On November 30 2010 the Tokyo District Court issued an order for the avoidance of a business transfer that was made by a bankrupt company before it filed for bankruptcy. The court also ordered the transferee to restore the transferred assets that could still be identified; in the case of assets that had been transferred, but could no longer be identified, the transferee was required to make payment to the value of such assets. The court ruled that the fact that the transferee had jointly assumed part of the bankrupt company's debts - and had paid some of the debt thus assumed - did not affect the assets to be restored or the payment to be made by the transferee.


On February 17 2009 a company transferred its business to its subsidiary, of which the company held 100% of the shares. The subsidiary assumed the company's name, whereas the company adopted a new name. At the time of the transfer, the book value of the company's assets was around Y9.07 billion and the debt amounted to around Y8.4 billion. When the business was transferred, the company's representative director was also the representative director of the subsidiary.

The terms of the business transfer agreement between the company and the subsidiary, concluded on February 17 2009, provided for:

  • the company to transfer its business to the subsidiary;
  • the subsidiary to pay Y1 million as consideration for the business transfer; and
  • the subsidiary to assume part of the company's debts (in an amount of around Y2.9 billion).

On the day of the transfer, the company explained the restructuring plan to its creditors - a number of financial institutions. The representative director explained that a situation had arisen in which it might prove difficult to continue the company's business because of a cash-flow problem, and that he would consider court-administered insolvency proceedings for the company. He further explained that the company would transfer part of its assets (with a book value of Y2.8 billion) to the subsidiary, which would jointly assume part of the company's debt, together with the company, in the amount of Y2.9 billion.

Despite its efforts from around the end of January 2009, the company was unable to collect account receivables in the amount that it had expected, and failed to present funds to settle its bills in February 2009. On March 26 2009 the company's banking transactions were suspended.


On January 6 2010 the court declared the company bankrupt and appointed a bankruptcy trustee. The bankruptcy trustee exercised the right of avoidance, filing a motion against the bankrupt company's fraudulent act. It based its motion on the view that the company had transferred its business in the knowledge that it would prejudice creditors and the beneficiary, or the transferee knew at the time that the business transfer would prejudice creditors.

The court issued an order of avoidance, which stated that:

"It is found on the facts that the company was insolvent when it transferred its business, and for the creditors in respect of which the transferee did not jointly assume the company's debts, the bankruptcy estate was reduced by the business transfer and such creditors were prejudiced. The company transferred its business in the knowledge that it would prejudice the creditors and, considering that the company's representative director was also the representative director of the subsidiary or the transferee, the transferee had an intention to prejudice the creditors. Thus, the business transfer falls within the description of a fraudulent act to be avoided."

"In principle, the assets that were evidently transferred from the bankrupt company to the transferee shall be restored to the bankruptcy estate as is. However, regarding the assets that were transferred but can no longer be identified, the transferee shall pay an amount equal to the value of such assets to the bankruptcy estate."

"The fact that the transferee jointly assumed a certain portion of the debt of the bankrupt company, together with [the latter], and paid some of the assumed debt does not affect the assets and the amount of payment to be restored by the transferee because the legal effect of exercising the right of avoidance applies only between the bankruptcy estate and the transferee, and the transferred asset and debt are restored as a result of such legal effect. In addition,... if the payment of the assumed debt would reduce the assets and the amount of payment to be restored, while the creditors in respect of which the transferee jointly assumed the debts could have satisfaction of their claims, the creditors for which the transferee did not assume debt would be prejudiced because they had claims only against the bankrupt company, which could not be satisfied. Such result would contravene the purpose of the right of avoidance [and would not be appropriate]."

For further information on this topic please contact Rika Sato at Jones Day by telephone (+81 3 3433 3939), fax (+81 3 5401 2725) or email ([email protected]).