing by a distressed company,

The Composition and old Reorgamzation Acts did not fully contem­plate p05tpetition financing, \Vhilc the Acts treated posiopening credits 05

common benefit claim:;,250 debts incurred during the gap hetween theinsolvency filing and the case opening were treated as ordinary unsecureddebts25I Since such protection was insufficient to motivate financial insti­tutions to invest funds in distressed or bankrupt companies, postpetition

246, Under japanese law, cessation of payments occurs when a d~btor demonstrat~s

Its inabihty to generally and continuously meet its outstanding debt obligations JOKAI

MlCiJISAISEiHO, sup"a note 29, at 364247. Civil Rehabilitation ACl an. 93J; RA arL 49L248, c;,,-i.l P..chubihtution Act un 93·2.1; R.;' urL 49 2,L

249, 11 l!SCA § 164 (2005). For an in-depth survey of practice under this seCllOo.see generally Charles Jordan Tabb, Obtaining Credit, in 2 CKAPTER 11 TH~ORY ACiD p!<AC

neE §§ 13:1~1362 Games f. Queenan,]r. et al cds" 1994),2:30 FUI (;l ue~u ipllull uf WliaL CUB:'litULES a ~UJnnlVH uent:f.i.l cla-iul. see: ~upn.1 llutE" 9-+

25L JeWAI MINJISAISEIHO, supra note 29, at 474.

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38 Comell International Law]owl1al VoL 39

financmg was not popular in Japan. 2J2

Given the importance of such investments, the eRA and the RA givepriority positions to postpetition lenders in order to encourage postpelilioninvestment. Allhough the pwteCliou::> ale llut as extEnsive as those pro­vided by the U.S Bankruptcy Code,253 postpetitlon fmancing has becomemore popular since the enactment of the CRA and the R.A...

a) Priority Claims

Under the CRA, eLther the CDurL or a provisional supervisor may spec­ify that a credit extension made during the period between the insolvencyfiling and the commencement of the case be treated as a COmmon benefitclaim 25 -1 When the court or a trustee authorizes a postopening credil,such a credit is also treated as a common benefiL claiLTl. 255

Similarly, in a case under the RA., the coun or a supervisor may per­mit credit extended after filing but before case opening to qualify as a cam­iliU IL 1J<-ndit claiJn. ?"il'i \Vhcrc a provisional tru5tee is (lppointed. (lny suchcredit is automatically treated as a common benefit claim, and the trusteeneed not seek any further approval from the court or a supervlsor.237 Pos­topening rrprlit i, ::rlso treated as a common benefit claim unless the courtrequires the trustee to obtain approval for such borrowing.258

If a debtor in an RA case does not have enough assets to satisfy allcommon benefit claims, those claims are treated on an equal basis regard­less of any priority status, and these creditors share pro rata159 On theother hand, the priority of a common benefit clai.m in a CRA case ansesfrom noninsolvency law. Thus, postpetition financing generally ranksbelow a claim entitled to pnonty under noninsolvency law, bm ie is equalin priority with other common benefit claims without priority status undernoninsolvency law.260

252. Kiyohito Koyama, Minjisaisei TetsuzuJIi To DIP FineHice Nado A,.aWna ShU/inKy6ky~ Wo Megutte [New Financil1g Through Civil Rehabililariol1 PnJ(.f~ding and DIPFiJ1Clncing!, 105 jIGYOSAlSc! To SAIKENKA;-;RI [TL'RNARouND &: CREDlT ]v[G~IT.1 149, 149(2004).

253. See 11 U.S.CA. § 364 (2005)254. Minji Saiseih6 [CiVIl Rehabilitation Act]. Law No. 255 of 1999, art. t20,

«mended by Laws No. 80 &: 129 of 2001, Laws No 45, 98 &: 100 or 2002, and Law No.76 of 2004.

255. TeL arts. 41.1.3, 119.1.5.256. Kaisha K6seiho [Corporale Reorgamzation Act], Law 0:0. 154 of 2002, arts.

128.2-.3, amended by Law No. 76 of 2004.257 IeL art 1281.258 Id. arts. 72.2.3. 1271.5259. rd. art 1331.260 To ~iv<: d<: fa~Lo priorilY to a postpetition lender with a common benefit claim,

Takashi Sonoo, a former hankruptcy judge, suggests that the courts applying the eRAand the R.!\ should not conclude too quickly that a d<:btor has insuFficient funds to

sansfy all common benefit claims. Ln the absence of such determination, a trustee or theDlP may pay postpetition claims ahead of other common benefit claims pursuant to thegeneral practice followed in cases where the debtor has enough lunds to satisfy all com­mon benefit claims. JOKA.1 MI~JISA1S£lHO, supra note 29, § 16-8, at 56.

2006 Japan '5 Revised Laws 011 Business Reorganization 39

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\;Vhen a CRcA- or RA case converts to a liquidation case,16J common

benefit claim holders maintain their priority position over unsecured credi­tOIs262 The COlDmon benefit claimants in a BA case are treated equallyand shan~ pro rata with the other common benefit claimants. However,claimants who incur procedural expenses to the general benefit of all credi­tors, costs of preservation or sale of estate, or distribution costs receivepriority over the other common benefit claimams2b3

While postpetltlon fmancing under the CR.\ and the RA. is treated as acommon benefIt claim with prionty over unsecured claims, there 1S nosuch priority over the other common beneht claims.l64 Therefore., the pro­teetlOn artorded to postpetitJOn financing under the eRA and the RA is notas potent as the protection provided by the U.S. Bankruptcy Code.

b) No Priming Lien Protection

Under the US Bankruptcy Code, a postpetition lender may ohtain a:5CIliUl or equilllit:n OIl " debtor's propo:rcy dl<lt i", suhject ilJ udlel liell,,;)65

Neither the eRA. nor the RA provides for such a priming lien, however,mainly because of the strongly held lien law principle of ftrst-in-time, first­in-right Linnf'r thr eRA or the RA a. pn<:rppfjrillrJ crf'rlirnr m",y ohr;,in "

lien on properly that is inferior to any prior existing liens. Such a postpeti­uon creditor is not subject to an automatic Slay and is free to foreclose itslien upon default. 266

In]apan, a posrpetition lender is likely to obtain a first pnority lien onaccounts receivable or the inventory of a company in a reorganization casebecause such liens are not popular outside of [he insolvency comext.267

Accordingly, a reorganizing debtor lends to have accounts receivable andinveIll.ory unencumbered by other liens, making a first priority lien availa­ble for a postpetition lender. Consequently, postpetition financing hasbecome popular m Japan. 2013 Smce the eRA and the RA gIVe a debtorgreater access to financing in a bankruptcy case, a distressed company maynow be motivated to file early for bankruptcy protection to obtain suchpostpctition financing.

261. The coun may, UII its own moriun, decide to convert the case to a bankruptcypro"eeding if neeess"r)'. Minji S"i.eih6 [Civil R"h,bilit,,-,ion Act], Law No. 255 of 1999,an. 248, anuncled by Laws No. 80 &. 129 of 2001, Laws No. 45, 98 &. 100 of 2002, andLaw (\;0. 76 of 2004; Corporate Reorganization Act art. 250.

262. Civil Rehabilitation Act art. 252.6; Corporate Reorganization Act art. 254.6; SAarts. 27. 151 .

263. Hasanho [Bankruptcy Acl], Law No. 75 of 2004, arts 152, 148.1.1-.2.264. Civil Rehabilitation Act an. 1212; Corporate Reorgamzation Act art 132.2.

265. 11 USCA. § 364(d) (2005). For a genera! overView of priming liens, see Tabb,mpra nOle 2.4':J, S 15.42-.+:;

266. Civil Rehabilitation Act arts. 119.1.5,12.1.1; Corporate Reorganization Act arts.127.1.5, 132.

267 Koyama. su.pra note 252, at 149

268 Fur more detail~ on postpetltlOn financing in Japan, see generally (d.

40 Cornel! international Law Journal Vol. 39

4. Amtl).\i:; uf IllccnLlI(S ftH L1 Debtor

Cleary, the CRe'\. and the RA. give debtors similar incentives to file earlyfor bankruptcy protection. As has been discussed, barh statutes abolishedthe intensive screening of bankruptcy filings previously required under theComposition and old Reorganization Acts. In addition, a debtor may nowbe able to obtain postpetition secured financing in CRl\. and RA cases.

Nonetheless, the eRA and the Rl\ attempt to motivate early flUng 1n

very different ways. The CRA, on the one hand, offers a debtor a fasterbankruptcy proceeding and a DIP system. Yet, as has been noted, it alsohas Its di.sadvantages. For instance, the court in CRA Cllses does not generally issue a compr·ehensive injunction while a decision on whether to opena caSE is pending. Moreover, the eRA does not generally suspend debti'nfnrri'meDt hy secured creditors.

The RA, on the other hand, offers advantages for debtors that are notfound in the CRA. First, it generally suspends debt enforcement bysecured as well as unsecured creditors. In addition, the court in RA casesmay m0re readily issue a comprehensive injunction pending a decision toopen the case. The RA has its own disadvantages, however. For example,its trustee system may be a disincentive, and the RA procedure is muchslower than the C KA procedure.

