by Satoshi Kiyama
I. Introduction
There were about 13,800 corporate bankruptcy cases in Japan in 2004.[1] In the last two years, the number of corporate bankruptcy cases decreased because Japan’s economy recovered from the bubble burst.[2] As the Japanese economy recovered, the types of corporate bankruptcies have been changing, especially during these past four years.
There are two types of bankruptcies in Japan: liquidations and reorganizations. Reorganizations in Japan are divided into two categories: negotiations between creditors and debtors, and reorganizations in which the court is aggressively concerned with the procedure. Reorganizations are later divided into two types of procedures: the Corporate Rehabilitation Law and the Civil Rehabilitation Law (CRL). A company going into bankruptcy who satisfies the conditions can use both laws. Generally, it was said that the Corporate Rehabilitation Law is for a big company like a public company listed in the first section of the stock market. On the other hand, the CRL was thought for small or mid-size companies. But today there is no obvious distinction that depends on the company’s size. Sometimes, listed company files for the CRL.
However, there are some differences between the Corporate Rehabilitation Law and the CRL. For example, the upper limit of a debt repayment plan’s period is 15 years in the Corporate Rehabilitation Law.[3] On the other hand, the upper limit is 10 years in the CRL.[4] Additionally, both laws have its own system of administration. The Corporate Rehabilitation Law has a general rule advocating the use of an administrator (trustee) in the practical use. On the other hand, the CRL does not generally use an administrator because the CRL follows the debtor-in-possession system similar to Chapter 11 in the United State. Courts, however, may use an administrator in certain CRL cases, as when a court determines that the board of the company no longer has power to reorganize or to manage the company.[5] This exception, however, is rare. Therefore the board of a company is likely to file for a CRL rather than under the Corporate Rehabilitation Law because if a company files under the Corporate Rehabilitation Law the board of the company may lose management authority. Additionally, the condition for approval of the plan under the Corporate Rehabilitation Law is more severe than that under the CRL. Under the Corporate Rehabilitation law, the reorganization plan can be approved by an agreement with creditors. The agreement must consist of at least two-thirds in amount and in number of creditors. On the other hand, the CRL requires at least more than one-half in number and in amount of creditors of attendance the meeting.
This paper will focus on the CRL because that law is based on Chapter 11 of the United States Bankruptcy Code (Chapter 11). The CRL was enacted in 2000 as an amendment to the Composition Law. From 2000 to 2002, case filings under the CRL increased dramatically. In these two years, however, the number of all bankruptcy cases has been decreasing because Japanese economy’s recovery. Therefore, filings under the CRL, in general, have also been decreasing. However, the CRL is still an important bankruptcy form because the CRL became a popular type of bankruptcy. Japanese bankruptcy has been changing from the liquidation type to the reorganization type. Additionally, there are more advantages for companies to use the CRL than the Corporate Reorganization Law. For example, the board of a company can continue to manage as long as the court does not determine that the board has no power to manage. And, under the CRL, it is easier to obtain the approval of the rehabilitation plan than under the Corporate Rehabilitation Law.
This paper will examine the major differences between Chapter 11 of the United States and the CRL of Japan. Part II will give a background on Chapter 11 and the CRL. Part III will discuss the differences, specifically the procedure to protect a company's assets, and the existence of super-priority in treatment of common-profit debt. Part IV will propose which procedure is better, Chapter 11 or the CRL, by examining each difference. Finally, Part V will conclude that the CRL is more suitable for Japanese reorganization because of traditional Japanese bankruptcy, whose main type was liquidation, and common sense about bankruptcy of debtors and creditors. Generally, debtors and creditors, in Japan, have the common sense that bankruptcy means the end of the management. Therefore, it is severe for debtors to be approved to reorganize. The CRL dexterously modifies Chapter 11’s concepts and provisions to match this Japanese common sense.
II. Background
Before discussing Chapter 11 and the CRL, it is useful to know the background of both laws and to compare the two laws. This part gives a background on Chapter 11 and the CRL.
A. Overview of Chapter 11
Like Japan, there are two types of bankruptcy cases in the United States: liquidation and reorganization. Chapter 11 applies to the latter type. However, from 1978 to the 1980’s, Chapter 11 was not often used because this procedure was more costly and needed more time to complete than negotiation. At that time, a negotiation between a company and her creditors was the main method to reorganize the company. This negotiation, however, also had a disadvantage point for debtor that the plan to cut debts and reschedule the payment needed all of the creditors’ approval. In the 1990’s, many companies started to apply for Chapter 11 because Chapter 11 had the power to bind creditors if the plan was carried at the meeting of the creditors.[6] Unlike negotiation, Chapter 11 does not require the agreement of all creditors. The approval for proposed plans requires only at least two-thirds in amount and more than one-half in number of the allowed creditors.[7] Additionally, since the technique called the pre-packaged Chapter 11, where the reorganization scheme is agreed to beforehand among the main creditors, came to be used, Chapter 11’s practical use grew.[8] The term, “pre-packaged Chapter 11,” is used to describe a case in which the debtor has negotiated a deal with its creditors before the petition is ever filed, but the help of the bankruptcy law to close the deal is needed. An example is when a large creditor refuses to accept the plan of reorganization. Creditors present an insurmountable obstacle if the plan is not under Chapter 11. But under Chapter 11, the creditor is effectively forced to go along if it is in the same class of creditors.[9]
