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Asset classes used as collateral for security

Real estate

Can security be granted over real estate? If so, what are the most common forms of security granted over real estate and what is the procedure?

Yes, security can be granted over real estate. A mortgage over real estate as collateral for a loan is common in secured lending transactions in Japan.

To create a mortgage, the mortgagor and mortgagee must enter into a mortgage agreement. In order for the mortgagee to prove the creation and existence of mortgage, the mortgage must be registered with the relevant authority. Although it is possible for multiple mortgages to be created and registered over one piece of real estate, priority among mortgagees is determined by the mortgage’s date of registration with the relevant authority.

In addition to standard mortgages which can be created and registered for a fixed amount of secured obligation, a so-called ‘revolving mortgage’ for existing and future secured obligations up to a certain maximum allowable amount specified in the applicable agreement can be created and registered in Japan.

Machinery and equipment

Can security be granted over machinery and equipment? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes, security can be granted over machinery and equipment in Japan. In such cases, a chattel mortgage or pledge is commonly used. 

In order to create a chattel mortgage over machinery and equipment, the mortgagor and mortgagee must enter into a mortgage agreement. In order for the mortgagee to prove the creation and existence of the chattel mortgage, machinery and equipment subject to the chattel mortgage must be transferred to the mortgagee or the chattel mortgage must be registered with the relevant authority. 

On the other hand, to create a pledge over machinery and equipment, it will be necessary for the pledgor and pledgee to enter into a pledge agreement and to transfer the possession of assets. In order for the pledgee to prove the creation and existence of the pledge, it must keep physical possession of the assets.

Factory mortgages may also be created, especially in structured or project finance transactions such as solar power generation project. In order to create a factory mortgage, the mortgagor and mortgagee must enter into a mortgage agreement. In order for the mortgagee to prove the creation and existence of a factory mortgage, the owner of factory (as mortgagor) must first register its ownership of the factory foundation in a factory foundation registry book. Thereafter, the factory mortgage over the factory foundation must be registered in the factory foundation registry book within six months after the registration of the ownership in the factory foundation.

Receivables

Can security be granted over receivables? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes, security can be granted over receivables in Japan. In such case, a pledge or security by assignment is commonly used.

In order to create a pledge over receivables, the pledgor and pledgee must enter into a pledge agreement; in order to create a security over receivables by way of assignment, the assignor and assignee must enter into an agreement on security by assignment. The pledgee or assignee can prove the creation and existence of the pledge or security by assignment through any of the following procedures:

  • notice with notarisation date to a debtor of the pledgor or assignor concerning the creation and existence of the pledge or security by assignment;
  • procurement of written consent with notarisation date from a debtor of the pledgor or assignor on the creation and existence of the pledge or security by assignment; and
  • registration of the pledge or security by assignment with the relevant authority.

Financial instruments and cash

Can security be granted over financial instruments? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. In establishing security on financial instruments, a pledge is the most common form of security, although security by assignment is also common. The required procedure is also different depending on, among other things:

  • the form of security;
  • the type of financial instruments;
  • whether the financial instruments are tangible or registered securities; and
  • whether the issuer is a closed company or a publicly held company.

For example, in establishing a security over registered bonds or registered stocks, the registration of the security is required in addition to mutual agreement. In case of tangible securities, delivery is required instead of registration. A security over stocks can be perfected against third parties once it is entered into the shareholder register.

Can security be granted over cash deposits? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes, but it is uncommon because prior consent from the bank, which keeps the deposit in its custody, is usually required under the deposit agreement between the depositor and such bank. In establishing security on cash deposits, a pledge is the most common form of security. 

Intellectual property

Can security be granted over intellectual property? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. Both pledges and securities by assignment are common. Registration is required in addition to mutual agreement in order to establish a valid security over patent and trademark rights, and ensure that security over copyrights and publishing rights are perfected against third parties. In establishing a security on licence, the procedure differs depending on the type of licence and licensed right.

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