Court Acceptance of Petition for Corporate Reorganization

Takefuji Corporation (“Takefuji”), one of the largest consumer finance companies in Japan, petitioned the Tokyo District Court for corporate reorganization on September 28, 2010 and the court accepted the petition on the same day. The court immediately appointed a provisional trustee and an investigator to determine whether Takefuji is eligible for insolvency proceedings under the Corporate Reorganization Law of Japan. The court also ordered a moratorium on the enforcement of judgments against Takefuji and forbade Takefuji to repay its creditors and sell or loan its assets.  

The Corporate Reorganization Law sets out procedures for corporate reorganizations that do not require the consent of all of the creditors of the petitioning company. Furthermore, the effect of a corporate reorganization in Japan extends to the debtor’s assets located overseas.

As a quick summary, pursuant to the corporate reorganization process under Japanese law, the debtor is rehabilitated by discharging its liabilities in accordance with a reorganization plan which has been approved by the relevant parties (for example, unsecured creditors, secured creditors and shareholders) and the court. Usually in traditional corporate reorganizations in Japan, the existing management is completely removed and a court appointed trustee takes control of the debtor company. A filing for reorganization may only be made if the debtor cannot pay its debts as they become due without serious difficulties in the continuance of its business. Takefuji’s total liabilities according to its balance sheet dated June 30, 2010 are ¥443.608 billion (approximately US$5.3 billion). This amount of liabilities is expected to increase during the reorganization proceedings.

Mr. Eiichi Obata, Esq. of the LM Law Offices was appointed as the provisional trustee. The telephone numbers 0120 938 685 and 0120 390 302 (domestic use only in Japan) have been set up by the provisional trustee for inquiries about the Takefuji reorganization.  

Mr. Hideaki Sudo, Esq. of the Tokyo Fuji Law Offices was appointed as the investigator to determine whether Takefuji should be allowed protection under the Corporate Reorganization Law.

Chance of Debtor in Possession Reorganization

There are reports that the Tokyo District Court may take a debtor in possession approach in the case of Takefuji, which is unlike the traditional corporate reorganizations in Japan as mentioned above. If adopted by the court, such an approach would likely involve the current representative director of Takefuji being replaced by another Takefuji insider and the court appointing a supervisor to oversee the current management’s handling of the reorganization. It is still not clear at this time whether the court will adopt a debtor in possession approach.  

Anticipated Schedule

A creditor information session will be held on October 5, 2010 in Osaka and in Tokyo on October 6, 2010. The provisional trustee will explain at the information sessions (1) the circumstances that led Takefuji to petition for reorganization, (2) an outline of the reorganization schedule, (3) an outline of the reorganization plan, and (4) the possible selection of a sponsor. It is anticipated that creditors will be able to ask the provisional trustee questions at the information sessions.

Click here to see the tentative schedule announced Takefuji for the significant reorganization events and a flowchart which outlines the procedure for corporate reorganizations in Japan.

Rights of Creditors (including Bond Holders) with respect to the Corporate Reorganization Proceedings

Firstly, if a claim by a creditor against the debtor is held to be legitimate, such creditor may be entitled to recover all or a portion of its claim against the debtor in accordance with the accepted reorganization plan.  

Furthermore, among other things, creditors that have filed claims shall have the following rights in connection with the corporate reorganization proceeding:  

(a) the right to view certain documents related to the reorganization proceedings;  

(b) the right to object to the claims of other creditors who file their claims;  

(c) the right to express opinions to the trustee regarding proposed reorganization plans or propose one’s own reorganization plan; and  

(d) the right to participate in the creditors’ meeting including voting on proposed reorganization plans.

A creditor can ask the court to adjudicate whether the creditor’s claim is legitimate or not in the case where a shareholder or another creditor of the debtor has challenged the legitimacy of the creditor’s claim. If the creditor that has been challenged does not petition the court for this adjudication within one month after the claim investigation period ends, the creditor loses any rights it may have had to recover under its claim.  

Takefuji’s Debts

Debts as shown in the latest financial statements

Takefuji’s financial statements dated June 30, 2010 state that Takefuji has the following debts:  

Bonds that mature within one year: ¥42.156 billion (US$500 million) (market value)  

Bonds that mature after one year: ¥15.843 billion (US$190 million) (market value)  

Loans that must be repaid within one year: ¥47.134 billion (US$560 million) (estimated current value)  

Total Debt: ¥105.133 billion (US$1.25 billion)  

Takefuji has defaulted on payment of principal and interest on all of its bonds in accordance with the order of the Tokyo District Court. The Nikkei Newspapers reported that as of the end of August 2010, Takefuji had outstanding bond obligations of ¥92.6 billion (US$1.1 billion). For the purposes of Japanese law, bond holders will be classified as general creditors and their claims will be subordinated to the claims of security holders. Furthermore, it is important to note that bond holders will need to file their claims with the court to be recognized as creditors of Takefuji.  

Consumers’ Claims for Return of Excessive Interest

A series of Japanese Supreme Court rulings since January 2006 have clarified that certain interest payments that consumer finance companies such as Takefuji had been receiving from their customers were illegally excessive, and that consumer finance companies have a duty to return the amount of overpayment upon demand by the customer who overpaid. A customer who paid excessive interest to Takefuji would be considered a general creditor and must file with the Tokyo District Court in order to preserve a claim against Takefuji. It has been reported by some news sources that 113,000 customers demanded repayment from Takefuji before the reorganization petition was filed and that there may be two million customers that have claims against Takefuji for excessive interest. Takefuji’s liability for excessive interest has been reported as being between ¥1 trillion and ¥2 trillion, so the extent to which customers file claims with the court will likely have a significant effect on the recovery rate of all of the general creditors.  

It should be noted that, although the type of proceeding is different from Takefuji’s, in the civil rehabilitation proceeding of Credia K.K., which commenced in September 2007, the rehabilitation plan allowed customers of Credia K.K. who paid illegally excessive interest to give notice of their claims even after the due date to file proof of claims and were permitted to receive the same recovery rate as the other general creditors. Moreover, in the case of Credia K.K., customers whose claim amount was ¥300,000 or less were given special treatment under the rehabilitation plan and were paid in full.  

It will be interesting to see whether the court in the Takefuji proceeding will provide similar special treatment (i.e. better recovery rate and extension of filing deadline) to customers of Takefuji who paid excessive interest. At this early stage, there has been no indication that such similar special treatment will be provided to customers of Takefuji who paid excessive interest, but we will update you as soon as we receive relevant information.  

Takefuji’s Accounts Receivable

According to Takefuji’s securities filings for the period of April 1, 2010 to June 30, 2010, ¥200.449 billion of Takefuji’s accounts receivable are collateralized. A party that has a security interest in accounts receivable will have priority over general creditors with regard to such collateralized accounts receivable.  

Delisting from the Tokyo Stock Exchange

The Tokyo Stock Exchange announced that Takefuji stock will be delisted on October 29, 2010.

As the corporate reorganization process has just commenced, we will issue further updates as there are material developments.