B. The “Debtor in Position” (DIP) concept under Chapter 11.
Chapter 11 has some characteristics making it possible to continue a business. First, as a general rule, there is no administrator or trustee. Therefore, the debtor can continue the business by possessing and using her assets. In addition, the company can lend and sell her assets as long as the business owns the assets.[10] This concept is called debtor-in-possession (DIP). Second, the approved plan at the meeting of the creditors binds opponents to the plan. Third, at the filing of a Chapter 11 case to the court, the court prohibits claims, enforcement of securities, or compulsory executions by creditors.[11] This procedure is called the “automatic stay.” These procedures were instituted to allow the debtor to continue the management of the business.[12]
In these characteristics, DIP is the most important concept in Chapter 11. Chapter 11 creates DIP whenever a debtor files for it. The term, DIP, refers to a debtor that keeps possession and control of its assets while undergoing a reorganization under chapter 11, without the appointment of a case trustee.[13] DIP is the normal situation when a debtor files for Chapter 11 because there are few cases that the trustee is appointed to take over the estate.[14] The debtor is not a static entity and its financial affairs do not cease with the filing of the petition as long as the debtor is and has business. A business needs to obtain supplies, sell property, products or services, meet payrolls, use equipments, and collect credits. Usually, these activities of the debtor must be conducted by the DIP. Of course, there are some exceptions, as where the DIP is displaced by a trustee.[15] For example, if a debtor files for Chapter 11 with the intent to do fraud creditors and the court, a trustee may be appointed.[16] Moreover, if the board of a debtor company engages in gross mismanagement, a trustee may be appointed.[17] Additionally, the bankruptcy code provides that if appointing a trustee is in the best interest for creditors, shareholders, or others having interests in the estate, a trustee may be appointed.[18] The term, in this provision, “interest” is not clear, so courts must determine whether a trustee may be appointed or not on a case by case basis. These cases, however, are rare, and many cases have no trustee.
C. Overview of the CRL.
The CRL was enacted to revise the Composition Law, which was enacted in 1922. The system and concept of bankruptcy under the Composition Law were not so different from the CRL. Both laws adapted Chapter 11’s “DIP” concept. However, the Composition Law had some fatal defects. The DIP system in the Composition Law was not so strict. Therefore, there was no credibility when a company filed the Composition Law proceeding with the court. In most Composition Law cases, the creditors could not trust the procedure and the debtors. As a result, the use rate of the Composition Law in bankruptcy cases was minimal.
The Composition Law had some defects that needed revision. The Composition Law had some problems from the point of view of debtors. First, when the debtor applied for bankruptcy under the Composition Law, the debtor had to predict the future and had to establish a successful negotiation condition.[19] It was very difficult for debtors to predict the future because generally an application for bankruptcy under the Composition Law reduced the sales of the debtor. Additionally, for debtors, the same reason as liquidation was necessary to file for bankruptcy under the Composition Law.[20] A debtor files for liquidation typically because the debtor cannot pay all the debts with the assets at hand. In this situation, it is too late for the company to reorganize. Furthermore, the Composition Law could not bind secured parties. Secured parties, like mortgagees, could foreclose on their collateral securities. Therefore, even if the specific asset was necessary to reorganize, the secured party who held a security on the asset could decide to foreclose on its collateral security. The Composition Law had no mechanism to stop this type of disposal of the debtors’ assets. If the asset was absolutely necessary to reorganize for the debtor, the debtor could not reorganize even if she had other assets or valuable intellectual property.
