This note discusses certain issues relating to the Electronically Recorded Claims System, which is a book-entry system for monetary claims newly introduced in Japan, and which creates a new type of monetary claim that will be created and assigned only by entry in the electronic registry maintained by the recording institution. The Electronically Recorded Claims System is expected to contribute to a secure and smooth trade in monetary claims. The official English translation of the relevant law and brochures explaining that system has not been released so the term Electronically Recorded Claims System or other terms used in this article may differ from the English terms that will be later employed in this context.

Background

Traditionally under Japanese law, two types of monetary claims are customarily traded, nominative claims (shimei saiken) and claims on bills (tegata saiken). Nominative claims are generally those claims whose obligees are specified, compared with claims represented by bearer securities. Nominative claims are created typically by a contract between two parties or more, such as a purchase agreement and a loan agreement. For example, when a purchase agreement for goods is entered into, the seller has account receivables vis-à-vis the buyer. Such account receivables fall into a category of "nominative claim" under the Japanese Civil Code.

The validity of a nominative claim depends on valid existence and effectiveness of the underlying transaction, that is, the purchase agreement in the above example. If the purchase agreement in question was entered into due to fraud by a party, such a purchase agreement can later be rescinded, in which case the nominative claim created by the purchase agreement is no longer valid. Therefore, a prospective assignee of a nominative claim should confirm that the underlying transaction is validly existing and effective beforehand.

In addition, under the Japanese Civil Code, an assignment of a nominative claim shall be deemed perfected and is effective against a third party if the obligee assigning the claim gives notice of such assignment to the obligor or the obligor acknowledges and consents without objection to such assignment. Since the information on whether such notice or acknowledgement has been made is not publicly available, though, it is not easy for an outside party to ascertain the current holder of the nominative claim. There is often a risk of double assignment of the same nominative claim to different parties. That has been an obstacle to a secure and smooth trade in nominative claims.

On the other hand, claims on bills are claims represented by bills, such as promissory notes and drafts. Claims on bills can be created only by making the bills, and can be assigned only by physically endorsing and/or transferring the bills. The creation and assignment of claims on bills are not influenced by the valid existence or effectiveness of the underlying transaction.

However, the problem with bills is that physical production and transfer of bills in paper is required for creating and assigning the claims. The amount of trade in monetary claims is incomparably larger than in the past, when the bills system was first implemented. It is expensive and time-consuming to create, hold, and ship many paper bills. There is also a risk that paper bills may be lost or stolen. For this reason, bills are not as frequently utilised for trading in monetary claims as they were in the past.

Enactment

In light of the disadvantages of trading in nominative claims and claims on bills, for the past several years, there has been discussion about introducing a new system of electronically recorded claims in Japan. In 2004 a working group of the Ministry of Economy, Trade and Industry (METI) commenced the study of the scheme of the new system and possible business models using the system. After that, METI, the Ministry of Justice (MOJ) and the Financial Services Agency (FSA) discussed structuring and legislating the system. On March 14 2007, the MOJ and FSA submitted a bill of the Electronically Recorded Claims Law with the Diet of Japan, and the bill passed the Diet on June 20 2007. This new law was promulgated on June 27 2007, and will become effective within 18 months of its introduction.

Outlook of the law

The Electronically Recorded Claims Law provides for, among other things, the creation, assignment, extinguishment and other treatment of "electronically recorded claims", and for the businesses and supervision of the "electronic claims recording institution". Electronically recorded claims are a new type of monetary claim different from nominative claims and claims on bills, and can be created or assigned only by entry in the electronic registry maintained by the electronic claims recording institution. The electronic claims recording institution is a corporation designated by the competent ministry to maintain the electronic registry for the electronically recorded claims. Unless otherwise specified, references to articles and other provisions below are references to the relevant provisions in the Law.

Creation of claims

Electronically recorded claims will be created only by entry in the electronic registry of particulars of such creation (Article 15). The entry will be made only when requested by both the obligee and the obligor of the relevant claims, in principle (Article 5, Clause 1). If the obligee and the obligor separately request the entry, the entry will become effective when the latter (from a timing perspective) request is made (Article 5, Clause 3).

The Law requires that the following particulars be recorded to create electronically recorded claims: (i) that the obligor will pay a certain amount; (ii) the due date for payment; (iii) name and address of the obligee(s); (iv) in case there are two or more obligees, whether the claim is divisible or indivisible, and if divisible the amount of claim held by each obligee; (v) name and address of the obligor(s); (vi) if there are two or more obligors, whether the obligations are divisible, indivisible or joint and several, and if divisible the amount of obligation owed by each obligor; (vii) serial record number and (viii) the date of the entry (Article 16, Clause 1). Additional information, such as provisions on the method of payment, interest, default interest, events of default, set-off, limitation on assignment or guarantee, notice and resolution of disputes, can also be included in the record (Article 16, Clause 2).

