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Japan

In October 2003 the Ministry of Justice published a draft outline to amend many provisions of the Commercial Code. The proposed amendments affect the authorization of bond issues and the resignation and liability of commissioned companies for bondholders.

Authorization of bond issues

Any bond issuance must be authorized by an issuer's board of directors. But the Commercial Code does not prescribe what terms of an issuance the board must determine. In practice many boards delegate to some extent the authority to determine the terms to their representative directors.

The draft outline proposes that where a board determines the maximum redemption amount, the maximum interest rate and the minimum issue amount of a proposed issuance, its representative director may determine the actual issue amount. It also proposes that if a board determines the issue period of the bonds, its representative director may determine when the bonds are to be issued. It is expected that the amendments will provide clearer guidelines regarding the extent to which boards may delegate to their representative directors the authority to determine the terms and conditions of a bond issuance.

Commissioned companies for bondholders

In practice, a number of commissioned companies for bondholders are also large creditors of the issuer. In such cases, if an issuer defaults under a bond, conflicts are likely between the commissioned companies and bondholders. A commissioned company generally may not resign without the approval of the issuer and a bondholders meeting. The draft outline proposes to resolve this conflict by permitting a commissioned company to resign without approval if certain events occur as provided in the agreement between the issuer and the commissioned company and its successor is appointed.

Under Japanese law, where a commissioned company is also a creditor of an issuer, the commissioned company is generally liable to the bondholders for damages if the commissioned company collects receivables from the issuer and the issuer defaults under a bond within three months of that collection. This is unless the commissioned company shows that it was not in breach of its obligations in respect of the bond and there was no causation between the collection and damages incurred by the bondholders. The draft outline questions whether the three-month period should be extended and whether the commissioned company should also be liable where its subsidiary collects its receivables from the issuer.

Commissioned companies are generally limited to banks and trust companies. The draft outline questions whether the qualification should be expanded to include other companies, such as servicers.

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