As between the two statutes, it appears that the i.ncenti.ve structureunder the eRA more effectively motivates debtors to file for insolvency pro­LeCLiUll Llmn the RA stTuctun::. I:mpirical data show that the number ofreorganization filings in Japan increased by approximately 2.8 times in2000 and 4.8 times in 2001 after the CRA. replaced the Composition Act in1999.269 In 2003, while the combine.-1 numhn of insolvency case filingsunder the eRA. the &.A., and liquidation laws decreased by 16.6%,270 thenumber of eRA filings declined only 7.4%.271 In the same year, the num­ber of RA filings dropped by 16.5% after the substantial amendment to theold Reorganization Act became effective.272 Such data demonstrale thaIthe R/I. does not effectively induce a debtor to file for protection

B. Achievement of Rapid Restructuring

Another problem that Japanese bankruptcy practice faced before theen<J.ctment of the eRA 8nrl rh". sl1hsr:mri:11 :1ml'mlml'nr of the RA was theslow pace of bankruptcy cases. Previously, for example, the proceduretook approximately one year from filing to plan confirmanon under theComposition Act273 and at least two years under the old Reorganization

269. Sugeno, supra nOle 60, at SO (nOling that 231 composition filings were made in1999,662 CRA filmgs in 2000, and 1,110 CRA filings in 2001).

270. Teikoku Dalabank, Bankruptcy Informalion ill 2003, http!/'W'Nw.tdb.co-Jp/tosan/syukei/03nendo.html (last visi.ted Oct 14,2005)

27 L Sugmo, supra note 60, at 50 (nuting a deC(~ase in hlings from] ,] 09 in 2002 to941 in 2003),

272. rd.

273. Sonou, eRA i/1 il.5 Fourth Year, supra note 40, at 33.

ACc. 274 \Vhile a compi1flY in need of reorganization may want to spend

some llme under coun protecnon in Qrder to restrucLUre its business andnegotlate a plan of reorgaruzation, a reorganization case should not last toolong because tbe Fa]ue of a business in an insolvency proceeding tends to

decrease very quickly over timeHmv, then, do the eRA. and the Rl\ ensure quick restrucLUring) The

tw-o SU1Wtes incorporate certain procedures by \-vhich a dlstressed com­pany can hasten its reorganization process. Below, this subpart examinesthe procedures for claim examination, sale of a busmess, amI confirmationof a reorganization plan and how they promote rapid restructuring. InadditlOn to these procedures, many diStrlCt courts have adopted timetablesfor eRA and RA proceedings \vhich debtors are expected to observe. 27'S

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2006 Japan's Revised Laws on Business Reorgallizatiol1 41

1. Claim Examination

In the past, examination of claims alone lasted lor some time andoften dragged oU[ (he 1vhole process of rdwbilitation or reorganization_

l-or example, under the old H.eorgamzanon Act, elann exammanons wereconducted in examination hearings27G which were not constrained by anytime limitations or deadhnes, Thus, the hearings often extended for severaldays and delayed the whole reorganization process

To address this problem and speed up bankruptcy procedures, theCRA, and the RA have <Jbolished the claim examinallon hearings and modi­fied the process of examining claillls_ Under the new procedure, creditorsmust file their proofs of claim by a specified deadline_Hi The debtor ortrustee must then prepare a schedule of claims.278 If a creditor fails to fileits proof of claim by the deadline, it generally loses its claim, extept in aeRA case where the DIP is aware of the existence of the claim. 279 Anyinterested party may object to a scheduled claim before the court-ordereddeadline expires280 If any objection is filed v.rith respect to an unsecured

274. Hideki Malsushima, K6sei Kel)whuan SOl./hi Sahufet No TamenQ Zaisan Hyott;Kosei Saihen Kl.lhatfi Seido Nt Kl./llsuru Kaisei Ihen [Amending the Asset Appraisal andClaim Confirmation Procedures for Early Development of q Rwr)<anization Plalll, illKAlSHAKl~Sfl KIGYO Sex';OGO, supra note 21, at 54.

275, See sllpra text accompanying note 31.276. Kaisha Koseiho [Corporate Reorganization Law], Law No. 172 of 1952, arts.

135-140 (amended 2002), translated in 2 EHS LAW BUI 51:01<.. no. 2350 (2000).277. Minji Saiseiho [Civil Rehabilit.alion Act], Law 1\0,255 of 1999. arlo 94, amended

by Laws No. 80 & 129 of 2001, Laws No. '6 98 & 100 of 2002, and Law No. 76 of2004; Kaisha Koselho ICorporate Reorgamzatlon Act], Law No. 154 of 2002, art. 138,amended by Law 1\0. 76 of 2004. In the Tokyo District (ourt, the daim filing period isgenerally approximarely one monrh for a CRA ca,e and 25 momhs in all RA <:as~. MAI­

Sl'SHIMA, supra note 31, at 82,256; Oya, s\'pm note 32, at 135. In the United States, thereis no automatic ueadline for the filing of claims in a Chapter 11 case, and the court setsa deadline in each. case. FI'D. R. BANKl{. P. 3003(c)(J).

2713 Civil RdlabililaUull Au "rL 101, CUII'UJ"Lt: Kt:IJ[~<11JiL<1r'Un All <1' L 140.279. Civil Rehahihtation Act arr. 10l.3. CI fw R. BA."Kl{. P 300J(c)(2) (providing

that a creditor that fails to file a claim timely loses its nght to vote or [0 receive a disrri·burion in the case)

280. Ciyil Rehabilitation Act, art. 102: Corporate Rcorg"ulz£lt1on Act un. 147, CjfED. R. BA:,KR- P. 3007 (imposlng no deadline for flling objeclions to claims).

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42 Cornell International Law Journal \'01. 39

claim, the coun generally rules on the contested issues in an expeditedprocedure 28 ! Such a ruling is subject to an appeal in an ordinary civilprocedure. 2s1 Under the RA, if an objection is made to the value of collat­eral, the coun decides the value based on expert opinion, and this decisionis subject to an immediate expedited appeapSJ

2. Sale of a Bu,iness

a) Sale at an Early Stage in the Case

\Vllell d L.:VlllIJdllY ill [illdllddl Jbuo:, :,ee1.::. LU ::.dl illl Ot pilll of iL~

business, the sale typically must be completed as soon as possible becausethe value of a distressed company tends to declme very quickly While adebtor may include the sale of its business in its reorganiz:\tion plan, boththe CRA and the RA permit such a sale early in the process under certaincircumstances.284

1.'nrJ"r hnth th" eRA and the RA. the murt may permit a debtor to sellall or a major part of its business once a reorganization case IS opened Toauthorize such a sale, the court must find that the sale is necessary for thereorganization of the debtor's business. In addition, before authorizingsuch a sale, the court must provide two specified groups an opportunity to

be heard: first, the creditors' committee, if there is one, or the creditors; andsecond, any labor union or person that represents a majority of the employ­ees205 Because of these procedural requiremem::> in eRA Gl:,es, il gener­ally takes about two weeks for the TOkyo District Court to issue an orderfor the early sale of a business. 286

TLlt: eRA <Iud tht: RA ldkt: difft:lt:Ul dppwadu:s to sak of a business ora major pan thereof while the deciSIOn on opening a Ca~e is pending.Because a decision on opening a eRA case usually occurs within twoweel,s of filing, " court 8ener3Uy no." not ~nnn>~~ th", ~;11f' of thf' hll~inf'~~

during this period. In contrast, the waiting period for opening a typical RAcase lasts at least a month. 287 Given this longer time period, it is com­monly understood that the RA permits the sale of a business during this

281. Civil RehabiLitation Act art. 105; Corporate Reorganization Act art 151. forexceptions 10 these rules, see Corporate Reorganization Act arts. 107, 109; Civil Rehabil­ItatIOn Act arts. 1)0, 1Jt!

282. Civil Rehabilitation Act art. 106; Corporate Reorganization ACl art. 152.283 Corporate Reorganization Act art. 153.JR4 hi "rt<; 4fi 1 (.nthori7ine the cOllrt 10 pnrnir a sale outside of the plan), ] 67.2.

Although the eRA does not have a comparable provision, it is generally understood thata firm may sell its business by providing for the sale in its rehabilitation plan. JOKAl

MINJISALSEIHO, supra note 29, § 154, at 618.285. Civil Rehabilitation Act art. 47; COTpoTote R"orgoni7ation An art 462- -, Tn

the United States, the sale of all or a substantiaL portion of a debtor's business beforeplan confirmation is subject to somewhat grater restrictions. See generaHy 3 COLLIER,supra note 33,'l. 363.02.

