Japan's ruling on no business cessation

Author: | Published: 19 Jul 2014
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Mugi Sekido and Satoshi Nakamura of Mori Hamada & Matsumoto explain how the Tokyo District Court construes business cessation default provisions in samurai bonds

Norway's Eksportfinans has successfully defended itself in litigation over claims that it defaulted on its samurai bonds (yen-denominated bonds issued in Japan). These claims related to defaults relating to a cessation of its business and commencement of proceedings similar to a winding-up or dissolution. The litigation was brought in the Tokyo District Court by hedge funds managed by Silver Point Capital in Connecticut, US. The funds held ¥9.6 billion ($93.8 million) of the Eksportfinans samurai bonds.

The claims against Eksportfinans were dismissed on March 28 2014, in a decision rendered by a three-judge panel led by Chief Judge Hidetaka Matsui, a former senior officer of the Securities and Exchange Surveillance Commission of Japan. The judgment was not appealed and became final and conclusive.


Eksportfinans was incorporated in 1962 as a public limited liability company to provide long-term financing for the Norwegian export sector. Eksportfinans is owned by a consortium of banks operating in Norway (85%) and the Norwegian government (15%). As the country's only export lending institution, Eksportfinans provided financing for a broad range of exports and aided the internationalisation of Norwegian industry, including through the purchase of foreign assets and other export-related activities. Eksportfinans has actively issued bonds internationally, and these have received high ratings from credit rating agencies.

"This is a useful precedent for the interpretation of similar default provisions used internationally"

As a result of the 2008 financial crisis, the EU updated the Capital Requirement Directive to tighten the credit exposure regulations imposed on financial institutions. Under the European Economic Area Agreement, Norway was required to follow the directive from January 1 2011 and, without any exemption, Eksportfinans would have been required by the directive to have capital equivalent to five times its existing capital. In January 2011, Norwegian authorities determined that there were no grounds to set up permanent exemption measures for Eksportfinans and ordered that it comply with the directive.

On November 18 2011, the Norwegian government announced it would establish a new state-owned institution that would be exempt from the credit exposure regulations and offer government-subsidised fixed rate loans, and that Eksportfinans would manage and operate a temporary financing scheme during the transition period.

The company's four largest shareholders – three banks and the Norwegian government holding a total of 86.3% of issued shares – issued a press release on November 22 2011. Among other things, it stated that: they aimed to wind down Eksportfinans in an orderly manner to preserve the interests of all stakeholders; no new loans would be granted from Eksportfinans going forward; and they planned to wind down Eksportfinans in an orderly manner with the aim of maintaining the equity in Eksportfinans intact.

The following day, Eksportfinans issued its own press release stating, among other things, that it would not provide new lending in its own name going forward, with the exception of loans that were committed as of November 18 2011, and that it would retain its existing portfolio of loans which would be managed by Eksportfinans until their respective contractual maturities.

On July 1 2012, the Norwegian government established the new state-owned company known as Eksportkreditt Norge to begin administering the government-subsidised export financing scheme that had previously been handled by Eksportfinans.

Samurai bond default claims

Eksportfinans issued two series of samurai bonds in 2010 and 2011 (as described in table 1 below). These were governed by Japanese law and subject to the non-exclusive jurisdiction of the Tokyo District Court. They were issued only with a fiscal agent and without a commissioned company for bondholders performing a role similar to a bond trustee.

Table 1

1st series bonds 2010 2nd series bonds 2011
Issue date June 16 2010 July 28 2011
Aggregate principal amount ¥30 billion ¥30 billion
Issue price 100% 100%
Interest rate 0.89% per annum 0.72% per annum
Maturity date June 16 2015 July 28 2016

Among the events of default set out in both series were the two events relating to a winding up or dissolution, and a cessation of business. These were:

  • 'an order of a competent court is made or an effective resolution is passed for the winding-up or dissolution of the issuer or any similar proceedings are taken in respect of the issuer'; and
  • 'the issuer shall cease or threaten to cease to carry on the whole or substantially the whole of its business'.

