Firm Profile report | Japan 2010 >> ALB special
Mori Hamada & Matsumoto
Foreign insolvency proceedings in Japan
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s a natural consequence of the Lehman shock back in 2008, many international business entities have become insolvent and have filed for legal proceedings in their respective jurisdictions in the past couple of years. In some instances, foreign insolvent companies which commenced their bankruptcy proceedings in their own jurisdictions have certain assets in Japan. Liquidators or administrators of these companies will be obligated to move such assets back to their countries and/or dispose of them in order to maximise the distribution of assets to creditors in compliance with the applicable bankruptcy laws. Some of these liquidators or administrators intuitively ask themselves the following question: does my appointment as liquidator/ administrator by the competent court with jurisdiction in my country give me authority over the debtor company in Japan? This article will give you an outline of the relevant law of which you should be aware when acting as a liquidator/administrator of an international entity which has certain assets in Japan.
Recognition Order and Assistance Order Even if the law under which you are appointed as a liquidator/administrator sets out that it will be applicable to the insolvent entity’s assets located in a different jurisdiction, Japanese law does not automatically recognize foreign legal proceedings or your authority in the Japanese territory. You must first obtain a Recognition Order from a Japanese court for the legal proceeding to be recognized by the court, in accordance with the Act on Recognition and Assistance for a Foreign Insolvency Proceedings (RAFIP Act.) This legal procedure is in line with the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (UNCITRAL), which requires
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such recognition from local courts before a foreign liquidator/administrator may act with authority in the territory. However, unlike the position under the UNCITRAL Model Law, the Japanese Recognition Order does not by itself result in automatic provision of certain assistance to foreign liquidator/administrator. In Japan, the Recognition Order is simply a precondition for obtaining one or more Assistance Orders. These include (i) an order to injunct an ongoing compulsory execution against debtor’s assets, (ii) an order to generally prohibit compulsory execution against debtor’s assets, (iii) a general prohibition of asset disposal and repayment of debts by the debtor, and (iv) an order to exclusively give asset disposal rights in Japan to the debtor-in-possession or foreignappointed liquidator/administrator (called an Administration Order). It is important that a foreign-appointed liquidator/administrator understands that he/she is not legally empowered to take control over or dispose of debtor’s assets located in Japan without first obtaining the Administration Order. Japanese law considers that the debtor’s assets can only be controlled or disposed of by the existing executive officers and does not automatically recognise the liquidator/administrator’s authority as given by a foreign legal system. Thus, in the case where a liquidator or administrator of a debtor sells debtor’s certain assets and re-patriates the proceeds to the company’s jurisdiction without first obtaining an Administration Order in Japan, it may be regarded as theft or embezzlement under Japanese criminal law.
Restriction on disposal rights Once an Administration Order is issued, the foreign liquidator/administrator will become an approved trustee under the RAFIP Act, and becomes the sole person who can control the debtor’s business and dispose
of the debtor’s assets in Japan. However, even having secured the Administration Order, the approved trustee must also obtain individual court approvals each time it wishes to dispose of debtor’s assets or transfer them beyond Japan’s borders. This restriction is intended to prevent unjust removal of such assets from Japan and to protect domestic creditors’ rights. From a foreign liquidators/ administrators’ standpoint, obtaining such individual approvals is quite burdensome and unnecessary, as they are already appointed as the authorised fiduciary of the debtor under the law of the relevant jurisdiction and are therefore obliged to meet their fiduciary obligations. This would seem to make any further imposition by the Japanese courts unnecessary. The author admits that it seems somewhat strange that the RAFIP Act requires individual approval for asset disposal to protect domestic creditors, since the court will have already recognized the foreign proceedings as fair and legitimate during the process of issuing the necessary Recognition Order. Having said that, it is not advisable to neglect the requirements of the RAFIP Act in taking the risk of committing theft or embezzlement under the Japanese law. If you think the individual approval of asset disposal is a redundant requirement in your case, you may want to specifically explain and exhibit to the Japanese court the fairness of the proceedings in your country and how the Japanese creditors would be equally treated thereunder. Then one could request that the Japanese court issues a “catch-all” approval to apply to all of the company’s assets, or that it expedites the future approval process. Accumulating these efforts would help rationalise the court practice and facilitate international bankruptcy practitioners’ activity in Japan in the future. Junichi Tobimatsu, partner Mori Hamada & Matsumoto email: junichi.tobimatsu@mhmjapan.com tel: +81-3-5223-7760
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