This content is from: Japan

Japan: Trends in the amendment of collateral legislation

On March 4 2019, a study group on collateral legislation for movables and claims (study group) was established by the Ministry of Justice to review such legislation.

In recent years, the need to review the conventional method of financing, which relies on real estate collateral and personal guarantees, has been raised. In the context of a decline in the value of real estate, personal guarantors – especially those who provide personal guarantees for corporate debts – tend to bear excessive burdens. As a result, loans secured by movables and receivables have garnered attention; however, the current Civil Code does not provide for sufficient regulation with regard to such collateral. In particular, the following two problems are highlighted in the materials of the study group:

(a) the absence of explicit provisions on unpossessed collateral against movables; and

(b) the absence of a rule concerning the establishment of collateral for a group of assets, including property to be acquired in the future.

With regard to (a), in practice, a mortgage by transfer (joto-tanpo), transferring title to assets to creditors for a security purpose while retaining physical possession thereof, which is not explicitly provided for in the Civil Code, is used and the law’s position on this issue has been clarified to a considerable extent through case law. According to the study group, however, the following points remain unclear: (i) the superiority or inferiority of a mortgage by transfer to other security interests; (ii) the scope of assets covered by a mortgage by transfer, (iii) the legal relationship in cases where the mortgagor unjustly disposes of the collateral; and (iv) the treatment of a mortgage by transfer in the event of debtor bankruptcy.

The study group is expected to conduct basic research aimed at (1) the establishment of explicit provisions with regard to unpossessed security interests over movables and security interests over liquid assets, with reference to the case law regarding mortgages by transfer; (2) clarifying legal relationships concerning collateral for movables and claims to increase predictability; and (3) making the legal system concerning collateral for movables and claims more reasonable. It is expected that the Civil Code with regard to collateral will be amended in the next few years at the earliest.

Junya Shimada

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