Japan has a relatively advanced system of bankruptcy laws.
Five different types of bankruptcy proceedings exist under Japanese law. The choice of which process to take largely depends on the size of the entity seeking bankruptcy and, if it is a business, whether it is sufficiently solvent to continue operating. Yet only three proceedings are commonly used: Corporate Reorganization under the Corporate Reorganization Code, Civil Reconstruction under the Civil Reconstruction Code and Liquidation under the Bankruptcy Code.
Key Elements of the Corporate Reorganization Code
Corporate Reorganization under the Corporate Reorganization Code is designed for large corporations that, if they fail, would have a significant impact on the economy. The goal is to preserve the company's operations and rehabilitate it financially so it can continue to do business. As part of the process, the court adjudicating the bankruptcy appoints administrators to manage the company's day-to-day business and displaces the company's management.
Procedure of Corporate Reorganization
After the initial application is made, the court determines whether rehabilitation is possible or if the company is insolvent. If the court decides that the company is solvent, it will order a temporary order and appoint an interim administrator, usually a practicing attorney who typically remains as the primary administrator through the proceedings. Once final approval for bankruptcy is given, business professionals are appointed to the team of administrators. Soon after, a meeting of "interested parties" is convened and composed of creditors, representatives of the debtor company and shareholders. Following the meeting, the lead administrator designs a reorganization plan to include a repayment schedule for the creditors. Another meeting is held in which the interested parties are able to review the plan. While creditors may provide feedback, they do not have the power to veto the plan. Following court approval, the plan is implemented. If the plan proves unworkable, the administrator will then present a liquidation plan to the court.
Civil Reconstruction Code
Civil Reconstruction is similar to how Corporate Reorganization unfolds. However, the Civil Reconstruction Code also applies to individuals. In terms of corporate bankruptcy, many of the primary elements of the two laws are the same, such as the initial application procedure, the implementation of a reorganization plan--called a "reconstruction plan" under this process--and the meetings of interested parties. One key difference is that under the Civil Reconstruction Code, the court does not remove the management of the debtor company. Rather, the management is charged with executing the reconstruction plan, though the court may appoint a supervisor to oversee the process if it so chooses. Another key difference is that the reconstruction plan requires the approval of the creditors through a majority vote.
Liquidation Under the Bankruptcy Code
If a company does not qualify for reorganization, it may be subject to liquidation under the Bankruptcy Code. It also applies to individuals. Both creditors and the debtor company petition the court under the Bankruptcy Code. The court appoints an administrator and notice is given to creditors of the debtor company, who must file then file their claims. Next, the administrator starts converting company assets into cash for disbursement.
