Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Restructuring & Insolvency volume discussing topics including asset purchase, notable filings and cross-border coordination within key jurisdictions worldwide.
GTDT: In the last year, have you seen any developments or trends in the nature and volume of insolvency filings?
Hiroyasu Ueda, Kanako Watanabe and Akira Hidaka: The number of insolvency filings in Japan has been decreasing for the past several years. Although the SME Finance Facilitation Act, which was encouraging the banks to take a relaxed approach against the companies in financial problems, was terminated in 2013, the FSA has nevertheless continued to maintain the same policy to date in order to avoid bankruptcies of the small and medium-sized enterprises (SMEs). While a large number of SMEs are still suffering due to financial problems, these companies are being supported through out-of-court workouts that usually just reschedule the repayment of loans to a later date but do not reduce the balance of the financial debt.
To support the rehabilitation of SMEs, the government also set up some types of organisations to facilitate the out-of-court workout. For example, the government set up the SME Revitalization Support Councils in each prefecture to work with the local banks to rehabilitate the SMEs. Sometimes, the restructuring plan includes the haircut, but in most cases, the plan allows for several years of rescheduling of the loans to give some time for the companies to rehabilitate its business. There is another state-owned organisation, REVIC (Regional Economy Vitalization Corporation of Japan), which assists SMEs in stabilising their financial situations. In addition to facilitating the out-of-court workout discussions, REVIC can provide new debt and equity financing to the companies in financial problems and purchase the non-performing loans from the banks. However, the REVIC programme is expected to be terminated in March 2021 and is now shifting its support from financial to the development of the restructuring professionals at the local levels.
There has been some criticism regarding the involvement of these government organisations in the private companies’ restructuring process. Another framework and option available for the out-of-court restructuring is a process called ‘Turnaround ADR’, which is based on the Industrial Competitiveness Enhancement Act. It is a process for out-of-court workouts without the involvement of the government authorities. In the Turnaround ADR, the Japanese Association of Turnaround Professionals (JATP) elects a mediator and holds the creditors’ meetings for the purposes of the workout discussions. In the past several years, the number of Turnaround ADR cases has remained small, but it is expected that the number of cases will increase after the above change of REVIC’s stance on support.
Although the number of the filing at the court has been decreasing, court proceedings are still significantly being used for complicated matters such as for cases after the failure of the out-of-court workout, in which the debtor could not obtain unanimous consent from the creditors to the restructuring plan, or for cases with accounting or other compliance irregularities. Filing at court is also necessary if the companies have problems regarding operating cash flow.
GTDT: Describe the one or two most notable insolvency filings in your jurisdiction in the past year.
HU, KW & AH: The corporate reorganisation of Japan Drilling, Co, Ltd (JDC) would be the most notable insolvency filing of 2018. JDC is an offshore drilling contractor providing drilling services worldwide, however, it was affected by the severe market fluctuations in the energy sector. The corporate reorganisation proceedings were filed for both JDC, the Japanese headquarters, and its subsidiary in the Netherlands, Japan Drilling (Netherlands) BV.
GTDT: Have there been any recent legislative reforms? Is there a perceived need for reform?
HU, KW & AH: In 2018, the Industrial Competitiveness Enhancement Act was amended to provide greater protection for the claims of trade creditors in judicial insolvency proceedings that are commenced following the failure of out-of-court workouts. In principle, the trade claims are subject to the pro-rata treatment with other financial claims, however, under the amended Industrial Competitiveness Enhancement Act, the trade claims can be exempt from the amendment by the plans if JATP confirms that the claim of a trade creditor involves a small amount and the settlement of such a claim is necessary to avoid significant impairment to the debtor’s business, because the court will ‘take into account’ the JATP’s confirmation when it approves the exceptional preferential treatment (eg, full payment) to the trade creditors. It is expected that the value of the debtor’s business can be protected better by keeping their business relationship with the trade creditors.
GTDT: In the international insolvency field, have there been any legislative or case law developments in terms of coordination of cross-border cases? What jurisdictions are you most likely to have contact with?
HU, KW & AH: In the past several years, there were a number of cross-border shipping restructuring cases in Japan. In 2015, there was the first corporate reorganisation filing done for the companies incorporated in foreign countries (in this case, in Singapore and Panama) at the Tokyo District Court. Although there was no recognition and assistance system (such as the one under the UNCITRAL Model Law) in the debtor companies’ countries of incorporation at the time of the filing, the trustee successfully completed the sale of the vessels through some creative manners. In 2018, there was the second corporate reorganisation filing done for a company incorporated in foreign countries (in this case, in the Netherlands), as explained in the above as the notable insolvency filing.
As far as restructuring matters are concerned, Japanese companies have contacts with companies from various jurisdictions, but particularly with the United States, United Kingdom, Singapore and a few Asian countries.
GTDT: In your country, is there a particular court or jurisdiction that sees a higher concentration of insolvency filings? What is the attraction of that forum?
HU, KW & AH: The Tokyo District Court and the Osaka District Court see a higher concentration of insolvency filings in Japan since they have broader jurisdictions and special departments to try insolvency cases. Japan adopted the cross border insolvency laws based on the UNCITRAL Model Law, however, the recognition and assistance for foreign insolvency proceedings has to be filed at the Tokyo District Court.
GTDT: Is it fair to describe your jurisdiction as either ‘debtor-friendly’ or ‘creditor-friendly’ in terms of how insolvency filings proceed?
HU, KW & AH: Japan should be categorised as a debtor-friendly jurisdiction. It has been criticised for the limited disclosure and the limited involvement of creditors for many years by international creditors. The limited involvement of creditors may be one of the reasons for Japanese lenders to prefer the out of court workout these days. Recently, the government has started considering e-disclosure in insolvency and other legal proceedings, which is expected to improve the access to the information by the creditors.
GTDT: What opportunities exist for businesses wanting to purchase assets out of an insolvency, and how efficient is the process? What are the best ways to take advantage of opportunities in this area?
HU, KW & AH: A ‘363 sale’ type process is available under every type of insolvency proceeding. In urgent cases, the sale can take place very quickly. In practice, the informal discussions with major creditors are essential and the court respects the creditors’ views, however, the creditors are not allowed to file the objections and argue the fairness of the sale before the closing. It is sometimes viewed negatively from the creditors’ viewpoint, however, this approach often works efficiently to rehabilitate the debtor’s business especially in SME cases.
The Inside Track
What two things should a client consider when choosing counsel for a complex insolvency filing in this jurisdiction?
Choosing an experienced practitioner in the core of the industry is important as sometimes retaining the trust of the court and the players in the restructuring field becomes essential while dealing with and solving the complex issues smoothly. Choosing a counsel in a full service firm with international practice may also be important to solve a broad range of issue occurring in complex case, especially if the company is a listed company doing business worldwide.
What are the most important factors for a client to consider and address to successfully implement a complex insolvency filing in your jurisdiction?
There are several different schemes available for the debtors to restructure its business in or out of the court. It would be essential to select the best schemes maximising the company’s business value and the distribution to the creditors.
What was the most noteworthy filing that you have worked on recently?
We represented a company with ¥13 billion of debt in a Turnaround ADR case. An accounting fraud was found with the company but the company successfully obtained the consent from all of the lenders by promptly filing the Turnaround ADR and finding a credible buyer to achieve 100 per cent payment of the debt.