This content is from: Local Insights

Japan

Japan's revised bankruptcy law was enacted in May 2004 and is expected to come into effect in January 2005. This follows the introduction of the Civil Rehabilitation Law in April 2000 and the revised Corporate Reorganization Law in April 2003. The purpose of these laws is to rehabilitate debtors, but the aim of the new bankruptcy law is to provide modernized procedures for the efficient liquidation of debtors and the fair distribution of debtors' assets.

At the same time, substantive rules that apply in all insolvency proceedings were revised in many respects, such as the following:

Avoidance

Provisions setting out the requirements for, and effects of, a trustee's avoidance of debtor transactions have changed. Firstly, the law clarifies the requirements for avoidance, reflecting court precedents and dominant interpretations. Under the new law, voidable transactions will be categorized into two types: (1) voidable preference, such as where a debtor transfers funds or grants security to particular creditors in preference to other creditors; and (2) fraudulent conveyance, such as where a debtor transfers its assets without receiving fair consideration. Secondly, the new law will generally protect fair-value business transactions in insolvency procedures. So no sale of goods at a fair price will be voidable unless (a) the transferee knows that the debtor intends to appropriate the received cash and (b) the sale generates such risk. Nor will it be voidable when a debtor creates a security interest to obtain a new loan.

Assignment of rent receivables

The current law generally provides that a debtor's assignment of future rent receivables more than two months from the date of the bankruptcy judgment shall not be effective in a bankruptcy procedure. Primarily in response to the needs of the securitization industry, the new law abolishes this restriction. The new law is consistent with the Civil Code and the Law of Civil Enforcement in that transfers of future receivables are permitted except in limited circumstances.

Swap transactions and close-out netting

The new law incorporates accepted market standards (such as Isda standards) in relation to swap transactions and close-out netting arrangements where a party becomes bankrupt. With respect to close-out netting arrangements, Japan's Close-out Netting Law only covers derivatives transactions where one of the parties is a financial institution. The new law provides that close-out netting arrangements will apply in all bankruptcy procedures.

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