The Electronically Recorded Monetary Claims Act (Act 102 of 2007, the Law) was enacted on June 20 2007 and implemented on December 1 2008. The Law consists of 100 articles, the first 50 of which address electronically recorded claims, the others addressing the role and obligations of the electronic claim recording institution. The English translation of the Law can be accessed at the website of Japan's Financial Services Agency).
Purpose and significance
The system of electronically recorded claims established by the Law (New System) provides for new types of monetary claims that are completely different from existing ones. The main purpose of the New System is to facilitate financing for businesses by ensuring certainty of transactions involving monetary claims.
Traditionally, financing using monetary claims is performed through an assignment of such claims. However, this assignment scheme is prone to risks including invalidity of monetary claims, double assignment and the assertion of defences to payment. Another traditional financing scheme developed in Japan is a discounted assignment of promissory notes, but that scheme requires the payment of costs related to the issuance, delivery and storage of promissory notes, and is susceptible to the theft or loss of notes. The New System of electronically recorded claims is designed to reduce or eliminate these costs and risks.
The New System is the first system of its kind in the world. It may seem that it is similar to the electronic recordation systems used in Korea regarding electronic notes and electronic claims, but the two systems are substantially different in practice. The Korean electronic notes system electronically establishes bills and notes but does not create a new type of monetary claim. Also, the Korean electronic claims system provides a new method of perfecting claims but does not provide a new means of creating and assigning the claims themselves.
A basic knowledge of the New System is indispensable for every entity that deals with financing in Japan because it is unlike any other system in the world.
Establishment, transfer and termination of claims
Electronically recorded claims are monetary claims, the establishment or assignment of which requires certain electronic records under the Law. Though electronically recorded claims differ from claims documented by notes and bills, these two types of monetary claims have some common features. For example: (i) neither type of claim is affected by the existence or validity of the legal relationship that substantially created the claim; (ii) neither type of claim is recognised without a record, either an electronic records or a written document such as a note or bill evidencing the claim; and (iii) the obligations and rights under both types of claim are determined only by what is recorded in either the electronic records or the written documents. One key difference between electronically recorded claims and claims documented by notes and bills is the fact that no written documents are issued for the former type of claim. This lack of written documents results in the elimination of costs associated with the issuance, delivery and storage of written documents as well as the elimination of the risks of theft or loss of written documentation.
Electronically recorded claims can be divided into three categories based upon the type of electronic records. The Accrual Record category is primarily used to establish ordinary electronically recorded claims. Electronically recorded claims regarding the guarantee of a debt fall under the category of Guarantee Record, which is used to establish guarantee obligations under the Law. Finally, the partial or full satisfaction of electronically recorded claims is recorded under the category of Payment etc Record. Electronically recorded claims for indemnity may arise regardless of the parties' intent if certain criteria are met: (i) the underlying monetary claims are electronically recorded claims; (ii) the guaranteed claims are electronically recorded claims under the category of Guarantee Record; (iii) the guarantor has satisfied (either in full or in part) the obligation recorded as a principal obligation; and (iv) a Payment etc Record is made.
Establishment
Electronically recorded claims must correspond with the electronic records maintained at the electronic claim recording institution. A written agreement between the obligor and obligee is not required, however, and the electronic claim recording institution will not create an electronic record unless a request is submitted by both the potential obligor and obligee.
Items recorded in the electronic records are classified into two groups: mandatory items and optional items. Mandatory items consist of information essential for the creation of an electronically recorded claim, and the omission of a single mandatory item will prevent the successful establishment of an electronically recorded claim. By contrast, the obligor and obligee may decide whether or not to record optional items and the content of such optional items, to the extent permissible by the Law and the regulations stipulated by the electronic claim recording institution.
Accrual Record
There are eight mandatory items with respect to the Accrual Record (listed in Paragraph 1 of Article 16 of the Law), of which the following four items are the most important: (i) a statement to the effect that the obligor will pay a certain amount to the obligee; (ii) the date of payment (limited to a fixed date); (iii) the name and the address of the obligee; and (iv) the name and the address of the obligor. Because of these mandatory items, electronically recorded claims can be used only when claims are monetary claims with fixed payment dates. Also, because of this restriction, future claims cannot be recorded: electronically recorded claims can only be presently identified existing claims.
There are 15 optional items that may be recorded as part of a claim's Accrual Record, including interest, delinquency charges or penalties and events of default.
Guarantee Record
There are four mandatory items with respect to the Guarantee Record (listed in Paragraph 1 of Article 32 of the Law). The mandatory items of the Guarantee Record are: (i) a statement to the effect that a guaranty will be provided by the guarantor in favour of the secured party; (ii) the name and address of the guarantor; (iii) the name and address of the principal obligor and other matters that are required to identify the principal obligation; and (iv) the date of the Guarantee Record.
There are nine optional items that may be recorded as part of the Guarantee Record, including the scope of guarantee, delinquency charges or penalties and set-off rights.
Payment etc Record
There are seven mandatory items with respect to the Payment etc Record and no optional items (Article 24 of the Law). The mandatory items of the Payment etc Record relate to information required to identify the payment, such as: (i) the payment obligation; (ii) the act that has satisfied the payment obligation; (iii) the amount of the Payment etc; and (iv) the name and address of the person who made the Payment etc.
Disposition of claims
An assignment of an electronically recorded claim will not be effective unless an Assignment Record is created (Article 17 of the Law). Also, the creation of a pledge over electronically recorded claims will not be effective unless a Pledge Creation Record is created (Article 36 of the Law).
