Japanese companies in insolvency proceedings: contracts and claims

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Hiroki Takano of Nagashima Ohno & Tsunematsu explains the general treatment of contracts and claims under Japanese insolvency law

Although the number of corporate insolvency cases in Japan in 2021 was the lowest since 2000, many Japanese companies have been adversely affected by the Covid-19 pandemic and have excessive debt, which will presumably lead to a substantially greater number of insolvency cases (both liquidation and rehabilitation cases) in the future.  

This article explains the general treatment of contracts and claims under Japanese insolvency law when Japanese bankruptcy proceedings (which are roughly similar to those under Chapter 7 of the US Bankruptcy Code) or civil rehabilitation proceedings (which are roughly similar to those under Chapter 11 of the Code) are commenced against a debtor who is a Japanese company.

Bilateral executory contract

In the insolvency proceedings, a debtor or trustee is authorised to continue or terminate the debtor’s bilateral contract if both the debtor and the counterparty have yet to completely perform their obligations under the contract by the time of the commencement of the proceedings.

If a debtor or trustee terminates a bilateral executory contract, the counterparty can claim damages, which is categorised as a bankruptcy claim in bankruptcy proceedings or a rehabilitation claim in civil rehabilitation proceedings.  Creditors with bankruptcy claims or rehabilitation claims must file proofs of claims to be eligible to receive payment in the insolvency proceedings.  

The counterparty can claim restitution for any contractual benefits received by the debtor, which is categorised as an estate claim in bankruptcy proceedings or a common benefit claim in civil rehabilitation proceedings.  Creditors with estate claims or common benefit claims are entitled to receive payment outside the insolvency proceedings when the claim is due and payable. 

If a debtor or trustee continues a bilateral executory contract, the counterparty must perform its obligations under the contract and the claims of the counterparty are categorised as an estate claim or a common benefit claim.  

Validity of contractual clauses

In recent Japanese insolvency practice, the validity of contractual clauses in a bilateral executory contract subject to insolvency proceedings is controversial, and there are several noteworthy cases in which their validity has been challenged in court.

For example, there are court decisions that have ruled that a counterparty cannot assert against a bankruptcy trustee a penalty clause in a lease agreement upon the termination thereof by the bankruptcy trustee as well as those that have ruled that a counterparty cannot assert against a rehabilitation debtor an ipso facto clause in a lease agreement even though the debtor hopes to continue the agreement.

Filing and determination of claims

As described above, any creditor with bankruptcy claims or rehabilitation claims must file proofs of claims with the court within the filing period determined by the court in order to receive a bankruptcy dividend or repayment under the rehabilitation plan.  The claims duly filed will be assessed and a determination will be made as to whether to approve or disapprove each proof of claim filed by the debtor or trustee.  

Creditors are also entitled to object to a specific proof of claim filed by another creditor during the investigation period determined by the court.  If the debtor, trustee, or any creditor objects to a specific proof of a claim, the creditor whose claim is objected to can file a petition seeking claim determination with the court.  The party for whom the claim determination of the court is unfavorable can file an appeal with the court.

Under Japanese insolvency law, since insolvency procedures are conducted in Japanese, creditors are required to prepare proofs of claims and petition documents in Japanese, and Japanese lawyers often participate in these processes on behalf of foreign creditors.

 

 

Hiroki Takano

Associate, Nagashima Ohno & Tsunematsu

E: hiroki_takano@noandt.com

 

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