Unlike nominative claims, the creation of an electronically recorded claim is not subject to the valid existence or the effectiveness of the underlying transaction. The contents of electronically recorded claims will be determined solely by the particulars recorded in the registry (Article 9, Clause 1); provided that, if there is a discrepancy between the particulars recorded in the registry and the information provided by the parties requesting the entry to the recording institution, or if other exceptional events attributable to the recording institution occur, then the record of the relevant electronically recorded claim must be corrected (Article 10). The obligee recorded in the electronic registry is presumed to be the legal and valid holder of the relevant electronically recorded claim (Article 9, Clause 2).

Assignment of claims

Pursuant to the Law, any assignment of electronically recorded claims will not be effective until certain particulars on such assignment are recorded in the electronic registry (Article 17). The information necessary to be recorded in the registry for the assignment is (i) that the relevant electronically recorded claim is assigned, (ii) in case that the assignor is an heir of the recorded obligee, the name and address of such assignor, (iii) the name and address of the assignee and (iv) the date of the entry (Article 18, Clause 1). In addition, information such as agreements between the assignor and the assignee on the manner of notice and resolution of disputes can be included in the record (Article 18, Clause 2). In principle, a request by both the assignor and the assignee to the recording institution is necessary for entry of such information (Article 5, Clause 1).

Unless otherwise provided in the electronic registry in advance, or certain other exceptions in the Law apply, even if the entry of assignment of an electronically recorded claim in the electronic registry is incorrect, the assignee recorded in the registry will obtain such a claim, unless the assignee was aware of incorrectness or was grossly negligent. Also, unless otherwise provided in the electronic registry in advance, or certain other exceptions provided in the Law apply, any personal defence which the obligor could assert against the assignor cannot be asserted against the recorded assignee.

Ending electronically recorded claims

Unlike creation and assignment of electronically recorded claims for which an entry in the electronic registry is always required, an entry in the electronic registry is not required to extinguish electronically recorded claims. An electronically recorded claim will be satisfied and extinguished when the payment is made in full, even if such a payment is not recorded in the electronic registry. Such a payment cannot be asserted against any other party, however, unless the extinguishment of the relevant claim is recorded in the electronic registry. The entry of extinguishment of the electronically recorded claims in the electronic registry can be made through request by the obligee only (Article 25, Clause 1). The obligor that has made payment to the obligee may then request the obligee to approve the entry in the electronic registry (Article 25, Clause 2), or the obligor may in advance request the obligee to approve the entry in exchange for the payment by the obligor (Article 25, Clause 3).

It could occur that, even if an obligor of an electronically recorded claim has paid for it, the entry of extinguishment of the claim to the electronic registry is not made on time, due to the obligee's non-cooperation. The obligor risks being compelled to make a double payment if such a claim is further assigned to another party. For the purposes of avoiding such a situation, the Law provides for a set of provisions on the so-called Inter-Accounts Money Transfer Settlement System, under which system entries of extinguishment of electronically recorded claims in the electronic registry can be made immediately after the payment for those claims.

Under this system, the obligor of an electronically recorded claim can enter into an agreement to utilise this system in advance with his/her bank and the electronic claims recording institution (Article 62, Clause 1). Pursuant to such an agreement, the recording institution will give the bank the information on the relevant electronically recorded claim, including information on the obligor's bank account and the obligee's bank account (Article 63, Clause 1). When the full amount of the relevant claim has been transferred from the obligor's to the obligee's bank account, the recording institution will record entry of extinguishment of the claim in the electronic registry without delay (Article 63, Clause 2).

Guarantees

Guarantees of electronically recorded claims can also be electronically recorded by entry in the electronic registry (Article 31). The information necessary to be recorded in the electronic registry for the guarantee is (i) that the relevant electronically recorded claims are guaranteed, (ii) the name and address of the guarantor, (iii) the name and address of the obligee and other information necessary to identify the guaranteed electronically recorded claims and (iv) the date of the entry (Article 31, Clause 1). In addition, information such as provisions relating to limitation on the scope of the guarantee, liquidated damages, set-off and personal defences which can be asserted against the obligee and its assignee, and agreements between the guarantor and the obligee on the manner of notice and resolution of disputes can be included in the record (Article 31, Clause 2).

Under the Japanese Civil Code, a guarantee is valid and effective only if the guaranteed claim is valid and effective, and the scope of the guarantee cannot exceed that of the guaranteed claim. If a guarantee of the electronically recorded claims is recorded in the electronic registry pursuant to the Law, however, the guarantee will be valid and effective irrespective of the validity and effectiveness of the guaranteed claim, except when the guarantor is an individual (other than a business owner) (Article 33).

Pledges

In order to create pledge on electronically recorded claims, the pledge shall also be electronically recorded (Article 36, Clause 1). The entry in the electronic registry for the creation of the pledge is made when requested by both the pledgee and the pledgor (Article 5, Clause 1). The information necessary to be recorded in the electronic registry for creating pledge is (i) that the relevant pledge is created, (ii) the name and address of the pledgee, (iii) the name and address of the obligor, the amount of the pledged receivables and other information necessary to identify the pledged receivables, (iv) the order of priority of the pledge and (v) the date of the entry (Article 37, Clause 1). Information such as provisions on liquidated damages for the pledged receivables, conditions precedent to the pledged receivables and method and conditions of enforcement of the pledge, and agreements between the pledgee and the pledgor on the manner of notice and resolution of disputes, can be also included in the record (Article 37, Clause 2).