These two default events were the same as those used in euro medium-term note (EMTN) bonds issued by Eksportfinans. But while its EMTN programme included a trustee regime, its samurai bonds were issued without a trustee and therefore allowed any bondholder to declare an event of default with respect to its bonds by giving notice to the issuer at the head office of the fiscal agent.

Following the announcements in November 2011 by the Norwegian government, Eksportfinans and its largest shareholders concerning the future plans for Eksportfinans, Silver Point declared a default on the samurai bonds by sending a letter to Eksportfinans on December 4 2011. This claimed that default events had occurred both with respect to a winding up or dissolution, and a cessation of business, as described above. Silver Point demanded immediate repayment with respect to the 2.6 billion of samurai bonds it then held. Thereafter, Silver Point sent letters to the fiscal agent in November 2012 and January 2013 declaring events of default – first with respect to the ¥8.6 billion of samurai bonds it then held, including the above-mentioned ¥2.6 billion of bonds, and then with respect to an additional ¥1 billion of samurai bonds that it subsequently acquired.

On November 16 2012, Silver Point brought an action against Eksportfinans in the Tokyo District Court, demanding repayment of the principal amount of the bonds, which eventually was ¥9.6 billion, as well as default interest from the day following the respective default declaration dates. On March 28 2014, the Tokyo District Court issued its ruling, interpreting the language of the two relevant default clauses and finding that neither default event had occurred.

The court's ruling

No winding up or dissolution

The court first addressed whether the winding up or dissolution default event had occurred as a result of the press release issued by Eksportfinans' four largest shareholders. Silver Point alleged that this press release made by shareholders holding more than two-thirds of Eksportfinans' capital amounted to 'similar proceedings' to a winding up or dissolution.

The court held that because the language of the default event clause included references to 'an order of a competent court' and 'an effective resolution', it was appropriate to interpret the phrase 'any similar proceedings' to mean other legal proceedings for a winding up or dissolution. As a result, the court found that the shareholder press release was merely an expression of opinion and should not be considered to be the equivalent of legal proceedings taken for a winding up or dissolution of Eksportfinans.

'Business' and 'substantially the whole'

The other issue considered by the court was whether Eksportfinans had 'ceased or threatened to cease to carry on the whole or substantially the whole of its business'. The first aspect of this issue centred on the interpretation of 'the whole or substantially the whole of its business'. This was because Eksportfinans stopped provision of new export lending. The second aspect was the construction of the words 'threaten to cease'.

The court first found that the samurai bonds and the associated rights and obligations of all parties should be governed by and construed in accordance with Japanese law under the provisions of the conditions of the bonds. The court then noted that, in Japan, the term 'business' generally means 'economic activities conducted on the basis of certain purposes and plans'. The court also pointed out the interpretation of a 'transfer of business' under article 467(1) of the Japanese Companies Act. This has been interpreted to mean a transfer of all or a material part of assets organised for a certain business purpose and functioning as an organic unit (including factual matters that have economic value such as relations with customers), which ought to necessitate the duty of non-competition under law (see judgment of September 22 1965 of the Supreme Court, Grand Bench; Minshu volume 19, number 6, page 1600).

Therefore, the court held that it was reasonable to interpret the term 'business', as used in the relevant default clause, to mean external economic activities for gaining revenue which are provided with the physical and human conditions for such activities. It also found it reasonable to interpret the meaning of a 'cessation to carry on substantially the whole of its business' as the occurrence of a situation that may be deemed equivalent to a 'cessation to carry on the whole of its business'.

With regard to Eksportfinans' export lending, municipal lending and securities activities, although it had ceased new export lending and had come to conduct only management and collection of existing loans in the export lending business, these three activities had characteristics of economic activity for gaining revenue. The court also noted that Eksportfinans had the physical facilities and human resources necessary to perform each of these activities. The court accordingly held that each of these activities could be said to be a 'business' and that Eksportfinans could not be considered to have 'ceased to carry on the whole or substantially the whole of its business'.