Second, the Composition Law had some problems from the point of view of creditors. Because the period that a court supervised a debtor was too short, there were many cases where negotiation plans failed. Basically, the Composition Law had no provision to supervise the negotiation plan after it was approved by the majority of creditors. Additionally, a creditor could not compel a debtor when the negotiation conditions failed because there was no procedure to fix and prove who had credits and how much credits they had. Furthermore, the Composition Law had no provision about avoidable transfers and avoiding power. The avoiding powers may be used to undo a transfer of money or property made during a certain period of time prior to the filing of the bankruptcy petition.[21] Avoiding powers are used, for example, to prevent unfair pre-petition payments to one creditor at the expense of all other creditors.[22] This avoiding power is so important to keep the equality rule between creditors. However, there is no rule about that in the Composition Law. Therefore, under the Composition Law, it was impossible to avoid the effects of preferential transactions or fraudulent transfers and it was so difficult to keep equality rule between creditors.[23]
The CRL has articles that remove these defects of the Composition Law. The CRL revised these problems of the Composition Law by borrowing concepts from Chapter 11. First, the CRL does not require submission of the exact plan or the prospects of the business. The practice of the CRL only requires a rough plan and the prospects of the business after filing. Compared with the Composition Law, the requirement is not so severe. Second, the conditions for filing under the CRL are less stringent than under the Composition Law. The conditions for filing under the CRL include (1) a difficulty to repay debts, or (2) a possibility of bankruptcy (liquidation).[24] This revision helps companies to file under the CRL before it is too late to reorganize. Third, the CRL has a provision to deny the effect of the security right in specific situations. The CRL has a system that extinguishes the security right when the court recognizes that the asset is indispensable to continue the business.[25] Under this provision, the debtor can hold the assets necessary to reorganize in exchange for cash. Fourth, in most CRL cases, the court chooses the supervisory commissions to oversee the debtors’ managements or procedures.[26] After the rehabilitation plan is approved at the meeting of the creditors, the supervisory commission must continue to oversee the management of the debtor and the repayment in accordance with the plan for at least three years.[27] This oversight by the supervisory commission helps to enforce the debtor’s execution of the rehabilitation plan. If the debtor fails to execute the rehabilitation plan, the court can end the CRL procedure and the court can order that the debtor go to liquidation.[28] Fifth, the CRL has a provision that allows the court to fix the amount of the credits of each of the creditor.[29] Once the credit is fixed under this procedure, the creditor has the power to proceed to compulsory execution without a judgment.[30] Finally, the CRL has some provisions for avoiding power.[31] Under the current CRL, the debtor or its supervisory commission can deny the effect of some types of contracts. For example, they can deny preferential assignment, attachment within 30 days from the date of insolvency, or the security’s registration which is knowingly registered more than 15 days after the attachment agreement. This avoiding power reestablishes the status quo ante.[32]
The CRL provides these sections to remove the problems of the Composition Law. Since the CRL‘s amendment, the CRL has worked better than the old Composition Law. The CRL has become one of the most useful and a commonly used procedure to reorganize a company.
III. Discussions on the difference between Chapter 11 and the CRL
Chapter 11 differs from the CRL mainly on four grounds: (1) the procedure in protecting the company’s assets, (2) the treatment of common-profit debt, (3) the existence of conditions to file a proceeding with the court, and (4) the conditions for approval of the plan. This section examines these differences in detail.
A. Protection of the company’s assets
The most important difference between Chapter 11 and the CRL is the procedure in protecting the company's assets. Filing under Chapter 11 gives the debtor the power of an “automatic stay.” On the other hand, filing under the CRL gives the debtor no power to grant an automatic stay to repay any debts.
1. Chapter 11’s protection of the company’s assets.
Basically, under Chapter 11, the court gives the debtor an automatic stay to repay any debt.[33] The court grants the debtors the effect of an “automatic stay” only upon filing under Chapter 11. Among the advantages to a debtor in bankruptcy reorganization, the most immediate is the automatic stay. Basically there is no need for the debtor to take other procedures to protect her assets. This power is the easiest and surest way to protect the debtor’s assets. The stay comes into effect automatically and instantly against many people who had no prior notice or opportunity to contest it. Unlike the normal injunction, the stay is imposed by operation of law ex parte. Additionally, actions taken in violation of the stay, even if innocent because it was without notice of the filing of a Chapter 11 bankruptcy are void or voidable.[34]
Finally, this power contributes to the creation of the equality rule between creditors because the “automatic stay” prevents specific creditors from collecting only their credits.
On the other hand, the debtor and its counsel must realize that stay litigation will be filed by creditors early in the case and that the court must act on a request to lift the stay within 30 days or it will automatically be lifted as to the requesting creditor’s collateral.[35] They must also be aware that the burden will be on the DIP to show the existence of adequate protection for the secured party’s interest in the collateral.[36]
This automatic stay power significantly affects all creditors because, as a general rule, there is no way for creditors to collect their credits. On this point, to balance the rights between debtors and creditors, Chapter 11 provides relief from the stay. The Chapter 11 automatic stay provision provides such relief from the stay, as the termination, modification, conditioning, or annulment of the stay; on request of a creditor in interest and after notice and a hearing, the court is required to grant relief from the stay for cause, including the lack of adequate protection of an interest in property of the requesting party.[37]
2. The CRL has a different procedure to protect the company’s assets.
Under the CRL, a court does not have power to grant an automatic stay to repay debt. Therefore, filing bankruptcy under the CRL creates the possibility that the debtor’s assets may dissipate if the creditors take the assets under the “first come, first serve.” rule. If this situation is allowed, the equality rule between debtors and creditors cannot be achieved and a reorganization of the debtor becomes impossible. The CRL provides for a different procedure to stop payment or avoid forcible executions. Under the CRL, the debtor must file a provisional deposition asking the court to prohibit the company from repaying any debts.[38] In practice, the debtor’s counsel generally files the provisional deposition at the same time as the filing of the CRL proceeding. The use of this provisional deposition prevents the debtor’s assets from dissipating.