286. Sonoo, Two and a HaU' Years" supra note 24, ot 5)

287. Oya, supra note 32, at 135.

2006 Japan's Revised Laws on Business Reorganization 43

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b) Sh:ueholders Right to Veto a Sale

\Vith court approval, a company in an RA. reorganization may sell itshusiness early in the case 'vVhile the R.I\ does not require an affIrmativeshareholders resolution pursuant to the Commercial Code, the court willnot permit a sale if the debtor is solvent and the. share.holders holding InUlt;

than oDe-third of the voting Tights file a written objection. ~S9 Shareholdersdo not have such veto power if the company is insolvent. 290

Sale of a business under the CPA, on the other hLl.nd, must 5lltisfyCommercial Code votmg requirements even \vhen the court permits suchsale early in the process, unless It is necessary for the continuation of thedebtor's business1 \!1 For sale of all or a major part of a bUsiness, (he Com­mercial Code requires an affirmative shareholders resolution as well as anaffirmative board resolution292 In order fOT a shareholders resolution tobe approved, holders of at least half the voting rights must attend the share­holders' meeting, and two-thirds at the represented Yoring rights must

approve the resolution293

Alternatively, if the debtor is insolvent and a sale is necessary for itsrestructuring, the court in a eRA case may permIt a debtor to sell all or amajor part of its business withom an affirmative shareholders resolu­tion. 294 According to case law, "necessity for restructuring" exists where,WiLhOll[ s"le of the business, a debtor will likely be forced out of business

or suffer a rapid decrease in value295

c) Effectiveness of Early Business Sale

In practice, do the eRA and the RA successfully enable a debtor to sellits business early in the bankruptcy process? The CR.:'\. has been quite suc­cessf1l1 in encouraging a rlehtor to sell its business before pLm confirma­

tion, For example, eRA cases involVing the sale of a business accountedfor approximately 10% of all cases filed in the Tokyo District Court fromApril 1, 2000 to March 31, 2004, the first four years after the statute wentinto effect. 296 or these cases, nearly three-quarters involved sale of thebusiness before plan confirmation. The number of cases in which theTokyo District Court approved sale of a business before the confirmation of

288 See SHli'J K,\ISHA KOSf.lHO [NEW CORPORATE RHlRGAJ\IZATlO:; ACT] 208-10 (TokyoBengoshl Kai ITokyo Bar Ass'n] ed., 2003) (notlng that the amended RA should be con­strued as allowing business transfers during the waiting period where necessary).

2tl9. Corporate Reorganization Act arl. 16.7.2290 rd. art. 40.8.291. Mil1Ji Sabdho [Civil Re.habilitation Act], Law No. 255 ot 1999, art. 431,

amended by Laws '\io. 80 & 129 of 2.001, Laws No. 45, 98 & 100 of 2002., and Law No.76 ot 1[)04

292. SrtOHO, art. 245.1(1)293 rd, art. 34:3294. Civil Rehabilitation Act art. 43.1.2.95. In re "'pon CoHn KK, 1719 Klc;'y\; HOi\IL: 51 (Tokyo HIgh Lt., June 11, LUU4j.

296 Ohtake, supra noll: 13, at 56

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44 Cornell International Law Journal Vol. .39

i:l phtn iIlCJXi:l5<:d 1'mm 5C,"Cntccn cases in 2000 anJ four in JOO] to thirty in

2002. and rhirly-ninl: in 2003297

Because the RA became effective early 2004, empirical data are not yetavailable as to whether the RA faeilitate~ ttw early sale of a bLlsiness None­

theless, considering the striking simllarilies between the RA and the CR.;\,.statutory schemes, one could expect that the RA also enables a debtor tosell its busmess earlv.

3. The Reorganization Plan

a) Deadline for Plan Submission

The eRA and the Ri\ have sped up the process of submitting rehabili­tation or reorgamzation plans Under both the eRA and the R.>\, the courtsets a deadline for the submission of the plan to the coun298 The deadlineunder the CR.'-\ is generally \\1thin twO months after the bar date,2YY andunder the R.I\. it is generally within one year after the case opening300 Thiscontrasts with t.he procedure under the otd Reorganization Act, where aplan was often submitted some two years after the ca::>t: u!-'t:ulng. The planmay be submitted by the trustee (including a trustee in a foreign insolvencyproceeding), the debtor, creditors who have filed claims, and the DIP (in aeM case) or share.holders (in an RA case).30J

b) Contents of the ReorganizatIOn Plan

A reorganization plan under the rRA and the RA generally describeshmv a business plans to reorganize itsdf. Under Japanese law, a liquida­tion plan may be filed in lieu of a reorganization plan if, after the case isopened., it becomes impossible ro rf-organize the business (if, for example,the business has been sold)302

The CR.'\ requires that the plan treat. all unsecured creditorsequally.301 Similarly, the RA requires that holders of the same kinds ofclaims be treated equally.504 However, both the LM and (he RA permit

297. Td)OR ric,;1 R"h,hilil:lIHm Act ~Tt. 10"'>.1: J<aisha Koseiho ICorporate Reorganization

Act], Law No. 154 of 2002, art. 1841, amended by Law 1\0 76 of 2.004. Chapter 11 ofthe u.s. Bilnkruptcy Code does not set a deadline for submitting a reorganization plan,but courts often 5et a filing deadlines, tailoring theITI to the needs of individual cases.Sec, e.g., Samuel L. Bufford, Chapter II Case Management and Delay Reduction: AnEmptrical Study, 4 A'vl. BC\:'o,KR. INsT. L. REV 85, 99-100 (1996) (describing one U.S.hankruptcy judge's ChJpter Ii CJse management system),

299. Minji SJbei Kisoku [Rules of Civil Rehabilitation], Sup Ct. Rule r,;o. 3 of 2000,3rt. 84.1. For the claim filing deadline in the Tokyo District Court, see supra note 277.

300. Corporate Reorg~nj::~tjonAct art. 1843.301 Civil Rehabilitation Act arts. 163.1-.2.,209.3; Corporate Reorganization Act arts.

1841-.2,244.3. Unlike u.s. BankrupLcy Code § 1121(b), neither the eRA nor the f{A

give;; a debtor "n exclusive right to filt; a plan,J0L Corporate KeorgantzatlOn Act art. 18'.1. Although the eRA UUO HUt have ,uch

a provision. it 15 generally recognized that a eRA plan may proVIde for liquidation SeeIV!AISl.:SHI"IA, supra note 3 J, at 146-48. U.s. law places no conditions on a Chapter 11liquidation plan. 7 C()L!.lER. stJpra note 33, 'if 1123.02[4].

303. Civil Rehabllilalion Ac~ art lJJ 1304. CorpOrate Reorganization Act art. 168.1. Accord 11 C.S.CA. § 1122(a) (2005).

c) Plan Confirmation

When the parties entitled to vOle approve a reorganization plan underthe eRA or the RA, the court wHl confirm the plan unless (1) the procedureor the plan violates the law, (2) the plan is not feaSIble, (3) the plan is notfair or equitable, or (4) the plan was approved by unfair methods313 Also,the court may not confirm the plan if the plan gives parties less than whatthey would receive in a bankruptcy liquidation, 3 14

diff<::L<::ll( U<::UlUL<::Lll ,vlL<::L<:: (1) U cbiw llUlJer LUllberll:> w lebO. favura!Jle

treatment305 or (2) such unequal treatment applies to (a) a smallunsecured claim,3°6 (b) claim filing coSts, or (c) postopening interest ordamages, unless such tre;ltment is unhir,307 For ex:ample, the Tokyo HIghCourt has upheld a golf course operator's eRA plan to mat dub membersmore favorably than other unsecured creditors on the grounds that the planwas nOl clearly unfair and \Va5 opposed by a very small number ofunsecured creditors,30R

Since an RA plan may modify not only unsecured claims but alsosecured claims and shareholders' interest, the RA requires that the plantreat the various levels of claims differently, provided such treatment is fairand equitable.309 Such differences must reflect the follOWing order of pri~

ority: (1) secured claims, (2) ordinary priority claims, (3) ordinaryul1:>ecureu daiIll~, ('-1-) umecureu claiIll~ subject to subon.hnanon agree­ment, (5) preferred shares, and (6) other shares.310

'vVhen the plan provides for deferred payments on unsecured debt, thepayment period may not la5t more than ten year':> from plan confirmationfor a CRAcase or fifteen years for an RA case absent special reasons toallow a longer installment period311 These deferred payment limitationsreplace the former practice of inslallrnenl payments lasting ten to lwentyyears. In fact, empirical data shO\\' that 440/0 of the rehabilitation plansfiled under the CRA from April 1, 2000 to March 31, 2002 had paymentterms of less than five years312 Such limitations on deferred paymentsunder the eRA and the RA have facilitated faster restructuring.

