Since April 2009, Business Revitalisation ADR (BRADR), a private restructuring procedure, has been used by companies in financial trouble as a method of restructuring. In this article, we will explain the characteristics and practical procedures relating to the procedure.
What is BRADR
Outline of BRADR
ADR stands for alternative dispute resolution and consists of dispute resolution processes and techniques that fall outside the judicial process.
BRADR is a method of revitalising companies using negotiations conducted by a civil organisation through a neutral and fair third party. It is different from judicial rehabilitation procedures set out in the Civil Rehabilitation Act (Minji-Saisei Hou) and the Corporate Reorganization Act (Kaisha-Kosei Hou).
The BRADR procedure is quick, simple and efficient. It is different to other legal restructuring procedures because the mediator facilitating the resolution process is able to propose a flexible and confidential solution.
The technique has a fair and neutral third party overseeing the procedure and facilitating resolution between the parties. This third party distinguishes BRADR from other private restructuring procedures (which generally concern direct negotiations among the parties themselves).
Merits of BRADR
(a) Conventional private restructuring has some drawbacks, such as the informal nature of the promises reached, the unfair treatment that certain creditors receive and the overall uncertainty of the process.
In Japan, companies used to rely heavily on banks for collecting money because the so-called main bank often served as the leader of private restructuring procedures on behalf of both a debtor and its creditors.
Before BRADR was introduced, the Private Restructuring Guidelines, which were collectively set by the Bank Association and Nippon Keidanren (Japan Business Federation), were used for larger private restructuring cases. The main bank was the largest creditor and served as the leader in the private restructuring procedure. It often reduced the loans owed by the debtor by a comparatively higher rate than the other creditors to facilitate the cooperation of all participating creditors.
Now though, in traditional private restructuring procedures, creditors who seek to conclude a procedure often take losses to avoid disagreement.
But in BRADR procedures, a neutral third party conducts the negotiation process. Under the system, all aspects of the procedure should be transparent among the parties in order to ensure fair and neutral settlement.
(b) Comparison with judicial restructuring
Judicial restructuring procedures bind certain creditors who are opposed to rehabilitation plans. Because of this, parties involved need to be attentive. Given that the court supervises the restructuring procedures, the parties are sometimes required to accept unfavourable decisions made by the court.
The advantages of BRADR include: (i) a faster and easier process; (ii) the flexible approach to problem solving by adjusting the interests of all parties concerned; and (iii) confidentiality.
With respect to confidentiality, it is generally acknowledged in Japan that pursuing a judicial restructuring procedure can degrade a business for two reasons:
Judicial restructuring procedures involve all creditors. This affects trade credit and consequently damages the debtor's ability to engage in ordinary business transactions. And because judicial restructuring procedures are open to the public, it may view the debtor's prospects for rehabilitation as being beyond hope, having damaging consequences on the debtor's business.
Characteristics of BRADR
Characteristics of BRADR process
Because BRADR uses a neutral and fair third party, it enables a cheaper, simpler and prompt process that introduces flexible alternatives to achieve voluntary resolution, while still providing the necessary confidentiality lacking in judicial restructuring.
The most important feature of BRADR is the ability to select or focus on particular creditors (e.g., limiting the creditors involved to financial institutions or to financial creditors owed in excess of specified amounts.) The technique also aims to achieve a private debt restructuring process through a mediated settlement that will not become effective without the consent of all relevant creditors.
BRADR is also expressly provided for in legislation in the Act on Special Measures for Industrial Revitalisation; Ministerial Ordinance concerning Certification or Other Matters for Accredited Dispute Resolver; and Act on Promotion of Use of Alternative Dispute Resolution. This contrasts with the Guidelines for the Private Debt Restructuring Process, which are not set out in statute and merely represent a tacit agreement between the Japanese Bankers Association, the Japan Business Federation and other bodies. But BRADR is more closely related to procedures such as the Civil Rehabilitation Procedure and the Corporate Reorganisation Procedure.
Compatibility with judicial procedures
(a) Special provision of special conciliation
Under Japanese law, one method of business revitalisation is special conciliation.
Special conciliation procedures generally involve a judge and a conciliation committee. The conciliation committee consists of two or more committee members who are experts in legal, tax or financial matters, corporate treasury, or asset valuation. If a BRADR procedure fails, the unsuccessful case may be later processed by a sole judge in a special conciliation procedure.
(b) Protection of Dip finance under rehabilitation or reorganisation procedure
The treatment of borrowings made from the start to the finish of proceedings shall be determined by a court on the basis that (i) the debtor-in-possession (Dip) finance was essential to continue the business, the need for Dip finance was reasonable and its maturity date was expected to occur after the scheduled resolution date of BRADR, (ii) all relevant creditors agree that the Dip finance should be given priority over other debt. The court may consider such treatment even if the BRADR procedure later shifts to a judicial one.