B. Use of the debtor-in-possession finance.
There is a difference in treatment of common-profit debt between Chapter 11 and the CRL. This difference affects on whether the debtor-in-possession finance (DIP finance) is often used.
1. Characteristics of the treatment of preferential debts under Chapter 11.
Chapter 11 has an order of precedence between common-profit debts. The DIP finance has super-priority after a Chapter 11 filing. DIP finance aims at providing convenient supply of money to a reorganizing company, making the reconstruction procedure a positive one. More specifically, under Chapter 11, the DIP finance creditor can get super-priority if the debtor cannot reorganize.[39] This means that if the debtor goes to litigation, the court will give the DIP finance creditor first priority to collect its credits.
Additionally, the DIP finance creditor can get a priming lien.[40] This priming lien is a system under which the court allows giving the creditor of the DIP finance a lien, which has priority to the old lien. The creditor of the DIP finance secures her credit by establishing a new lien, which is prior to other creditors or mortgage holders.
These provisions enable DIP finance companies and banks to finance reorganizing creditors. Generally, companies under Chapter 11 need cash because the sales of most Chapter 11 applicants decrease after filing. These provisions help the creditor to obtain DIP financing easily. The DIP financer can furnish funds to the debtor with a sense of security.
2. Treatment of preferential debt under the CRL.
The CRL differentiates between priority creditors and general creditors.[41] There is, however, no order of precedence among priority creditors. Thus, if the company fails to recover and goes into liquidation, preferential debts will be repaid pro rata. Of course, the DIP financer’s credit is classified under preferential credit.[42] There is no super-priority and no priming lien. This system itself is one reason that DIP finance has not spread over Japan.
C. There are significant differences between Chapter 11 and the CRL in the conditions for filing with the court.
1. There is no condition for filing under Chapter 11.
A company can file under Chapter 11 whenever it decides. There are no set requirements. Therefore, Chapter 11 can be used by all types of companies. It is not necessary that the debtor has some difficulty repaying its debts.
2. There is a condition for filing under the CRL.
The CRL, on the other hand, provides some condition for filing a CRL bankruptcy with the court. The CRL requires that a company must have (1) difficulty in repaying all debts by its assets, or (2) facts the possibility of bankruptcy (liquidation).[43] Therefore, even if the debtor files a CRL proceeding with the court, the court must examine whether there is difficulty in repaying debts, or whether there is a possibility of liquidation. If the court determines that the debtor does not satisfy any conditions, the court will not allow a CRL proceeding.
D. Conditions for the plan to obtain approval
1. Chapter 11 conditions for plan approval
Under Chapter 11, the reorganization plan can be approved by an agreement with creditors. The agreement must consist of at least two-thirds in amount and more than one-half in number of creditors.[44]
2. The CRL conditions for rehabilitation plan approval
The CRL, on the other hand, requires at least more than one-half in number and in amount of creditors of attendance the meeting.[45]
IV. Discussion on procedure
This part discusses which procedure is better, Chapter 11 or the CRL. There are some differences between Chapter 11 and the CRL as stated above. Examining these differences, this part will discuss which one is the better procedure.
A. Protection of a company’s assets
1. Chapter 11’s protection of a company’s assets.
The most advantageous point under Chapter 11 is that there is no need to file for an additional procedure to protect the company’s asset. The procedures are easy and more understandable. At the time of filing under Chapter 11, the automatic stay takes effect. The automatic stay power is so strong that all creditors are restricted. Of course, the automatic stay provision is not absolute. There is a relief procedure from the stay as stated above. Additionally, a long list of exceptions to the stay is provided to some creditors.[46] However, these exceptions are often narrowly construed. In addition, the broad powers under § 105 may be invoked to extend the reach of the stay even further.[47]
There is, however, a possibility that a company uses Chapter 11 only to protect its assets. Every company can file for Chapter 11 bankruptcy. The automatic stay is granted naturally even in cases where there is no need to protect the company’s assets. The automatic stay also gives all creditors a serious remedy for recovery after lifting the stay. There is a possibility that the automatic stay may be abused.
2. CRL’s protection of a company’s assets.
The most advantageous point under the CRL is that the court determines whether it is necessary for the court to protect the company’s assets by ordering a provisional disposal. The CRL has no automatic stay. The court determines the necessity of protecting the company’s assets on a case by case basis. Some cases may not need the protection of the companies’ assets. The CRL can treat those cases in ways that suit them best.