No 'threat' to cease business

The court then considered whether there was any 'threat' of Eksportfinans ceasing to carry on the whole or substantially the whole of its business. It noted that the relevant default event was one of many default events provided under the same conditions of the samurai bonds. In this regard, the court noted that all of the default events listed were objective events that clearly signalled a deterioration of Eksportfinans' credit, such as: a failure to pay interest on the samurai bonds; enforcement of security; acceleration of due date or a failure in the performance of borrowed money; continuation of a seizure or the like on a substantial part of assets; stoppage of payment; and a petition for bankruptcy, winding up or similar proceedings. The court found that there was no reason to interpret only the event concerning a threat of cessation of business as not requiring any objectivity, and that it should rather be construed as requiring an objective event similar to those described above. Therefore, the court concluded that for it to hold that such a 'threat' exists, it would need to find that there is an objective event which signals the actual likelihood of a cessation of the whole of Eksportfinans' business.

"The decision of the Tokyo District Court in this case was measured, reasonable and persuasive"

The court found that Eksportfinans was conducting management and collection activities with regard to its existing loans, which would continue until 2029 for export lending and until 2033 for municipal lending. It also found that it was actually expected to generate revenues in the future, and that it had newly-acquired loans from a shareholder bank. The court further found that, in relation to its securities business, Eksportfinans had entered into a portfolio hedge agreement with a major shareholder which would terminate in the event of, among other things, the expiry of the covered bonds, expected to occur on December 31 2023. Considering all the evidence, the court did not find any facts that would indicate that Eksportfinans had any plan to cease its securities business. The court noted a written statement submitted by Eksportfinans' CEO, which stated that there was a possibility that the company would conduct new business in the future. On the basis of these facts, the court held that Eksportfinans planned to continue its businesses and there was nothing to indicate the actual likelihood that Eksportfinans would cease to carry on the whole or substantially the whole of its business.


If a judgment had been made against Eksportfinans, it could have resulted in a cascade of default and cross-default claims against Eksportfinans by the EMTN trustee or multiple creditors. The risk arose from a default claim by essentially a single investor in Eksportfinans' samurai bonds, even though none of the other samurai bondholders or the trustee of the EMTN programme had declared a default. The existence of a trustee for the EMTN bonds was clearly useful in dealing with an individual bondholder capable of creating a potentially cataclysmic credit event. It will also be useful to require in conditions of bonds a threshold of bond holding who may declare a default.

Even though the default provisions at issue in this case were typical of provisions used in bonds issued in European and other international markets, there were surprisingly few interpretive precedents from courts in major capital markets. The fact that the decision of the Tokyo District Court in this case was measured, reasonable and persuasive should make it a useful precedent for the interpretation of similar default provisions that are used not only in Japan but internationally.

About the author

Satoshi Nakamura
Mori Hamada & Matsumoto

T: +81 3 5220 1845
E: satoshi.nakamura@mhmjapan.com
W: www.mhmjapan.com

Satoshi Nakamura is a partner at Mori Hamada & Matsumoto. His main practice areas include capital markets, corporate and M&A, private equity and international transactions. He was part of the Mori Hamada & Matsumoto team that represented Eksportfinans in its recent litigation, which also included Toru Ishiguro from its capital markets group.

About the author

Mugi Sekido
Mori Hamada & Matsumoto

T: +81 3 5223 7759
E: mugi.sekido@mhmjapan.com
W: www.mhmjapan.com

Mugi Sekido is a partner at Mori Hamada & Matsumoto. His main practice areas include litigation and arbitration, bankruptcy and restructuring, and regulatory. He was part of the Mori Hamada & Matsumoto team that represented Eksportfinans in its recent litigation, which also included Shiho Ohio from its dispute resolution group.