Similar to the classification of items included in the Accrual Record and Guarantee Record, items to be included in an Assignment Record and a Pledge Creation Record are classified as either mandatory items or optional items.
The mandatory items of an Assignment Record include: (i) a statement to the effect that an assignment of electronically recorded claims is to be effected; (ii) in the case of an assignor being an heir to the electronically recorded obligation holder, the name and address of the assignor; (iii) the name and the address of the assignee; and (iv) the date of the Assignment Record. The name and address of the heir to the electronically recorded obligation holder are required to reveal the relationship of the assignor to such electronically recorded obligation holder. The nature of the assignor may determine the applicability of the principle of acquisition in good faith (Article 19) and the principle of inability to claim affirmative defences (Article 20) under the Law (both discussed below).
There are five mandatory items with respect to the Pledge Creation Record, including: (i) a statement to the effect that a pledge is to be created; (ii) the name and address of the pledgee; (iii) the name and address of the obligor of the secured claims; and (iv) the amount of secured claims. Not only electronically recorded claims but also other existing claims can secure pledge claims. Also, if the amount of the secured claims is not fixed, their estimated values may be recorded.
There are seven optional items that may be recorded in the Pledge Creation Record, including: (i) interest, delinquency charges or penalties regarding the secured claims; and (ii) method of payment, conditions and other matters regarding the execution of the pledge.
As mentioned, the main purpose of the New System is to facilitate financing for businesses by ensuring the certainty of transaction of monetary claims. Therefore, the disposition of electronically recorded claims is one of the most important aspects of the Law. The Law establishes principles of acquisition in good faith and inability to claim affirmative defences to ensure the certainty of transactions of electronically recorded claims.
The principle of acquisition in good faith establishes that a person who is recorded in the New System as an assignee of the electronically recorded claims based upon an Assignment Record will acquire said electronically recorded claims unless that person acted with knowledge that such assignor did not lawfully have rights to the electronically recorded claims or conducted acts of gross negligence at the time such claims were recorded (Article 19 of the Law). There is a continuing dispute as to whether this principle of acquisition in good faith should apply not only to the lack of the assignment rights of the assignor but also to refute a claim of defective assignment of such electronically recorded claim, such as an unauthorised proxy.
The principle of inability to claim affirmative defences provides that an obligor under an Accrual Record or a guarantor under a Guarantee Record may not raise a defence regarding an obligee of an electronically recorded monetary claim based on the obligor's relationship with the person who assigned the electronically recorded claim to the obligee unless the obligee acquired those electronically recorded claims knowing that the obligor would be harmed (Article 20 of the Law).
However, these two general rules have exceptions. One of the exceptions is the selection of an optional item of the Accrual Record that rejects the application of these rules. In addition, these general rules do not apply if a person who does not engage in the business that relates to the record is harmed.
Termination of claims
Electronically recorded claims may be satisfied and extinguished by payment and set-off, among other things. The obligor has a right to demand the obligee to take requisite steps to record the full or partial satisfaction and extinguishment of the electronically recorded claim in the Payment etc Record in exchange for the corresponding payment and set-off, among other things. A common misunderstanding is that a notation in the Payment etc Record is required to expunge an electronically recorded claim. In practice, if electronically recorded claims are satisfied, these claims are automatically extinguished at the time of satisfaction without the need for any further notation in the Payment etc Record. The right to demand recordation of said satisfaction of payment in the Payment etc Record is permitted to deter abuse of the claims record and, if certain criteria are met, to establish an electronically recorded claim for indemnity.
In order to facilitate a transaction involving electronically recorded claims, not only the transaction itself but also the payment must be assured. In light of this consideration and as a general rule, any payment in satisfaction of an electronically recorded claim made to a person who is recorded as the obligee or pledgee of the electronically recorded claim will be effective and applied to the satisfaction of the claim even if that person does not have the right to receive the payment, unless the person who made the payment acted with knowledge that the payment was being made to the wrong person or performed an act of gross negligence.
Claim recording institution
The electronic claim recording institution is a private company designated by the relevant authorities as one capable of conducting an electronic claim recording business. The electronic claim recording institution is prohibited from conducting any business other than an electronic claim recording business and ancillary businesses.
Outlook
The New System established by the Law provides for the creation of a new type of monetary claim, but the Law does not stipulate any limitations on the types of monetary claims to be covered by the New System. There are some contemplated uses for the New System, such as a substitute for promissory notes and use in high-liquidity syndicated loans, but additional uses and functions are limited only by the user's creativity. Also, because there is no purpose clause in the Law, in order for the New System to be quickly adopted for practical use some of the provisions of the Law, such as optional items of the electronic records, have been delegated for determination by Cabinet order. Though it may take some time, electronically recorded claims will eventually be accepted as a valuable medium for the processing and recording of monetary claims.
| Author biographies |
Nobuyoshi Inujima
Nagashima Ohno & Tsunematsu
Nobuyoshi Inujima is a partner at Nagashima Ohno & Tsunematsu specialising in financial transactions involving structured finance, asset finance and syndicated loans. He graduated with an LLB from the University of Tokyo (1996) and with an LLM from Duke University School of Law (2003). He is admitted to practice law in Japan (1998) and New York (2004). Nobuyoshi worked at Debevoise & Plimpton LLP in New York as a foreign associate from 2003 to 2004.
Kohmei Shimizu
Nagashima Ohno & Tsunematsu
Kohmei Shimizu is an associate at Nagashima Ohno & Tsunematsu. His main area of practice is loan transactions, including M&A financing, DIP financing, J-REIT financing, financings for securitisations and corporate finance. He graduated from Chuo University in 2003 with an LLB and was admitted to the Bar in Japan in 2004. |