On the other hand, the CRL has a more complicated procedure than Chapter 11. The debtor and its counsel must file another procedure, a provisional deposition, asking the court to prohibit the company from repaying any debts. The counsel should especially pay attention to this procedure and the debtor’s assets. If the counsel thinks that it is necessary to protect the debtor’s assets, he or she should file the provisional deposition. This means the counsel should investigate the financial statements particularly before the debtor files the CRL with the court.
Additionally, this provisional deposition has power only to stop a debtor’s repayment to creditors, sales of assets, or other dispositions of the assets. Therefore, the provisional deposition cannot stop litigation, foreclosure on securities, or compulsory executions. It is necessary to file another procedure to stop compulsory executions or litigations by creditors. This additional procedure involves ordering a suspension of compulsory executions or litigations.[48] It is also necessary to file another procedure to stop foreclosure on securities by secured parties. This procedure involves ordering a suspension of the foreclosure on the security.[49] If these ordered suspensions are not enough to achieve the purpose of the reorganization, the court can comprehensively ban the creditors from any actions of collection.[50] This procedure’s effect is simpler than the automatic stay. The court in the end examines the necessity of the order more carefully than the provisional deposition.
3. Which is the better procedure?
In practice, there is no outstanding difference between Chapter 11 and the CRL because applicants under the CRL usually file a provisional deposition. Though the provisional deposition does not have the same power as Chapter 11’s automatic stay, the debtor can protect their minimum needed assets, especially cash. There are provisions in the CRL that have a similar effect to the automatic stay of Chapter 11. Depending on how the debtor and its counsel use the CRL, it has the same effect as an automatic stay.
For the following reasons, however, the CRL is a preferable procedure. The automatic stay has too strong an effect on all creditors. Surely, the automatic stay is one of the most effective and easiest ways to protect a debtor’s assets. In Japan, there is an ongoing debate as to whether the automatic stay should be introduced into Japanese bankruptcy law. But, there is no rationale for the necessity of the automatic stay. Considering the impact on creditors, the court should at least examine the necessity of the automatic stay. In fact, Japanese bankruptcy law did not yet adapt the automatic stay because Japanese legislators thought that granting an automatic stay to debtors was extravagant. On this point, the CRL provides a better procedure.
B. Treatment of common-profit debt.
1. Chapter 11’s treatment of a common-profit debt
The most advantageous point for Chapter 11 is that it is easy for a company to get cash by using the DIP finance. In business, cash is often compared to the blood of a human body. Making it easy to get cash by using DIP finance after filing Chapter 11 bankruptcy is an advantageous system for a reorganizing company. Chapter 11’s super-priority and primary lien characteristics create a favorable environment for the debtor to aggressively use DIP finance.
Additionally, it is easier for creditors to predict whether they can collect their credits under Chapter 11 than under the CRL. The DIP financer can lend money to the debtors with ease of mind because the financer can get super-priority and a priming lien. The reorganizing company also has more assets, and a more easy to use DIP finance.
On the other hand, Chapter 11 might increase the sense of unfairness among common profit creditors. As a general rule, the prior mortgagee has a right to collect its credits from the mortgage property prior to others following mortgagees or non-mortgage creditors. However, after filing a Chapter 11 bankruptcy, the priority may be reversed with a priming lien. The order among the creditors is stable. Additionally, after filing a Chapter 11 suppliers to the debtor have common-profit credits, but they have no super-priority. Cash has super-priority, but goods have no super-priority. However, both cash and goods are absolutely necessary for the debtor to reorganize. This seems unfair.
2. CRL’s treatment of a common-profit debt
The most advantageous feature of the CRL is that there is absolute fairness among common-profit creditors. Every common-profit creditor can equally collect their credits on a pro-rata basis if the debtor cannot reorganize and goes into liquidation.
On the other hand, it is difficult for a company to use the DIP finance. It is not so fashionable to use the DIP finance among reorganization companies in Japan. There are many reasons: (1) the DIP finance’s interest rate is too high for the reorganizing companies; (2) after the DIP financers strictly investigate the reorganizing companies’ assets, the financers often withdraw their offer because the asset situation of the debtor is too bad to finance; and (3) Japanese banks may believe that banks should not give insolvent debtors a chance to reorganize. Unlike the United States’ economic system, the Japanese economy system is too strict for insolvent debtors to start over.
Also, it is more difficult for common creditors to predict whether they can be repaid. For normal common-profit creditors, it is difficult to keep up with the debtor’s assets situation. Therefore, it is almost impossible to know exactly whether they can collect all their credits or, if not, how much they can collect.
3. Which is the better procedure?
Chapter 11 is a preferable procedure because it can promote the DIP finance. Japanese bankruptcy law should develop favorable environments for reorganizations. Reorganization absolutely requires sufficient cash to continue the operation of the company. However, generally speaking, a company filing under the CRL faces a shortage of funds because the news of filing triggers credit insecurity for the company. Even though there is no reason to stop payment, the debtors of the company sometime refuse to pay their debts.[51] Therefore, the company cannot collect their sales proceeds satisfactorily. Additionally, in general, banks never agree to grant a new loan to the company. The company has to operate the business in such a severe atmosphere. Considering the situation, the DIP finance is so invaluable for a company filing under the CRL.
