This content is from: Local Insights

Japan

Prompted by the transition from real estate-based financing to cashflow-based financing, the Ministry of Justice is considering a new registration system to record the transfer of title to movable assets, such as inventory and equipment. The new system would facilitate financial transactions involving chattel mortgages by making such mortgages more reliable and secure.

The creation of a chattel mortgage over a movable transfers the title to the movable to the mortgagee. However, since such transfer is not publicly registered, it is difficult to determine the legal owner of the asset. The Civil Code of Japan provides that transfer of title to a movable can be perfected against third parties by physical delivery of the movable to the transferee or by the transferor's declaration that the transferor, having direct possession of the movable, shall possess the movable on behalf of the transferee (a possession declaration).

Transfers perfected by possession declaration are common, as they allow mortgagors of movables to use the mortgaged assets. However, possession declaration places mortgagees at risk because the legal title of the movable is transferred without any apparent change in possession. Therefore, it is extremely difficult for a potential mortgagee to determine whether the movable to be mortgaged has already been mortgaged to a third party. Also, there is a risk that the mortgagor may attempt to transfer the title to a previously mortgaged movable to a bona fide third party purchaser. The purchaser may obtain the title to the movable by operation of law, provided that it was not negligent in making the purchase.

The proposed registration system is intended to remove these risks. Under the new system, a mortgagor and mortgagee would jointly apply to register the transfer of a movable created under a chattel mortgage. Registration would perfect the transfer against third parties. It is expected that only corporate transferors will be entitled to use the new registration system.

Two issues remain regarding the framework of the new system. First, it is unclear whether the new system will apply to the registration of all transfers of title to movables or only to transfers of title to movables where a chattel mortgage is created. Second, there is debate over whether registration under the new system should override a transfer of title perfected by possession declaration that had taken place before the registration. On March 3 2004, the Ministry of Justice made a public proposal regarding the registration system and invited comments from the public. A bill for the new registration system is expected to be considered in the Diet in late 2004, and, if passed, to take effect in the middle of next year.

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