The main purpose of the Chukan Hojin Law, which took effect on April 1 2002, is to allow certain non-profit organizations to become separate legal entities. Any organization, the members of which share a common interest, whether it is for profit or not, so long as it does not distribute dividends to its members, is entitled to apply for chukan hojin status.
There are two types of chukan hojin. In a limited liability chukan hojin, its members must not have any liabilities to any creditors of the limited liability chukan hojin while the members must make initial capital contributions to the chukan hojin. However, the contributions do not have to be made by its voting members. Contributions can be made by a third party that does not control the chukan hojin. Conversely, in an unlimited liability chukan hojin, members may have liabilities to the creditors of the unlimited liability chukan hojin but there is no requirement for the members to provide capital contributions.
A limited liability chukan hojin is required to have a specific corporate governance structure. General meetings of members are required and at least one director and auditor must be appointed. No similar requirements exist for an unlimited liability chukan hojin.
In Japanese structured finance transactions, limited liability chukan hojins are starting to be used as special purpose vehicles (SPVs) to hold the voting interests of other Japanese SPVs, which hold the assets backing the transaction. Since capital contributions of a limited liability chukan hojin are not required to be made by its voting members, if an originator makes such contributions, it is possible to set up a structure whereby a bankruptcy of the originator will not likely effect the assets held by the chukan hojin. Therefore, similar to many foreign SPVs, such as Cayman Island SPVs, a chukan hojin SPV can be established as a bankruptcy remote entity providing protection to the investors in the event of a bankruptcy of the originator.
In Japan, since limited liability chukan hojins will likely be more cost effective to set up compared to foreign SPVs, originators may start using these corporate vehicles more in the future.