Surely, in today’s Japan, there are some investment companies and banks that accept DIP finance. Most of them are foreign-capitalized companies. They take risks since the debtor has a high possibility of going into liquidation. Therefore, the interest rate of the DIP finance is uniformly high. DIP financers want to offset the risks with a high return. If the CRL has the same systems as the super-priority and the priming lien, the DIP financer can furnish funds to the debtor more aggressively. Additionally, as a result of such a system, the interest rate for the DIP finance will be reduced. Moreover, there is a possibility that Japanese banks, which show less appetite for DIP finance, might start accepting DIP finance. To revive the Japanese economy, it is necessary to promote reorganizations. Therefore, Chapter 11’s super-priority and priming lien are better procedures than the CRL.
C. Condition for filing with the court.
1. Chapter 11’s condition
It is easy for a company to file Chapter 11 because there is no condition to file with the court. Any reason, like shortage of cash or a possibility of going into bankruptcy, is not necessary for Chapter 11. Therefore, sometimes a company that owes enormous damages, files for Chapter 11 because the damages are too heavy to compensate. In the United States, a court often determines that a company should pay heavy damages including punitive damages.
However, there is a potential for abuse of this procedure. All companies can file for Chapter 11 with a court whenever the company determines. Therefore, there is a possibility that a company may unnecessarily file for Chapter 11. Filing for Chapter 11 has the power of an automatic stay. However, the unnecessary use of Chapter 11 causes all the creditors of a company great inconvenience and trouble.
2. CRL’s condition
The most advantageous aspects of the CRL is that the court can determine whether it is necessary to file for the CRL. The court examines the company’s financial situation and determines whether (1) there is difficulty in repaying debts, or (2) there is a possibility of going into bankruptcy. This procedure prevents the debtor from needless filing of a CRL.
On the other hand, this procedure of examining the company’s financial situation takes time. Therefore, there is a time log between the filing of the CRL and the start of the procedure (or provisional disposition). Sometimes, this time log makes it impossible to reorganize because if news of the filing of a CRL is out, the creditors of the company may cause a disturbance and rush to collect their credits.
3. Which is the better procedure?
Considering the effects to creditors, the CRL has a better procedure. The effect of filing under Chapter 11 is an automatic stay, which adversely impacts all creditors. Also, the needless filings under Chapter 11 have the same effects of overprotecting debtors. At the very least, the court should examine whether it is necessary to grant an automatic stay. Surely, there is a disadvantage in the time log and the court’s examination makes it more impossible to reorganize. This problem, however, can be avoided by the court by examining the finances of the company. In practice, the court examines whether there is a minimum necessity to file the CRL. This takes two to three days. In this examination, it is possible to prevent the debtor from unnecessarily filing the CRL. Therefore, the CRL has a better procedure than Chapter 11.
D. Conditions for approval of the plan
1. Chapter 11’s conditions for approval of the plan
Chapter 11’s condition to approve the plan is severe because the creditors’ right is weak through the entire procedure. Balancing between the debtor’s strong status and the creditors’ weak rights, Chapter 11 establishes a more severe condition to approve the plan than the CLR. On the contrary, the disadvantage of Chapter 11 is that it is difficult for the debtor to get the plan approved.
2. CRL’s condition for approval of the plan
The advantage and disadvantage in the CLR are completely contrary to Chapter 11. In other words, it is easier for the debtor to get approval of the rehabilitation plan under the CLR than Chapter 11. Through the entire CRL procedure, the debtor’s status is weak and creditors’ right is stable to some extent. Additionally, the CRL offers much more court participation in the procedure than Chapter 11. The court usually supervises the CRL procedure through a supervisory commission, and in some cases through an administrator.
3. Which is the better procedure?
It is difficult to determine which procedure is better in general because both laws attempt to balance the status between the debtor and the creditor. This determination depends on which law’s essence is suitable for the country.
The CRL’s procedure matches the needs of Japan. Even though reorganization is recognized as one major type of bankruptcy cases, number of cases is still less than that of liquidation. It is necessary to promote the reorganization in today’s Japan rather than liquidation because reorganization is more useful than liquidation from the view of economics. This need match the CRL’s provision. On the other hand, traditional thinking about Japanese bankruptcy, which a creditor is absolutely stronger than a creditor, matches the strong status of creditors through the entire procedure. Therefore, the CRL’s concept and procedure is better for Japan than Chapter 11.
V. Conclusion
The CRL is better for a Japanese company than Chapter 11, even though Chapter 11 has some advantageous points.