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2006 Japan's Revised Laws on Business Reorganization 45

305. Accord 11 USc.A. § 1123(a)(4) (2005).306. Accord id. § ll22(b) (2005) (authorizing administrative convenience class).307. (ivII Reh"bllitallon Act art. 155.1. Corporate Reorganization Act art. 168.1.308 In re Nippon Bil Project Co., j 131 KINYC; HA,'iREl 24 (Tokyo High Ct, Sept. 3,

2DDl).309, Corporate Reorganization Act art. 168.3. Under US law, the "fair and equita~

ble" requirement only applies in the cram down context, and only to a class that has notaccepted the plan. 11 USC.A § 1129(b)(l) (2005)

'3 I O. Corporate Reorganization Act art. 168.1.311. Civil Rehabilitation Act art. 155.3; Corporate Reorganization Act art. 168.5.312. Sanaa, Two and a Half Years', supra note 24, at 54.3i3. Civil Rehabilitation Act art. 174.2; Corpurate Rcorg"ruzation Act an. 1992 C)

11 USCA § 1129(a) (2005) (i]11posing thirteen requirements for the confirmation of aplan).

314. KOSEl KUKAKc l"o ]lTSV'1U To RIRON, supra note 142, at 112-13. Set: eR.A, art.174.2.4 (authorIZing denial also when approval would not be tn the general mterest ofthe creditors); Corporate ReorganIZation Act art. 199.22 (requiring confirmation where

.~

:~

:~[.,,

46 Cornell International Law JOHrnal \101. 39

Upon confirmation, the plan bc.como binding on the creditors, andtheir claims become enforceable only as modified by the plan315 Anyclaims not provided for under the plan are dIscharged] l6

d) Prepackaged Plans

The US. Bankruptcy Code has a prepackaged plan provision that per­mits prefiling acceptance of a plan that binds parties in a future reorganiza­tion case 317 In a U.S prepackaged plan, the debtor can negotiate arestructunng agreement and solicit acceptance from the creditors prior tothe. Chapter 11 filing 3I8 This prepackaged filing process provides for avery quick reorganization process.

Because the CRA and the RA do not have similar provisions, evenwhen one investor has made a prefiling deal with a debtor to support itsreorganization, other creditors may disregard the deal once a case tsopened. Moreover, even when there is a prearranged pIan, debtors tend tonegotiate such a plan on1y with their main banks and conceal this informa­tion from other parties. Therefore, the other parties are likely to distrustsuch a plan Because of this possibility and the uncertainty in the reorgani­zation or rehabilitation proceedings, investors could be discouraged fromcooperating "Yith a debtor to create a prepackaged or prear rangt'd plan

A case in point is the Tohato case3I9 Tohato, a confectioner, becamefinanCially distressed and conducted an auction to sell its business on feb­ruary 14, 2003, before filing for bankruptcy under the CRA.. unison Capi­tal, a private eqUity fund, won the auction with a bid of JPY l' US million(USD $1.1 million at $1=¥120). On March 14, 2003, Tohato filed for eRAprotection with a plan to sell its business to Unison Capital. After theopening of the case, an unomccc.ssful bidder at thc auction complainedabout the prepetition auction process. Since the prepetition plan [Q sell itsbusiness to Unison Capital was not binding, Tohato disregarded the prepe­tition deal with Unison Capital and agam conducted an auction to sell thesame busmess after the bankruptcy filing. In the end, Unison Capital wonthe bid again, but this time it had to pay ]PY Y183 million (1;5D 515 mil­lion at '51=¥120) to buy the same assets.

Because of these problems, few prepackaged or prearranged filingshave occurred in Japan. For example, court recorcls show only nine

the plan is fair "nd equnable). Accord USCA § 1129(a)(7)(A)(ii) (200J) (impusing a

Similar requirement with respect to unsecured creditors absent their consent).315. Civil Rehabilitation Act art. 179; Corporate Reorganization Act art. 20S. Accord

J J U.S.CA. § 1141(a) (2005).316. Civil Rehabilitation Act art. 178; Corporate Reorganization Act an. 204 Accord

11 USC.A § 1141(d)(1) (2005).317. 11 U,S.CA. § 1126(b) (lOOS).318. See In re Bd. of Dirs of Multicana! SA, 314 BR 486, 504-05 (llankr. S.LJNY.

20(4) nn fJrepaCk~Epn plan.., in lhe I.lniled Stales. seE gcner~lh Alesi<1 R<1tUley-Mari­nelli, Prepackaged Plans of Reorganization, in A PRACTICAL CUlDE TO Ol.;T-OF~COLRT

R",l","cn;Rl~'-'SAND P"HACKACFI) PTA", OF RI'0l1.GA;";17.ATlUN ~ 4 (r.;icholas P. Saggese &Alesia Ranney-Marinelh eds 2d I'd. 2000)_

319. Nobuo Savama, T6hato No Case Ni ivIiru ITohato Casel, 106 jlGYOS,\lSU ToSAIKENKfu';Rl rTlJR'~AROuKD& CREDlT MGMT.I 120,121-24 (2004)

2006 Japan's Revised Laws on Business Reorgani:UltLOI1 47

prepackaged or prearranged U:Zl-\ fllmgs in the lokyo District Coun from2000 to 2002.320 While this is a small number, these nine prepackaged orprearranged fllings took an average of only forty-nine days until case com­pletion. ,0 I In ordn to c?Cpe.dite the. proceedings for which a debtor- suc­

cessfully negotiates a deal before filing for bankruptcy, Japan must adoptprovisions that clarify the rules [or using prepackaged and prearrangedplans. In this connection, some Japanese lawy-ers have suggested creatingguidelines for prehlmg plans that include disclosure reqUlrements and pro­visions that make prefiling plans bmdmg. 322

To expedite a eRA case, a debtor may use a summary proceeding323 orconsensual proceedingl24 after the deadline for filing claims has passed,provided that it meets certain requirements Summary proceedings enablea debtor to skip the claim examination and claim approval procedures if,inter alia. creditOrs holding more than three-Wths at the tiled claims asdetermmed by the court consent in writing to waive the procedures and toapprove the proposed rehabilitation plan325 Lnder the summary proceed~

illg, tllt:" LlelJlur urrly :,kjp'" L1uo clailll eX3It1inaricH! amI claim appwvall'wce­dmes; the rehabilitation plan still needs to be approved in the creditors'meetingJ26 Since the general eRA requirements apply to such plan"pprov"l, one-h,.dl or more of the IHlsecured creditors plTsent "t the n,cet­

ing must vote in favor of the plan, and those voters must represent at leastone-half of the aggregate claim amounts. 327

To avoid this approval process, a debtor in a CR!\ case may usc consen­sual proceedings, provided, inter alia, that all unsecured creditors whohave filed claims consent in writing to \vaive the claim examination andapproval procedures and to support the proposed rehabilitation plan. LLH

In such a case, the court approves the consensual proceeding and confIrmsthe rehabilitation plan without requiring approval at the creditors'meeting. 329

Summary proceedmgs and consensual proceedings are very differentfrom prepackaged filings in the follOWing respects. FIrst, both summaryproceedings and consensual proceedings are available only after the dead­line for filing claims has expired 110 Unlike prepnclzaged filings, these pro

320. Sonoo. Two (md II Half rears'. supra nOlr. 24, at '52.321. rd.322. PREPACKAGE GAL\JIGYO SAlSEr [I'REI'..I.L.l0\GW BC~I"hS RLl.LJVL!{Y] § 2, ,,[99-192

U.JJ'A:-:ESE Ass'" rOR BV5. RECOVERY, 2004).323 MinJi 5aiseihlj [Civil Rehabilitation Act]' Law ;-";0 255 of 1999, arts. 211-216,

amended by Laws ;-';0. tJO & 129 of 2001, Laws No. 45, 98 & 100 of 2002, am! Law No.76 of 2004

324 ld. arts 217-220.325 ld. art 211326 Id. art 212.3 See also Ylinji Saisei Kisoku [Rules of Crvil RehabilitatlOl1j, Sup

CL Rule "0 3 of 2000, art.l08 (requiring a creditors meeting to take place within twomonths of the summary proceeding decision).

327. Civil RehahLlitation Act art.l72-3328. hI. art. 217.1.329. ld. arts 217.1, 219330. Id.ans21J.217.

48 Cornell international Law Journal Vol. 39

cedures are not avaibhlp before the debtor files for CRA protection.Second, summary proceedings are not binding on the parties involved in afumre creditors' meedng for plan approval, and consensual proceedingsrequire consent from all creditOrs who have filed a claim 3 ]1

In addition, unlike plans confirmed through the regular CRA, process,the confirmation of a pian through summary or consensual pwceedmgsposes a number of disadvantages to creditors. First, the plan under sum­mary or consensual proceedings does not discharge unWed claims332 Sec­ond, claims recognized in a confirmed plan under a summary orconsensual proceeding are not treated as final, executable judgments333

Therefore., a creditot ill " ::>turun'lry or consensual proceeding needs toobtain a final executable judgment if the debtor defaults in its obligationsunder the plan. Lastly, unlike a regularly confirmed eRA plan, the court isnot permitted to ~ct :aside sl'ch a plan if the debtor fuib to pc.rforl11 tllt'plan.334 Because of these disadvantages to creditors, the use of summaryor consensual proceedings has been very uncommon in Japan In fact,court records show that only three consensual cases tonk pl;]("p ;<t theTokyo District Court from 2000 to 2002335

4 Analysis uf Rapid Restr uecurin9.

As has been discussed, both the eRA and the RA effectively providerapid bankruptcy proceedings for ordinary bankruptcy cases. To hastenprocedures, the two laws supply deadlines for filing of proofs of claim andfor submission of the reorganization plan336 In addition, many districtcourts have published detailed timetables that are generally respected bythe parties. Limitations on installment payments under the laws enable abankrupt company to complete its restructuring quickly33? In addition,more sales of a business have been conducted in the early stages of bank­ruptcy cases338

One drawback of the eRA and the RA, however, is that they are inade­quate to handle bankruptcy cases where most if not all of the creditorsagree to a restructuring plan proposed before a bankruptcy filing. SincelldLher of the lWO statutes has proVISIOns or rules regarding prepackagedDr prearranged filings, they discourage parties from cooperating with debt­ors to achieve prepackaged or prearranged filings. In addition, parties

331 Id. art 217.332. ld. arts. 178 (dlschargmg lhe debtor from all claims UPOIl the confirmation of

the pbn), 216 (exempting application of c~rrain articles in summary proceedmgs), no(exempting application of certain articles m consensual proceedings).