(c) Public financial system
When a debtor borrows operating funds in order to remain as a going concern, the Organisation for Small & Medium Enterprises and Regional Innovation (SMRJ) will guarantee the debt. In addition, when a debtor makes use of the system of credit guarantee corporations, the Japan Financial Corporation will provide a special guarantee limit that is separate from the limits of other guaranteed amounts.
Responsible person of BRADR Procedure
The person responsible during the BRADR procedure is the facilitator.
The facilitator is appointed by the accredited dispute resolver, who must satisfy the qualifications specified by the Business Revitalization of the Minister of Economy, Trade and Industry in addition to being qualified for Alternative Dispute Resolution by the Minister of Justice pursuant to Article 5 of the Act on Promotion of Use of Alternative Dispute Resolution (Act No. 151 of December 1 2004, the ADR Act), which prescribes the general procedure of alternative dispute resolution.
The facilitator should also have business revitalisation experience and be licensed by the Minister of Economy, Trade and Industry, as provided for in the Ministry of Justice Ordinance for enforcement of the ADR Act.
The Japanese Association of Turnaround Professionals (JATP) is the sole licensed accredited dispute resolver for BRADR.
Relevant creditors
Creditors involved in BRADR can be selected from among all the creditors concerned (the relevant creditors). However, since the ADR Act stipulates that Certified ADR shall be carried out "at the request of both parties to a civil dispute" (ADR Act, Article 2, Item 1), the arbitrary selection of creditors, including eliminating particular creditors, will likely prevent a consensus of the selected creditors to adopt the procedure.
BRADR procedures
Process
(a) Preliminary consultation
Applications to begin BRADR will only be approved where the business value of the debtor meets a minimum threshold and it is possible for the debtor's business to revitalise with the aid of creditors. So the JATP will only decide whether to approve an application after reviewing the possibility of revitalising the business.
(b) Application to begin BRADR and predetermined facilitator
When a debtor applies to begin proceedings, after preliminary consultation, a so-called predetermined facilitator is designated. This facilitator surveys the business, treasury, legal and other matters of the applicant with the help of external professionals.
To apply to start BRADR, a debtor in financial difficulty will prepare a draft of the revitalisation plan and submit an application to the accredited dispute resolver. Based on the results of the survey, a predetermined facilitator may give certain instructions with respect to the structure or details of the debtor's business revitalisation plan.
If the applicant cannot tailor its plan in accordance with the predetermined facilitator's instructions, it should withdraw the application or it may be rejected by JATP.
(c) Formal application
A debtor can only formally apply to start proceedings after preparing a plan for business revitalisation. At that time, an operation commission should be paid by a debtor to JATP.
(d) Suspension of payments
After the accredited dispute resolver approves the application from the debtor, a notice of suspension of payments will be sent to the relevant creditors who are subject to BRADR by JATP and the debtor.
This notice informs the relevant creditors to stop collecting their receivables, not to exercise their rights in any collateral, guarantee, mortgage, pledge, security, etc and not to petition for commencement of procedures, civil rehabilitation or company reorganisation. This written notice also informs the relevant creditors that a creditors' meeting will be held to discuss the plan for business revitalisation.
Although creditors are not obliged to observe the notice, if they do not, BRADR will cease. So creditors need to consider which course of action is better: having the commencement of insolvency proceedings by or against the debtor or the possibility of recovery through BRADR.
(e) Preliminary plan meeting
Within two weeks of the suspension notice, the creditors' meeting to explain the outline of the business revitalisation plan (the preliminary plan meeting) will be held behind closed doors, with attendance limited to creditors who have received the suspension notice.
The agenda of the preliminary plan meeting will include:
(a) Explaining the status of the debtor's current assets and liabilities,
(b) Explaining the outline of the business revitalisation plan; and
(c) Questions and answers between creditors and the debtor and/or discussion among the creditors.
The preliminary plan meeting may also resolve the following matters with the unanimous consent of the creditors in attendance:
(a) Selecting the facilitator. Unless otherwise claimed by a creditor, the predetermined facilitator who has overseen the case will be the candidate,
(b) Details and duration of the suspension; and
(c) Time and place of future creditors' meetings
(f) Proposal of business revitalisation plan
The debtor will draft the business revitalisation plan in accordance with the explanation from the preliminary plan meeting. The debtor may consult with the relevant creditors, disclosing the contents of the draft proposal of the business revitalization plan.
The debtor must submit its proposed plan to the facilitator for investigation by the date agreed to on the business revitalisation plan (the deliberation meeting), which must fall before the creditors' meeting.
