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Criteria for enforcement

What are the common enforcement triggers for loans, guarantees and security documents?

There are a variety of enforcement triggers, with the following being common:

  • the borrower’s failure to make required payments on a timely basis;
  • the borrower’s breach of the terms of loan documents or security documents, including provisions in such documents regarding the exclusion of organised crime syndicates;
  • attachments on securities;
  • the disappearance of the borrower or guarantor;
  • the failure to honour cheques or notes, or defaults on the other debts of the borrower or guarantor; and
  • the commencement of bankruptcy or other insolvency proceedings for the borrower or guarantor.

Process for enforcement

What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?

The enforcement procedure is different depending on the kind of security, the secured asset and the terms of the security agreement. As for registered real estate mortgages, lenders are entitled to file a petition for a compulsory auction to the court as a judicial foreclosure. However, lenders often choose sale by contract because the sale price can be increased in a contract, which is not the case at a compulsory auction, although the consent of the borrower and other secured parties are necessary for this to go ahead. 

In case of a pledge and security by assignment, lenders may typically either seek a judicial foreclosure or enforce such a pledge or security by assignment through a security agreement. If the secured lender is a bank which keeps the borrower’s deposit in its custody, a set-off is typically chosen instead of exercising the security right. 

In case of the commencement of bankruptcy or other insolvency proceedings for the borrower, its assets will generally become subject to such insolvency proceedings, but the secured claims may be exercised outside of such insolvency proceedings (except in corporate reorganisation proceedings).

Ranking in insolvency

In what order do creditors rank in case of the insolvency of a borrower?

In general, creditors’ claims are paid as follows in borrower’s insolvency proceedings in Japan:

  • A secured creditor which holds a security interest has priority over its secured assets and is entitled to receive preferential payment in the amount up to the value of such secured assets.  Such a secured creditor has a right to enforce its security interest even after the commencement of insolvency proceedings. However, in corporate reorganisation proceedings, the enforceability of a secured creditor’s security interest may be restricted under the Corporate Reorganisation Act.
  • The priority ranking among multiple secured creditors who hold security interests on the same secured assets is determined based on the priority ranking of security interests held by them.
  • If the proceeds from secured assets are insufficient to pay the entire claim of secured creditors then these will be treated as unsecured creditors with regard to outstanding claim.

In general, unsecured creditors’ claims are paid from the insolvency estate after excluding secured assets for the secured creditors and deducting certain expenses, such as insolvency proceeding costs, insolvency administrator fee and remuneration for employees of the insolvent company.

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