Possible use of the claims system

As stated above, the Law will become effective within 18 months after its promulgation (that is, no later than December 27 2008). Before such effectiveness, the Japanese government (together with possible input from the public) will finalise the practical and technical aspects of the system by promulgating regulations and ordinances (the Law itself is silent as to such aspects). The Electronically Recorded Claims System has many potential uses, such as electronic bills, secondary distribution of monetary claims, liquidation or securitisation of account receivables, loans and credit and lease claims, so it is expected that the trade in monetary claims will become active in utilising the system.

Authors' biographies

Hirohito Akagami Anderson Mori & Tomotsune Hirohito Akagami is a partner at Anderson Mori & Tomotsune, engaged principally in the fields of financial, corporate and commercial law, with an emphasis on securities work and M&A. Typical of such transactions are the representation of the purchasers for a number of tender offers such as TI Group (for Japan Marine Technologies in 1998), Mannesmann (for Uchida Hydraulics in 1999), Boehringer Ingelheim (for SSP in 2000) and Solo Cup (for Sanyo Pax in 2001). In addition, Akagami has represented a number of issuers in their securities offerings such as Citigroup's Samurai bond offerings in 2005. Akagami received his LLM from the University of London, London School of Economics and Political Science (1993) and his LLB from the University of Tokyo (1986). He trained at Slaughter and May in London between September 1993 and September 1994. Akagami is a member of the Dai-ni Tokyo Bar Association in Japan. His native language is Japanese and he is fluent in English. Atsutoshi Maeda Anderson Mori & Tomotsune Atsutoshi Maeda is a partner at Anderson Mori & Tomotsune and he is principally involved in significant financial transactions (including real estate and receivables liquidation, DIP (debtor-in-possession) finance and project finance) and M&A deals (including cross-border transactions). He also advises many Japanese and non-Japanese clients on general corporate matters, in the areas of corporation law, labour law, contract law, intellectual property law, securities exchange law and various types of business law. Maeda received his LLM from University College London (2000) and his LLB from the University of Tokyo (1998). He trained at Herbert Smith in London between September 2005 and September 2006. Maeda is a member of the Dai-ni Tokyo Bar Association in Japan. His native language is Japanese and he is fluent in English. Tetsuya Itoh Anderson Mori & Tomotsune Tetsuya Itoh is a partner at Anderson Mori & Tomotsune with experience principally in the fields of structured finance transactions, other finance transactions, commercial and corporate transactions covering regulatory affairs, and asset transactions including real estate deals. Itoh has represented lenders, arrangers, agents, trustees, equity investors and originators and has multiple viewpoints to consummate various types of transactions. His involvement covers debt financing, equity investment, arrangement of funds, TMK (Japanese special purpose company for securitisation), REIT, trusts and construction projects. Recently Itoh was involved in setting up several real estate funds. Itoh is also involved in corporate transactions, including M&A and acquisition finance. He represents many financial institutions such as banks, and advises not only on transaction but also regulatory and compliance aspects. Itoh has published various articles on finance-related topics. He has given various seminars and lectures regarding finance, structured finance, and M&A, with a focus on new legislation and recent practice in the finance and corporate fields. Itoh is a graduate of the University of Tokyo (LLB, 1991) and the University of Washington (LLM, 1997). He is admitted to practice law in Japan (1993) and New York (1998). Kazuhiro Yoshii Anderson Mori & Tomotsune Kazuhiro Yoshii is a partner at Anderson Mori & Tomotsune. His principal areas of practice are securities law and corporate law, including capital market and M&A transactions. He has regularly advised issuers and underwriters in Japan, in connection with securities offerings in Japanese and overseas market. Yoshii is a graduate of the University of Tokyo (LLB, 1997) and the University of California at Berkeley, School of Law (LLM, 2005). He is admitted to practice law in Japan (1999) and New York (2005), and was associated with the New York office of Shearman & Sterling between 2005 and 2006. His publications include: "Legal Practice in Business Reorganization and Bankruptcy Prevention" (Seibunsha, January 2003) (collaborating with a partner of Anderson Mori & Tomotsune) "Chain-Reaction Bankruptcy Prevention Manual" (Seibunsha, February 2003) (collaborating with a partner of Tomotsune & Kimura) "Impact of the New Financial Instruments and Exchange Law on M&As" The Asialaw Japan Review, Volume 2 Issue 4, April 2007 Anderson Mori & Tomotsune (formed from the merger of Anderson Mori and Tomotsune & Kimura on January 1 2005) is a full service corporate law firm, dating back to 1952. It has more than 230 Japanese attorneys. The firm is mentioned by legal periodicals as one of the leading Japanese firms in banking, finance and capital markets matters, and Yoshii has been individually mentioned as among the top lawyers in these fields.