The facilitator will report the results of its investigation to the JATP, and the debtor will submit its final proposed business revitalisation plan to the JATP no later than the day before the deliberation meeting.
(g) Deliberation meeting
No later than the day before the deliberation meeting, the JATP will provide the creditors with copies of (i) the proposal of the business revitalisation plan submitted by the debtor, and (ii) the investigation report submitted by the facilitator.
The agenda of the deliberation meeting will include:
(a) Explaining the business revitalisation plan by the debtor;
(b) Report by the debtor on the borrowings of working capital that are vital for continuing business during the procedure;
(c) Report by the facilitator on the investigation results, including the facilitator's opinion on legal compliance, fairness legitimacy and economic rationality;
(d) Questions and answers based on the above and discussion among the relevant creditors.
Based on the results of the deliberation meeting, the debtor can revise its proposed business revitalisation plan. The facilitator is then required to analyse it again.
(h) Resolution meeting
A resolution approving the plan must have unanimous consent from the relevant creditors at the resolution meeting. A relevant creditor may vote by written proxy for its consent. A creditor who has not participated in the procedure may still be able to participate by attending the meeting and accepting all the existing results of the process.
If a resolution on the proposed revitalisation plan is not passed, then the chair of the resolution meeting may, with the unanimous consent of the relevant creditors, fix a date to reconvene the meeting. The debtor will be able to amend the business revitalisation plan to be proposed again to the relevant creditors by the date of the reconvened meeting (according to Ibid., Article 12). If this happens, the facilitator will be required to state its opinion on the proposed amended plan. If a reconvened meeting is to be held, the JATP will immediately notify the relevant creditors of the results of the vote on the resolution of the proposed business revitalisation plan at the resolution meeting. Once a resolution approving the plan has been passed, it will immediately become effective.
(i) After the resolution meeting
(a) Where consent is unanimous, private restructuring is carried out and the debtor begins to execute the plan. Rescheduling of debt or debt relief will be achieved, and payments under the plan will be made.
(b) Where consent is not unanimous:
(1) the BRADR procedure converts to special conciliation procedure: Please see above, which outlines the special conciliation procedure and oversight by a judge without a conciliation committee.
Through a special conciliation procedure, a judge may make an alternative decision instead of conciliation. If a judge makes such a decision, then the parties or their privies may file an objection to the decision.
(2) Conversion to a civil rehabilitation procedure or corporate reorganisation procedure.
Once a BRADR procedure is converted to a civil rehabilitation procedure or corporate reorganisation procedure, Dip finance incurred in the BRADR procedure may be afforded super-priority status by satisfying the following factors:
The Dip finance was essential to continue the business, the need for it was reasonable and its maturity date was scheduled to occur after the scheduled resolution date of BRADR.
All relevant creditors agree that the Dip finance should be given priority over other debt.
Duration
A typical BRADR will last around three months, beginning with the formal receipt of application to start the procedure and ending with the completion of a business revitalisation plan.
Since 2009, BRADR has been frequently used to achieve private restructuring. In March 2009, Japan Asia Investment applied for commencement of BRADR procedure. Since then, large companies like Cosmos Initia, Aiful Corporation, and Willcom have all made use of the procedure.
| Procedural flow of business revitalisation ADR |
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About the author
Nobuyuki Maeyama has experience in an extensive range of legal practice areas at Anderson Mori & Tomotsune. Mr. Maeyama acts as a court appointed trustee in bankruptcy in the corporate liquidation process, assisting clients in civil rehabilitation and corporate reorganisation related issues. He has also been involved with various financial transactions, including securitisation of real property and receivables, acquisition finance, commercial mortgage-backed securities, project finance and private finance initiatives. He has also provided advice to both domestic and overseas clients involved in M&A transactions. Nobuyuki Maeyama joined the firm in 1998 and has been a partner since 2008. |
Contact information
Nobuyuki Maeyama
Anderson Mori & Tomotsune
Izumi Garden Tower, 6-1, Roppongi 1-chome,
Minato-ku, Tokyo, 106-6036, Japan
Tel: +81-3-6888-1071
Fax: +81-3-6888-3071
Email: nobuyuki.maeyama@amt-law.com |
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About the author
Ryuji Kato has been engaged in various financial transactions, including securitisation of real estate property and receivables and fund transfer business at Anderson Mori & Tomotsune. Mr. Kato has also been involved with various bankruptcy cases, providing legal advice to domestic and overseas clients. |
Contact information
Ryuji Kato
Anderson Mori & Tomotsune
Izumi Garden Tower, 6-1, Roppongi 1-chome,
Minato-ku, Tokyo, 106-6036, Japan
Tel: +81-3-6888-5665
Fax: +81-3-6888-6665
Email: ryuji.kato@amt-law.com |