Generally, the most outstanding difference between Chapter 11 and the CRL is whether the court engages itself positively in the case or not. In Chapter 11, the supervision by the court is not severe. The DIP, the basic concept of Chapter 11, covers all the procedures. Therefore, the court does not actively participate in governing the procedure. For example, the court does not examine the reasons of filing Chapter 11. Additionally, the court does not examine the necessity of an automatic stay, and the court generally does not designate a trustee to supervise the procedure. Of course, Chapter 11 thinks about the general supervision of the procedure. The judge appoints a creditors’ committee to supervise the procedure.[52] There is normally supposed to be at least one creditors’ committee.[53] The creditors’ committee has the power to investigate the reason for bankruptcy. In addition, this committee has the right to make the debtor counsel about the plan with the committee. The CRL also has the system of creditors’ committee.[54] The creditors’ committee in the CRL has the power to offer an opinion on the rehabilitation plan or to demand a report from a debtor.[55] But the committee has no power to examine the reason that the debtor files for the CRL, and to ask the counsel about the rehabilitation plan. The power of the committee is not strong as in Chapter 11. Therefore, the role of the committee in Chapter 11 is more important than that of the CRL.
On the other hand, in the CRL, the court generally engages itself positively in the case. The court determines the necessity of the provisional deposition to protect the company’s assets or of filing for the CRL. The court generally supervises the procedure through the supervisory commission. This supervisory commission should not be a creditor of the company. Generally, the court appoints a lawyer who has no interest in the company as the supervisory commission. And this supervisory commission works in close cooperation with the court to supervise the procedure. In practice of the CRL, the debtor’s counsel, the judges of the bankruptcy court and supervisory commission hold meeting in the court many times. In this meeting, the debtor reports the business condition and financial statement (especially cash flow statement), main creditors’ opinion about the rehabilitation plan. And the supervisory commission also reports main creditors’ opinion about the rehabilitation plan, and the fact that the supervisory commission should use the avoiding power. The court advises the debtor’s counsel about the plan to be approved at the meeting of the creditors, and determines whether the court grants the supervisory commission the avoiding power. When the court grants the supervisory commission the avoiding power, the supervisory commission makes a litigation to deny the transaction between the debtor and the other party. In this manner, through the entire procedure of the CRL, the court engages itself positively. The court, in general, supervises from a neutral standpoint. Sometimes, however, the court advises the debtor in making a rehabilitation plan when the reorganization is better for majority of creditors.
In Japan, a debtor filing for the CRL has little credibility. The Japanese traditional sense on the bankruptcy is negative. Bankruptcy is thought of as a kind of crime. Therefore, creditors cannot believe the debtor who files for any kind of bankruptcy. As a result of this thought, the DIP of the United State itself could not expand in Japan.
By contraries, in Japan, the court has high credibility. Lawyers’ general credibility is also high. Recently, the CRL was accepted in the Japanese economic system because both the court and the lawyers supervise the procedure in the CRL. Creditors take some comfort from the fact that the court supervises the procedure. That comes from Japanese traditional thought, putting all of one's trust in the government. Generally, the Japanese do not fight the government. The CRL considers these thought of Japanese creditors, and introduced the DIP concept to fit with Japanese notions of the law and bankruptcy. Therefore, the role of court under the CRL is more important than under Chapter 11.
Additionally, in Chapter 11, the creditor’s right is not so strong. Chapter 11 has an automatic stay system without examining the necessity of a stay. The Japanese traditional sense of economy is that generally creditors are stronger than debtors. Creditors enjoy an overwhelming advantage in business. Therefore, banks are of high social and economic standing in Japan. From this point of view, Chapter 11, where the creditor’s power is stronger than that of the debtor, cannot apply in Japan. Therefore, an automatic stay is the excessive power for the debtor in Japan. At least, the examination of the necessity of the stay is necessary.
On another front, Chapter 11 has superior characteristics in treatment of DIP finance; the super-priority and the priming lien. These systems should be introduced to the CRL. Now, Japanese bankruptcy changes from liquidations to reorganizations. From an economic view, reorganization is easier and more useful than liquidation. A company is one organization in the economy. It is more useful, convenient and economic to reuse the existing organization than to start a business from cold. Surely, there are some cases that are difficult to reorganize. However, it is a shame to let an opportunity to reorganize just pass because of a shortage of cash. Many companies in Japan could not avoid liquidation because of its shortage of cash, even if they have special skill, intellectual property or know-how to reorganize. Also, a company’s liquidation creates unemployment. If the company’s size is bigger, unemployment becomes bigger. Therefore, if the company has room to reorganize, liquidation should be avoided.
In this manner, the government should promote reorganization more than liquidation. In this regard, the DIP finance is very useful for reorganization. Promoting DIP finance needs the system like Chapter 11’s super-priority or priming lien. These systems of Chapter 11 are a model for the CRL to emulate. If these systems are introduced to the CRL, they might go against the Japanese traditional economic thought. The necessity of reorganization, however, is more important than that thought in today’s Japan. While the CRL is ideal for the Japanese economy, characteristics of the Chapter 11, super-priority and priming lien, should be introduced to the CRL.