333. ld. art5. 180.2-.3 (treating claim5 recognized in the plan as executable), 216,220

334. Id. arts 189 (authorizing the court to nullify the plan upon the debtor's failure toperform [he pj;m), 216, 220.

335 $onoo, Two and a Half Years', supra note 24, at 52.336 See supra text accompanying notes 298-30l.33/ See :;«pm t~xt accompanying not~, 311 ~"n338. See supra text accompanying notes 296 -297

2006 Japan's RevlSfd Laws on Btl5lllCS5 Rwrganizmion 49

have rardy used the summary proceeding and consensual proceedingunder the CR.;.\. because of features that are unfavorable to creditors.

C. Debux';i Leverage III the Banknlptcy Process

A bankrupt company may become involved in man) negOliations. forexample, a debtor may renegotiate a better deal v\irh irs rr>lne creditors, or itmay negotiate a reorganization pLan With Hs creditors. To obtain a betterresult from a negotiation. a debtor needs to have some leverage.

Both the eRA and the RA provide debtors with a measure of levpr;l~p

For example, a debtor may gain strong leverage in negotiating with credi­tors by threatening to file for bankruptcy protection or to confirm a reor­ganization plan through cram dovvn provisions under the R.d,33~ Inaddltlon, rejection of executory contracts and avoidance of prerfl-ent13L orfraudulent payments are two well-recognized leverage strategies under theeRA and the RA. This subpart discusses executory contracts and avoid­ance actions as debtor toob fm negoti<iliull awl examines ,heIr strengthunder these laws.

1. Executory Contracts

An executory contract may be assumed or rejected under both the eRAand the RA. :H0 If the conlracl is assumed, the other parry's right under thecontract becomes a common benefit claim subject to payment in fuI!.-'-l i Ifthe contract is rejected, the other party will have a common beneht claimfor the value of its performance and an unsecured claim for the damagecaused by the reJection.'H7 The orher party may lequcsl lhe trustee or DIPto decide whether to assume or reject a contract within a specified, reason­able period of time 343 If the trustee or DIP does not make such a decisionwithin the reasonahlE' p".rioo, thf' contr::lCt is deemed assumed3 ++

By threatening to reject an executory contract, a debtor may achieve astronger position in renegotIatmg a COntract with a trade creditOr. Suchleverage may be weak, however. when a debtor is renegonatmz a rtc31 prop­eny lease or an employment contract. For example, when a bankrupt com­pany is a tenant and wants to close an unprofitable office or store, thetrustee or DIP may reject the relevant lease and give the landlord anunsecured claim lor the damages caused by the reJection, Because there is

339. See ,upra text accompanying notes 148-153.340 Minjl Salselho [CIVIL Kehablhtatlon ActJ, Law No 255 at 1999, art. 49, amrnded

by Laws No. 80 &: 129 of 2001, Laws No. 45, 98 &: 100 of 2002. and Law No. 76 of2004; Kaish'l KuseihO rCOrpOra[e ReorganizaUon Act], Law 2'h 154 of 2002, art, 6 Lamended by Law No. 76 of 2004, Accord II C5.CA § 365 (2005) (providing ford>5umption awj rejeclion of execUlory conIraets).

341. Civil Rehabiliwtion Act art. 49.4; Corporate KeorganizatlOn Act an. 61.4342 Civil Rehabilitaliun Act arL 49.5; Corporale Reorgalllzarion Act an 6] 5,

Hasanh IBankruptcy Act]' Law No. 75 of 2004, arL 54.343 CiyH Rehabilitation Act art, 49.2; Corporale Reorgamzalion Au art. 61.2..344. Civil Rehabililalivn Act art. 49.2; Corporate Reorganization Aet an. 61.2 :1

i

. ~

50 Cornell International Law Journal Vol. 39

no damage cap tinder Japanese Lnv,143 the b1ndlol'd's claim may llnpose asubstantial burden on a reorganizing debtor Since rejection of a real prop­erty tease may turn out to be unfavorable to a debtor, the leverage of con­tract rejection is weaker when a debtor is attempting to renegotiate a realproperty Lease with a landlord. If the debtor is the landlord, on the otherhand, the trustee or DIP is not permitted to reject a lease, provided that thelease is "perfected" before the opening of the case. 346 Since leases are gen­erally perfected in Japan, a landlord-debtor tends to have little leveragewhen renegotiating a real property lease with a tenant

Also, an employer-debtor's leverage may be WEak when it comes torenegotiating employment contracts. 'While the executory contract provi­sions under the eRA and the RA do not apply to collective bargamingagreements,347 they do apply to employment contracts. The power to rejectemployment comracts, however, is l1mited by Japanese lubor law. To elis­miss an employee, a company must have reasonable cause3 -18 and givethirty days notice or at least thirty days' average wage349 Generally, dis­missal of employees on restructuring grounds is constnled nnrowly :>.nd

reqUires, inter alia, negotiation "ith labor unions or employees inadvance.1"iO Due to such labor law limitations, a debtor under the CR.<\ orthe IV'" may find it difficult to dismiss employees effectively in order toreduce burdensome labor costs.

2. Avoidance Actions

If a debtor III fmandal trouble makes debt payments, creates a securityinterest, sells property at below-market prices, or enters into other dubioustransactions before the opening of a eRA or RA case, a trustee (in"" eRA or

RA case) or a supervisor (in a eRA case) may bter avoid those transac­tions.>,)l The pOSSibility of such an avoidance action may provide the

345. Unlike u.s. law,japanese law imposes no damage cap on a landlord's claim fordamages caused by the termination of a lease of real propeny. See MINPO, 'Ins.415-416; 11 USC A. § 502(b)(6) (2005) (limiting a landlords damages to any past duerent plu" the larger of one year'" rent or 15% of the renl [or the rern:;,ining term o[ thelease).

346. Civil Rehabilitation Act art. 51; Corporate Reorganization Act ~rt. 63; Hasanh6[Bankruptcy Act], Law No 75 of 2004, arts. 53. 56.1. Under japanese law, a lease ofreal property is "perfet:ted" when a tenant records the lease in a real property recordingsystem, owns a recorded building on the leased land, or occupies the leased buildingM1Nl'l\ art. 605; Shakuchi shilkuyaho [Leased Land and Buildings Act], Law No 90 of1991, amended by Law No. 153 of 1999, arts. 10, 3L

347 See rivil ll"h"bilit.rion Act art 493; COTp"nte Rl'liTgoni7o'ion An "If 611348. Rada kijunhij [Labor Standard Act], Law No. 49 of 1947, amended by Law No.

147 of 2004, art. 18-2; In re Nippon Salt Prod., 294 Mlt--CSH(' 456 (Sup. Ct., April 25,1975),

340. Rodo kiJunho, on. 20350 For reasonable causes for dismissal in restrucmnng cases, see KAl:uo Sl,GE"O,

R,)nOH() [LABOR LAW] 467 -69 (6th ed., 2003); K\zco Sl;Gc>O;O,JAPA..'ESE bIPLOY\lE:--lT A;";D

LABOR LAW 486-89 (Leo Kanowitz trans., 2002).351 Civil R"h"hht"t'on Act an. 135, Corporale. Rc.organizcanon i\ct an. 95 Cj 11

U.S.c.A. §§ 547 -548 (2005) (preferential transfers and fraudulent transfers).

2006 Japan's Revised Laws on Business Reorganization 51

debtor with some leVErage and place it in a bt:ttel position wlll::u llt:gull<it­

ing the lQnt<;o.lS Qf a reorganization plan or contract terms with creditors.

