Prompted by concerns that Japan’s current laws and regulations may not be considered business friendly, a subcommittee of the legislative branch of the Ministry of Justice recently commenced a study to determine whether establishing a new type of security right – which is to be granted to a creditor to secure performance of obligations over the debtor’s all assets (the Comprehensive Security Right) – would be appropriate.
Directive from the Minister of Justice
On February 10 2021, the Minister of Justice, Yoko Kamikawa, addressed the Legislative Council of the Ministry of Justice regarding Japan’s laws on security or collateral rights, which is not fully exhaustive and sometimes filled by court decisions, and not business friendly, stating as follows:
In light of the current situation of transactions using property other than real estate as collateral, such as the expansion of the use of financing secured by movable property and claims, it seems necessary to review the legislation on security from the perspective of clarifying legal relationships between the creditors and debtors and ensuring stability.
In response, the Security Legislation Subcommittee of the Legislative Council has been studying the revision of the security legislation at a pace of about once a month since April 13 2021.
Basis for the study to be conducted by the subcommittee
The basis of this study is the report of the ‘Study group on security legislation focusing on movable property and claims’, sponsored by the Commercial Law Study Group, a public interest incorporated association. From March 4 2019 to March 2 2021, researchers of civil law and insolvency law, lawyers, and people in charge of legal departments of companies discussed the revision of security laws and regulations in this study group.
In this report, the following statements are made, especially regarding comprehensive security rights (described below):
There might be a need to develop a comprehensive security right that collectively targets and enforces the entirety of property used for a certain business by the debtor, including intangible property rights as well as rights to movable property and claims.
In such case, this could be done through a review of the existing foundation mortgage (Zaidan Teitou) system and corporate collateral laws (Kigyo Tampo Hou), as well as the creation of a new security right.
With regard to a comprehensive security right, given that there are several options, it is necessary to consider what needs cannot be covered by existing security rights for individual movables and claims, and for collective movables and claims, and what specific situations can be envisioned for the use of the new security right. It is also necessary to further examine whether or not it is necessary to establish such a new right, and if so, what specific measures should be taken.
Japan’s low rating for ease of doing business
The above statement derives from the fact that Japan was disgracefully ranked 29th in the Doing Business 2020 published by the World Bank, which ranks countries according to the ease of doing business in each country in light of the regulatory or legal environment.
In particular, Japan was given a low rating in the area of credit provision, and one of the elements in that area, "Does the law allow businesses to grant a non-possessory security right in substantially all of its assets?” – which right could allow businesses to raise funds more easily – received a score of zero. In response to this report, the Prime Minister's Office has mentioned the need to review the security law system in its policy announcement.
Opposition to a comprehensive asset securitisation
The study by the Security Legislation Subcommittee of the Legislative Council has just begun, and it is not yet clear whether a new comprehensive security right will be established or not and the specific content of such comprehensive security right.
In particular, lawyers who specialise in the field of bankruptcy law have expressed their opposition to the establishment of a comprehensive security right one after another. They have stated that the comprehensive security right would lead to an excessive influence of creditors (mainly financial institutions) who are granted the comprehensive security right in insolvency proceedings and destroy the existing bankruptcy practice, which has been operating stably for a long time.
The future development of the Security Legislation Subcommittee of the Legislative Council will be closely followed in the coming months.
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