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Rehabilitation law to increase DIP financingKomatsu Koma & Nishikawa, Tokyo

This year, the Japanese government unveiled a package of structural reforms for economic stimulus, which includes the Civil Rehabilitation Law. This law, which took effect on April 1 2000, was established as a "reorganization type", in order to confront the recent increase of bankruptcy in Japan. It has already been applied in many bankruptcy cases, because it is easy to use.

Under the law, a rehabilitation debtor, which in the US is called the Debtor in Possession (DIP), has the right to conduct its business after the rehabilitation proceedings have started. However, the DIP is usually short of working capital. While there is a strong need for DIP financing, Japanese banks and other financial institutions are often reluctant to finance a DIP. However, the following provisions of the law can promote DIP financing:

  • Financing after the start of rehabilitation proceedings is treated as the "claim for common benefits", which can be performed at any time without following the rehabilitation proceedings. Even when rehabilitation fails, and adjudication of bankruptcy is made to a rehabilitation debtor, such a claim maintains its superiority over other claims.
  • Securities on the property of a rehabilitation debtor, which is regarded as indispensable for rehabilitation, can be extinguished by court order, and such property can be furnished to new investors as security for financing.
  • A rehabilitation debtor must report the status of its business management and properties to a court and an assembly of creditors. The financier can then be well-informed about the status of the rehabilitation debtor and its properties.
  • Supervising commissioners must oversee the enforcement of the rehabilitation plan for three years after it becomes final and conclusive. Accordingly, the financier can consult the supervisor's report and make an appropriate decision about financing.

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