The 2004 amendments to the BA, eRA., and RA. clarified \vhat makes atransaction avoidablc 352 Some of the major tyPc.s of avoidable transac­

tions include the following. First, any transactIOn or overpayment made bya debtor that impairs the interests of other creditors may be avoided underany of the followmg conditions: (1) both the debtor and the beneficiaryhad knowledge, at the time of the transaction, that the transaction or over·payment \vould impair creditors;353 (2) the transaction or overpaymentwas made after the debtor's cessation of payments or insolvency case filing,and the benefiCiary, at the time of the transaction, was aware of such cessa­non or flling or had knowledge that the transaction ",..auld impair credi­tors;354 or (3) the transaction was made without consideration after thecessatLOn of payments or wlthm SIX months pnor to the cessatlon ofpayments.355

Second, if a debtor has received a reasonable price for the sale of realpropeny, the transfer may be avoided, after a case is opened, only underthe follOWing conditions: (1) the transfer causes imminent risk that thedebtor may hide the consideration received or conduct other transactionsthat harm other creditors; (2) at the time of the tr'1nsfet, the debtor

intended to hide the consideration received or to hinder other creditors:and (3) the beneficiary was aware at the time of the debtor's intent to hidethe consideration or to hinder other creditors. 356

Third, if a debtor has made a payment or provided a security interestto a particular creditor, the transaction may be avoided under the followingconditions: (1) the transaction was made after the debtor became unablegenerally and continuously to pay Its outstanding mature debts or after itfiled for insolvency protection, and the creditor had knowledge thereof atthe time it received the payment or security interest; or (2) although thedebtor was not oblIgated to make such a payment or proVIde such a secur­ity interest, it did so within thirty days before becoming unable generallyand continuously to pay outstanding mature debts, and the creditor wasawurc at thc timc that the papTIent or receipt of ""curtty intcrC3t would

impair other creditors' interests357

352. Civil Rc:hl:lbiIitotion l\C[ Urt3. 1.27 1,1·1; CorponHc Rcorf;unL=;:I{:.ion Act u..rU.

86~98 For an overview of aVOldance actions under the amended BA, see Katsumi Yama­moto, Hminke1l [ [Avoidance Action I], 1273 ]URISTO 76 (2004): Katsumi Yamamoto,Hininhen II [Avoidance Action II], 1274 ]CR1STO 124 (2004).

353 Hasanho [Bankruptcy Act!. Law No. 75 of 2004, arts. 16011, 1602; Civil Reha­bilitation Act arts 1271.1,127.2; Corporate ReorgamzatlOn Act ans. 86.1.1, 86.2.

354. Bankruptcy Act arts. 160.1.2, 160.2; Civil Rehabilitation Act arts. 127.1.2,127.2; Corporate Reorganization Act arts. 86.1.2, 86.2. For a definition of "cessation ofp:;(yrnents,ll see ~ll.pn1 note /46

355. Bankruptcy Act art 160.3; Civil Rehabilitation Act art. 1273; Corporate Reor­ganization Act art. 86.3.

356. Bankruptcy Act art. 161.1; Civil Rehabilitation Act art. 127-2.1; Corporate Reor­g~niztl.tton -t-\ct art- 06-2.1

357. Civil Rehabilitation Act art. 127-3; Corporate Reorganization Act an 86-3.

52 Cornell InternatIOnal Law J(Jllmal Vol. 39

Unlike: d prdi::rcncc actiou under the US 1JdI1krtlprcy Code, an avoId­ance action under the EA, CRA or R!\ requires proof of the debtor's or thebeneficiary's state of mind, far example, rFhen a debtor has made a trans,;!Ction or overpayment that impairs the interest of other cn-<1itors, " phin­tiff in an avoidance action under the BA, eRA, or RA. must prove thedebtor's knowledge of such impairment. In the Takahashi Building caseinvolving a CRA proceeding, the coun held that a debtor's kno\vledge ofcreditor impairment can be estabhshed mthout a showmg of affirmativeintent to harm other creditors as long as the debtor's <l\Varene55 of a likelyloss to other creditors is shown358

The 2004 amendments to rile EA, C~A, and RA shifted rhe burden 01proving a hendiciary's state of mind from the plaintiff to the beneficiary inorder to bcilitate the use of the ayoidance action pro\'isions, Under thepreamendrnenr BA, eRA or RA, when a tkbwr hall maul:: a payUlclll 01

provided a security interest CO a particular creditor, a plaintiff in a prefer­ence action generally had to prove that the beneficiary, at the time of thetransaction, was aware of a ces<:3tion of payments or an insolvency filing.In practice, however, it is difficult and time consuming to prove such astate of mind of a beneficwry,359 Therefore, few avoidance actions werefiled inJapan before the 2004 amendments to the statutes, Empirical datashow that there were only eleven avoidance actions brought in the 794 eRAcases filed in the TOkyo District Coun from April 1, 2000 to August 31,2002,360 Among the eleven amidance actions, only three resulted in fmalorders, and six ,vere settled out of coun36l Because there were few suc­cessful avoidance actions in Japan, a debtor obtains little leverage from thepossibility of bringing an avoidance action under the CM or the Ri\, The2001 amendments sc-cl{ to solve this problem.

Another hurdle for avoidance actions under the eRA is thaL a DIPunder the eRA has no power to bring such an action, In contrast, the usBankruptcy Code authorizes either a DIP or a trustee, to bring ;J.n avoidance

action,362 \Vhik a trustee under the eRA or the RI\ has the power to avoida preferential transfer, a DIP under the eRA does not enjoy this power.When a trustee is nOC appointed under the CRit a court-appointed super',ii~

sor will have the power to bring an avoidance action provided that thecoun authorizes this power. 363 The reason that a supervisor, and Dor aDIP, has the power to bring an avoidance action is that the managementteam 01 a company in a L~'1 case generally remains in place followmg the

358 See [n- re Tahhashi Bldg. Co., 1106 K'N'YL HA:VREI 50 (Osaka DisL CL, Oct 20,2000) (holding that the debtor's payment to a certain creditor despite the debtor'~ ownfinanci31 difficulties is a preference payment tha t harms other creditors),

359, TAIZAGI. l:HALLENGES A"l) FUTURE OF THE NEW Ip;soJ,vENcy LAWS, supra note 3, at31.

360. Sonoo, Two dl1d a H(1lf rb:ws') supr'[i note 2-4, a~ 50, 54

361 ld, at 54.362. 1 J L'SCA §§ 547 -548 (2005),363 Minj; Sai~eih6 lCivH Rehabilitation Actj, Law No 255 of 1999, arts. StU, 1351,

um~ndftl by Law, Nu, 50 & 129 of ZOOl, L"w, (\U, 4'), 98 & 100 vf 2.002, auJ. La" '-lu76 of 2004,

2006 Japan's Revised Laws on Business Reorganization 53

CRe"', filing. Because of rhis, the legislalure assumed that It would beunlikely that the management would try to avoid preferential or fraudulenttransactions364 Because a DIP lacks the power to bring an avoidanceaction, it cun instigate an avoidance: action only indin~ctl} Ly t'~l~llaJilLg

the court to grant such power to a court+appointed supervisor and askingthe supervisor to initiate such an action.

A,; ;J rp,;ult, <Jvoi<:!,Jnce actions are quite: rare in Japan. A debtor gener­

ally seeks to negotiate a deal with creduors by threatening to bnng anavoidable action through a supervisor,365 but since a DIP does not have thepower to initiate an avoidance action, any levera:;e tends to be quite weakFurthermore, while the CRA gives trustees the power to bring avoidanceactiOns, the appointment of a trustee in eRA cases is very rareJGG Theavoidance system under the CR4., therefore, does not effectively prOVide adebtor WIth much leverage.

3. Analysis oj Debtor's Leverage

Rejection of executive contracts and aVOldance of fraudulent or prefer­ential transactions both serve as negotiation tools for a debtor. These toolsundlCf lh~ r:RA "n,llh". RA, hOWf'VI"T, "rl" not "''' "tynDS "l" tho,,/? found uncle"

the U.S. Bankruptcy Code because rejection of contracts is not an optionwhen a debtor is renegotiating a perfected real property lease with a ten­ant5Gf In addition, rejection of contracts does not function as a strongnegotiation tool when a debtor is negotiating a real property lease with alandlord or employment contracts with its employees.368 An aVOldanceaction under the CRA or the RA is not a strong negotiation tool alsobecause it reqUires proof of the state of mmd of the debtor or the benefIci­ary.369 Moreover, unlike under the U.S. Bankruptcy CDde,370 the DIP in aCRA case does not have the power to initiate an avoidance action.

D Credibility of Reorganization Procedures

To hrilil"tp pffprtivp insolvpnry pm("i'pr-ling<;, rhp CRA and the RA

need recognitIOn as credible restructuring tools. The question here is: howdo the CRA and the RA achieve reasonable results, amI how do they oblainthe public's trust? This Pan examines (a) plan performance and comple­tion 01 proceedings, (b) international insolvency laws, and (c) transparencyunder the eRA and the RA

364. ]OMI )'vl!"JISAISEIHO, supra note 29, at 225,365. Hideki Matsushjma, DrP H6,hinj Ni Okeru Kohei Seijitsu Gimu 0 .Megurll

Shomondai (Problems Relating to Ole Duty of Fairness and Good Faith in the DIP Systemj,]O=; jl(";vt>q"n To SAlVE"',,","">! [l"L'l'''APiX'''' & Cl<EI-'IT M''''H.I QO. Q2 (2004).

366. SCI;: ~llP"U lexl accompanying notes 204-205367. See supra text accompanying note 346.368. See supra texl accompanying notes 347-350369 See supra text accompanymg notes 358-361.370. See II Us.c.A. §§ 547-548 (2005).