[1] Teikoku Date Bank, Company Bankruptcy in Japan 2004, http://www.tdb.co.jp/tosan/ jouhou.html (last updated 2005).
[2] Id.
[3] The Corporate Rehabilitation Law § 168(5) (2003) (Japan).
[4] The Civil Rehabilitation Law § 155(2) (2000) (Japan).
[5] Id. at §§ 64-66.
[6] Cabinet Office of Japan, Trend of World Economy, http://www5.cao.go.jp/j-j/sekai_choury uu/sh03-01/sh03-01-02 -01.html (last updated Apr. 2004).
[7] 11 U.S.C.A. § 1126 (1978).
[8] Cabinet Office of Japan, Trend of World Economy, http://www5.cao.go.jp/j-j/sekai_choury uu/sh03-01/sh03-01-02 -01.html (last updated Apr. 2004).
[9] Elizabeth Warren, The Law of Debtors and Creditors 514 (4th ed., Aspen 2001).
[10] 11 U.S.C.A. §§ 1107-1108 (1978).
[11] Id. at §§ 105, 362
[12] Cabinet Office of Japan, Trend of World Economy, http://www5.cao.go.jp/j-j/sekai_chouryuu/sh03-01/sh03-01-02-01.html (last updated Apr. 2004)
Elizabeth Warren, The Law of Debtors and Creditors 507-509 (4th ed., Aspen 2001).
[13] Bankruptcy Action.com, Bankruptcy Dictionary, http://www.bankruptcyaction.com/ bankruptcydictionary.htm (last updated Mar. 11 2005).
[14] Michael J. Herbert Understanding Bankruptcy 61 (Matthew Bender, 1995).
[15] Michael J. Herbert Understanding Bankruptcy 312 (Matthew Bender, 1995).
[16] 11 U.S.C.A. §§ 1104 (a) (1) (1978).
[17] Id. at § 1104 (a) (1).
[18] Id. at § 1104 (a) (2).
[19] Composition Law § 18 (1922) (Japan).
[20] Id. at § 12. Bankruptcy Act § 126 (1922) (Japan).
[21] Bankruptcy Action.com, Bankruptcy Dictionary, http://www.bankruptcyaction.com/ bankruptcydictionary.htm (last updated Mar. 11 2005).
[22] Id.
[23] Especially, in general, the debtor’s bankers well knew the financial situation of the debtor. As the result, the bankers (even though the main bank of the debtor) establish security in a hurry before filing for the Composition Law.
[24] The Civil Rehabilitation Law § 21 (2000) (Japan).
[25] Id. at § 148.
[26] Id. at §§ 54-61.
[27] Id. at §§ 186, 188.
[28] Id. at §§ 189, 194, 249.
[29] Id. at §§ 99-113.
[30] Id. at § 104 (3).
[31] Id. at §§ 127-131.
[32] The Civil Rehabilitation Law § 132 (2000) (Japan).
[33] 11 U.S.C.A. §§ 105, 362 (1978).
[34] Elizabeth Warren, The Law of Debtors and Creditors 515-516 (4th ed., Aspen 2001).
[35] Id. at § 362(e).
[36] Id. at § 362(g). Elizabeth Warren, The Law of Debtors and Creditors 515 (4th ed., Aspen 2001).
[37] 11 U.S.C.A. §§ 362 (a), 301-303 (1978). 9C Am. Jur. 2d Bankruptcy § 2291.
[38] The Civil Rehabilitation Law § 30 (2000) (Japan).
[39] 11 U.S.C.A. § 364(c) (1978).
[40] Id. at § 364(d).
[41] The Civil Rehabilitation Law §§ 119-123 (2000) (Japan).
[42] Id. at §§ 119-120.
[43] Id. at § 21.
[44] 11 U.S.C.A. § 1126 (1978).
[45] The Civil Rehabilitation Law § 712-3 (2000) (Japan).
[46] 11 U.S.C.A. §362(b) (1978).
[47] Elizabeth Warren, The Law of Debtors and Creditors 518 (4th ed., Aspen 2001); see also United States v. Seitles 106 B.R. 36 (S.D.N.Y. 1989).
[48] The Civil Rehabilitation Law § 26 (2000) (Japan).
[49] Id. at § 31.
[50] Id. at § 27.
[51] Of course, this failure to pay is illegal as a breach of contract.
[52] 11 U.S.C.A. § 1102 (a) (1) (1978).
[53] Michael J. Herbert, Understanding Bankruptcy 308 (Matthew Bender, 1995).
[54] The Civil Rehabilitation Law §§ 117-118-3 (2000) (Japan).
[55] Id. at §§ 117-118