Although the number of corporate insolvency cases in Japan in 2021 was the lowest since 2000, many Japanese companies have been affected by the Covid-19 pandemic and have excessive debt, which will likely lead to a number significantly higher number of insolvency cases (liquidation and rehabilitation cases) in the future.
This article explains the general treatment of contracts and receivables under Japanese insolvency law when Japanese bankruptcy proceedings (which are roughly similar to Chapter 7 of the U.S. Bankruptcy Code) or civil rehabilitation proceedings (which are broadly similar to those in Chapter 11 of the Code) are incurred against a debtor that is a Japanese company.
Bilateral enforceable contract
In insolvency proceedings, a debtor or trustee is entitled to continue or terminate the bilateral contract of the debtor if the debtor and the counterparty have not yet fully performed their contractual obligations at the time of the opening of the proceedings.
If a debtor or trustee terminates a bilateral enforceable contract, the counterparty may claim damages, which are classified as a bankruptcy claim in bankruptcy proceedings or a rehabilitation claim in civil rehabilitation proceedings. Creditors with claims in bankruptcy or rehabilitation must file proof of claims to be eligible to receive payment under the insolvency proceeding.
The counterparty may seek restitution of any contractual benefit received by the debtor, which is characterized as an inheritance claim in bankruptcy proceedings or a joint claim in civil rehabilitation proceedings. Creditors with claims on the estate or joint benefit rights are entitled to receive payment outside the insolvency proceedings when the claim is due and payable.
If a debtor or fiduciary pursues a binding bilateral contract, the counterparty must perform its obligations under the contract and the claims of the counterparty are classified as an estate claim or a joint benefit claim.
Validity of contractual clauses
In recent Japanese insolvency practice, the validity of contractual terms in a bilateral enforceable contract subject to insolvency proceedings is controversial, and there are several notable cases in which their validity has been challenged in court.
For example, there are court decisions that have held that a counterparty cannot enforce against a trustee in bankruptcy a penalty clause in a lease agreement upon the termination of the lease by the trustee in bankruptcy. as well as those which have ruled that a counterparty cannot assert against a rehabilitation debtor an ipso facto clause in a lease contract even though the debtor hopes to continue the contract.
Filing and Determination of Claims
As described above, any creditor with bankruptcy claims or rehabilitation claims must file Proofs of Claims with the court within the filing time determined by the court in order to receive a bankruptcy dividend or reimbursement under the plan. of rehabilitation. Properly filed claims will be assessed and a decision will be made to approve or disapprove each proof of claim filed by debtor or trustee.
Creditors also have the right to object to a specific proof of claim filed by another creditor during the investigation period determined by the court. If the debtor, trustee or any creditor objects to specific evidence of a claim, the creditor whose claim is objected to may file a motion seeking determination of the claim with the court. The party for whom the court’s decision on the application is unfavorable may file an appeal with the court.
Under Japanese insolvency law, since insolvency proceedings are conducted in Japanese, creditors are required to prepare proof of claims and petition documents in Japanese, and Japanese lawyers often participate in these processes at the name of foreign creditors.
Partner, Nagashima Ohno and Tsunematsu
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