54 Cornell International Law JOllllwI vol. 39

1. Plan PttJUI mWlu; and Comptelioll of Proceed.ings

The most significant drawback of the Composition Act was that a reor­ganization plan was frequently ignored In consequence, (he lay\, had nocredibility as an effective reorganization toop71 Plans under the Composi­tion Act were not performed because the Act had no provisions to ensurethe performance of reorganization plans. That said, do the CRA and theRA provide systems to ensure that the reorgamzatlOn plan is carried om?

Under the CRA and the RA, a debtor has an obligation to perform areorganization plan promptly once the plan is confirmed. 37 L To ensurecompletion of a plan. both the eRA and the RA provide monnoring mea­sures For example, the case generally does not end upon the confirmationof the plan: rather, a trustee or supervisor monitors the debtor's periorm­ancc of the plan373 In a eRA Ca.Se \-\-'ith :a supervisor, the coun m~y termi­

nate the proceedings only when the entire plan is completed or three yearsafter the date of plan confirmation, wh1chever occurs first. 37+ In a CR.,,\

C8se wirh :'I rm"tPp, thp Conrt must terminate the proceedings when theplan has been funy completed or when the court deems that it will cer­tainly be completed.375 In an RA case, the court may terminate the pro­ceedings only when (1) the entire plan has been executed; (2) thereorganized debtor has paid two-thirds or more of the total amount 01funds to be paid under the plan, proVided that there has been no default onthe plan and no concern about the prospect of its completion; or (3) thecourt finds that the plan will certainly be completed376

In addition, if the court in a eRA or RA. case finds it necessary [0

ensure the plan's performance, it may order the debtor or other parties [0

provide rCdsumllJlt: securiLy to guarantee performance. lT7 Since cloims in

a confirmed plan are treated as final, executable judgments, a creditor in aCRA or RA case may initiate execution proceedings as soon as the debtOrdefaults on its obligations under thE' phn 378

Lastly, the court in a eRA case may set aSIde the plan if the debtor fails

J71. Ti\DA."SJ;-U 5t-!lM]Z:L"~ AI":::lfu-\.ivlE:RUl'U..! Y"-.At::JltA SAll<t:~'" IDlY~;'T GI'\:E Cp 0:-'; B-C:;l(-.iI<:SS

RECOVERY] 69 (2001).372. Minji SaiseihO [Civil Rehabilitation Act], Law ,",0. 255 of 1999, an. 1861.

amended by L"ws No. 80 &: 129 of 2001, Laws No. 45, 98 &: 100 of 2002, and Law No.76 of 2001; Kaish" K6seiho [Corporate Reorganization Act], an. 209.1, Law No. 154 of2002, amended by Law No. 76 of 2004. Accord 11 USC.A. § 1142 (2005).

373 Although a proceeding terminates upon plan confirmation in a CRA case whereno trustee or supervisor is appointed, such cases are very rare because the coun gener­ally appointD a supervisor or sometimes a trustee. Se<: Civil Rehabilitation 1\,.1 art 1RR 1(requiring the court to close the case upon pian confirmation unless there is a supervi­sor or trustee) Even if the eRA proceeding is terminated, the committee of unsecuredcreditors, if any, may supervise execution of the phill. Civil Rehabilitation Act art.154.2. Chapter 11 of the U.S. B.nlullptry (,,,riP h" nO similar provision.

374. Civil Rehabilitation Act art. i88.2.375. Id art. lS8.3376, Corporate Reorganization Act art. 239.1.')77. Clv!l RehabHllaLloll Act arc. 186), CUI pUl aLe: R"organlzation ,\ct art :'.00.4.

378. Civil Rehabilitation At:t art. 1802-3: Corporate Reorganization Act an. 2062

2006 Japan's Revised Laws 011 Business Rwrg£i/llzatio)J 55

to perfornL ,/9 \Vhcn t}l(' court finds, ,~ftcr the c()nfinnation of th.: plan,

that there is no possibility of its performance, both the eRA, and the RArequire the court to discontinue the proceedings,3oG Such a case may bedismissed or converted to a liquidation pmrf'f'rling, 38 \ vvhich gives adebtor a strong incentive to perform its plan. If it becomes necessary tomodify the plan for inevitable reasons, a debtor, trustee. supervisor, orcreditors may petition the court to revise the plan hefore closing theproceedings ..0,82

The eRA has proved quite successful in achieving effectlve plan per­formance. Of the 1,306 eRA cases flled in the Tokjo District COUrt in thefirst four years after the CR..i\ LOok effect on Apnl 1, 2000, YOti cases hadplans confirmed, and 287 of the cases were subsequently dosed, Of the287 closed cases, 200 cases (69.7%) had fully completed plans. In an addi­tional27 casu (9.+%) thc cascs tcnninatc.d UpUli tin:: eXjJilj uf the :-,ujJErvi.sion period, and in an additional 10 cases (3.5%) termination occurredupon the cancellation of the supervision order383 In contrast, only 50cases (17.4°;,',) WE're c1n'iFd hF(';m<;p of pl:m f>1i111rp 384

While no empirical data on plan completion are yet available for casesunder the RA, similar results are expected because the R.A.. has similar provi­sions [0 ensure the performance of reorganization plans.

2 Internatiol1al Insolvency

Japanese insolvency la\VS used to follow the territorialism principleunder which an insolvency case in Japan could only affect the debtor'sdomestiC assets, and an lDsolvency filed abroad could not aHecr assets inJapan 385 Public criticism of the territorialism prinClple arose, however,bCLaU~t:: ib forlualblic <1jJjJlic<itiuH l,;uulJ re:-,ul[ in unequal treatment ofsimilarly siwated creditors and inconsistent treatment of a bankrupt <:om­pany.386 Accordingly, in order to improve the credibility of its insolvencylaws, Japan abDlished this territorialism in 2000 D.nd adopted most of the

provisions of the united Nations Commission on International Trade Law(UNClTRAL) Model Law on Cross-Border Insolvency387

379 Civil Rehabilitation An art. 189.1.2.380. Civil Rehabilitation Act arl. 194; Corporate Reorganization Act art 241.1. CJ

11 V.SeA § 1144 (2005) (aurhorizing the revocation of confirmation of a Chapter 11plan only for fraud and only if the request is made within 180 days of confirmation).

381. Civil Rehabilitation Act art. 250; Corporate Reorgani~ationAct art. 252. Cj. 11US.CA, § 11l2(b)(7)-(8) (2005) (authorizing the court to convert a Chapter 11 reor­ganization case to a Chapter 7 liqUidation case llPOn finding "material default by (nedebtor with respect to a confirmed plan" or inahility of the debtor to effect substantialconsummation of such a plan).

382. Civil Rehabilnanon Act art. t87; Corporate Reorganization Acl art 233383. Ohtake, supra note 13, at 59.384. rd.38::1. Kabha l\.O~eI1lO /Corporale Rwrganizatlon Law], Law "io. 172 ot 19:52, art.

4.1-.2 (amended 2002), translated in 2 fHS LAW BULL. SlR. no. 2350 (2000).386 See SHIGEAKI "'10:-'100, SHIt; KOKLSAl T6sA;';HO :\0 ]lTSt.;"lU [PRACTlCe OF NEW

["'TERNATlOI"-:,\L lr-;sOLVE";CY LAW] 19~31 (2001).367. See G"ikuku TD,all 511U" TCl'ULuki No ShOnin Enjuni Kansurll Mar/cst! {Law on

Recognnion and Assistance of rore\gn lnsolvency Proceeding':, Law No. l29 of 2.000,

56 Cornell InternatIOnal Law Journal Vol. 39

A:, C\ l<O:jUlt,j,~pilnc:sc in501vcnc)' G15C1 no,v havc thc following effect::> inforelgn states FIrst, a DIP or trustee under the eRA, Ri\., or I3A has thepower to manage and dIspose of a debtor's assets located abroarl 3 i:lS Sec­ond, J.lthough a creditor who has rt'Cf>iwci p"'rtial satisfaction of its rightsin a foreign insolvency proceeding is permitted to file its entire claim underCRA, RA. or BA proceedings in japan, such a crediLOr is prohibited fromreceiving payments for the same claim in ajapanese insolvency proceedingif the payments to the other creditors of the same class are proportionatelyless than the payments the creditor has already received389 This "hotchpotrule" is designed to prevent creditors from receiving unequal payment fromthe debtor's overseas assets.

However, legal reform alone cannot resolve international insolvencyproblems In japi1rl. The actual effects of the CRA, R.~, and BA on foreignassets anel insolvency proceedings depend on the recogmtlOn of Japanesejuelicial decisions by the foreign country where such assets are located. Forexample, Daewoo japan was a japanese trading company and a wholly­owned subsidiary uf Dat:wuu MUtUI CUlllp<illj in Kon:a. Because elf the

bankruptcy of Dae,voo Motor, Daewoo japan became financially distressedand filed for rehabilItanon in the Tokyo District Court. Later, DaewooMotor filed <l prepetition debt enforcement action "'g;tinsr Dae\voojap",n in

the inchon District Court of Korea. Daewoo Motor requested, inter alia, ardund of an advance payment that it had made before the opening of theDaewoo Japan's rehabilitation case. Applying Korea's territoriahst princi­ple,390 the Inchon District Court refused to recognize the japanese rehabili­tation case of Daewoo japan and ordered a refund of the advance

amended by Laws No. +5, 9R, 100, 155 of 2002, Law No. 134 of 2003, and Law No. 76,154 of 2004 [hereinafter LR.'\FIPj; UNCITRAL Model Law on Cross-Border Insolvency,GA Res. 52/lStl, Annex, U.N. Uoc AjRes!)l/DS/Annex Oan. 30,1998), available athttp';/ww>V.iiiglobal.org/organizations!uncitral!modeUaw.pdf. For more informatiunregarding Japanese legislatiun on cross-border msolvency, see generally MOMOO, supranote 386: Shinichiro Ahe, RfCCtlt Developments of Insolvency Laws and Cross-Border Prac­llL~; ln th~ unlL~d 5wt~; "'LU ]up<.Hl, 10 AM. B"NKK. I"". L. Rrv. '17 (2002): JIideo

Horikoshi. Guide to Japanese Cross-Border Insulvency Law, 9 LAW & Bus. REV. AM. 725(2003); Kazuhiko Yamamoto, New Japanese Legi;/atiol1 on Cross-Border Insolvency as Com­pared with the UNCTTRAL Mudel Law, 2. INT. INSOLv. Rtv. 67 (2002), available at hup:/ /,,,,nviii!'Sl,·,baLorg,!cQuntry/jap,,n/kgi;;totion.pdf. The United States h:l.. recentlyadopted a domestic version of the UNClTRAL Model Law as a new Chapter 15 of itsBankruptcy Code. See Bankruptcy Abuse Preventlon and Consumer Protection Act of2005, Puh. L No. 109-8, § 801, 119 Stat 23, 134-45 (2005).

388. Miuji Sai,eih6 [Civil R<.habilitation Act], La", No. 255 of 1999, art. 38.1,amended by Laws No 80 &: 129 of 2001, Laws No. 45, 98 &: 100 of 2002, ~nd L"w No,76 of 2.004; Kaisha Koseih6 [Corporate Reorganization Act), Law No 154 of 2002, arts.32..1,72.1, amended by Law No. 76 of 2.004; Hasanh6 [Bankruptcy Act], Law No. 75 of2004, art 34.J

389 Civtl Rehabilitation Act art. 89: Corporate Reorganization Act an 137; nank­ruptcy Act art. 201.4.

390. Mika ylaeda, Nihfwn No Rensa!<han To Min)! SaiseiJiken [A Bankruptcy ChwI1 lIL

Japan. and Korea and a CIvil R~hubWwtiurt Ca~J':L 103 JLC,YOS."-13EI To 5"IKF"",""u [T,;",,·AROUND & CREDIT :vfGMT.] 180, 183 (2004)

2006 Japan's Revised Laws on Business Reorganiz.atiolJ 57

p",yrnent. )9J

A forelgn insolvency cast:, on the other hand, may have effects inJapanif the T8kyo District Court decides to recognize such a foreign insolvencyproceeding]C)2 Under Japan's Law on Recognition and Assistance of For­eign Insolvency Proceedings (LRAFIP), the court will recogni=e a foreigninsolvency proceedmg unless, inter alia, (1) a foreign representative doesnot pay the fees for the recognition-assistance proceeding in advance; (2)the foreign law manifestly provides that the foreign law does not apply to

aSsets in Japan (3) the result of recognition is contrary to public policy orgood customs in]apan: (4) any relief on recognition is manifestly unneces­sary; p) a foretgn representative who has applied tor recogni.tion does notaccept an obligation to give necessary information to the court, or (6) aforeie;n represenwtive has applied for recognition manifestly in bad

faith." Q" 'Nhih: th", coun's n:cognitiun dvt::> Hut !Jav\:: 'Illy aUlQmatic effect

on the debtor's assets or creditors, the court lllay order several kinds ofdiscretionary relief, such as staying the continuation or commencing anexecution or anion againST a debtor, re:rminaTing ;m execution, prohibitinga transfer of assets, or reqmring court approval for disposition of thedebtor's assets located in Japan394

Alterna tlVely, a representative in a foreign insolvency proceeding mayseek to commence a eRA or R.>\ case in ]apan395 When such concurrentmsolvency cases are pending, they can be coordinated in various ways.First, a trustee or DiP in Japan is expected to cooperate with the foreigninsolvency representatives and exchange intor mation necessary for reor­ganization of the dehtorJ96 Second, a trustee or a DrP in a foreign insol­vency case may appear in a]apanese insolvency case on behalf of creditorswho have filed claims in the foreign case and file claims for them in theJapanese case. Similarly, a trustee or a DIP in a Japanese insolvency casemay appear in a foreign insolvency case on behalf of creditors who havefiled claims in Ihf'Japanese case and may fj1f rl~im<; for them in the foreigncase397 Last, to avoid situations in which a creditor obtains morefavorable treatment than other creditors of the same class by recei.vUlg pay­ment on the same claim in different jurisdictions, the CR...1., RA, and BAhave all adopted the hotchpot rule. 398

391. Later, Daewoo Japan settled Ollt of COlirt with Daewoo Motor and its successorGM Uaewoo Uaewoo Japan will pay the settlement under its rehabilitation plan inJapan fa atl R1-84.

392 LR.A.FW supra nore 'l87, arts. 4, 17-24.393 Id. arts. 21, 22, 57.1, 62.1394. Id. arts. 25-5:5395 Minjl Saiselh6 [Civi] Rehabilitation Act]' Law '-;0 255 01 1999, art 209.1,

amended bv Laws No. 80 &. 129 of 2001, Laws No. 45, 98 &. 100 of 2002, and Law No.76 of 2004; Kaisha Koseih6 [Corporate Reorganization Actl, Law :\0. 154 of 2002, arL244.], amended by Law :"0. 76 of 2()()4.

396. Ctvil Rehabilitation Act art. 207; Corporate Reorganization Act an. 242397. Civil Rehabilitation Act art 210; Corporate Reorganization Act art 24'5.398. CIVil Rehabilitation Act art. 89.2; Corporate Reorgunu'ltiotl Act art. 137.2;

Ha:;anho [Bankruptcy Act], law 1'10. 75 of 2004, art. 2014

58

3. Transparency

Cornell International Law Juwnal Vol. 39

Japanese insolvency proceedmgs have come under critiCIsm for lack oftransparency when compared to U,S. and international bankruptcy stan­dards. 399 As a consequence, Japan has responded by establishmg moretransparent insolvency procedures. For example, both the CRA and the RAnow permit interested panies to request documents relating to a case.400 Adebtor and n trustee arc required to report to the court and creditors impor­

tant information relating to a eRA or RA. proceeding401 Parties to CRA orR/... proceedmgs are given notice of important coun orders and opportuni­ties to appeal such orders. 402

Conclusion

This paper has examined the effectiveness of the CRA and the RA in(1) structuring incentives for debtors to file early for bankruptcy protec­tiOD, (2) achieving quick reorganizations, (3) providing debtors with appro­priate leverage in reorganization cases, and (4) building public conhdencein the Japanese lllsolvency laws The paper first shows that the CRA hasmore effectively motivated debtors to file for bankruptcy protection thanthe RA. Second, while the eRA and tluo RA have. successfully dcce!e:lal"d

reorganizations in typical cases, they do not provide faster or more effectivereorganization for cases where all or most creditors agree to a prefilingfiLm Thirn, thr paper shows that 3 debtor has less leverage tn ::I bank­ruptcy case under the eRA or the RA than under the U.S. BankruptcyCode. Lastly, both the CRA. and the RA attempt to ensure performance of areorganization plan and seek to avoid unfair results by abolishmg the terri­torialist principle and by achieving greater transparency

In conclusion, the new business reorganization laws in Japan haverealized substantIal progress in facilitating reorganizations. Furthermore,early data show that the LRA has helped produce feasible reorganizationplans that ensure both payment to creditors and successful reorganizationof businesses. Although only limited empirical data tS available on the RAand it:s dfcctivcnc:s~, the :succc~~ of the eRA, which contains similar provi­

sions, provides reasons for optimism that the RA will provide comparableimprovements

399. Roundtable Discussion, Corporate/Deb! Restructuring: Japan, The Hong KongSAR & the Prople"s Republic oJ Lhma- A I<oundtable DiscusSlQn, 10 A\1. tiA:--<KR. [NST, L.REV, 1, 9-10 (2002) (comments by Satam Murase).

400, Civil RehabWtanon Act arts. 161-.2, 18; Corporate Reorgatlizil.tion Act arts,11.1-.2, 13. See also .\JllNjl SOSHOHG [MINSOHO] [Code of Civil Procedure], arts. 91.5(balring leque~", fUl l!.UCUlll"lll~ where ~uch re4ue~l:s wuuld illlelfere wilh the coun'sfunction or record keeping), 92 (authonzlllg the court to deny interested parties' docu­ment requests for pnvacy or business secret reasons).

401. Civil Rehabilitation Act arts. 125-126; Corporate Reorganization Act arts,81-85.

402 Civil Rehahilitation Act arts. 9-10; Corporate Reorganization Act arts. 9-10,