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Enforcement

Enforcement of Title-Based Security

Title-based security holders can repossess collaterals if debtors default. Furthermore, according to the security agreements, they may sell or evaluate the collateral and apply it to their debt.

In contrast, the Civil Code states that security holders may not repossess the collateral; however, they may exercise their security interest only through the court proceedings provided by the Civil Execution Act (Minji Sikko Ho).

Liquidation Duty

In Japanese law, however, title-based security holders are at a disadvantage compared with the rights provided to secured creditors in the Cape Town Convention. The Supreme Court restricts the rights of title-based security holders in two ways.

First, a liquidation duty is imposed on a title-based security holder. If the value of collateral is larger than the amount of the balance due, then the security holder must pay the surplus to the debtor.[1]

In practice, there are two methods of liquidation. First, there is an “acquisition- of-ownership liquidation,” where title-based security holders may acquire complete ownership and appraise the collateral. If the value of collateral is larger than the balance due, the security holder must pay the surplus to the debtor. If the price of collateral is smaller than the amount of the balance due, then the security holder must notify the debtor that there is no surplus.

Second, the “sale liquidation” method allows a title-based security holder to sell the collateral and acquire the proceeds. If the price of collateral is larger than the amount of the balance due, the security holder must pay the surplus to the debtor. If the price of collateral is smaller than the amount of the balance due, the security holder must notify the debtor that there is no surplus.

Title-based security holders may choose the more convenient method.

Debtor’s Right to Recover the Collateral

Second, debtors have an opportunity to recover ownership of the collateral after a default.[2] The debtor may pay the balance due and acquire complete ownership of the collateral until either of the following events occurs: first, in the cases utilizing the acquisition-of-ownership liquidation method, until the title-based security holder pays the surplus or provides notice that there is no surplus; and, second, in the cases of sale liquidation, until the title-based security holder sells the collateral to a third party.[3]

Clauses that attempt to contractually grant a creditor the right to acquire the collateral immediately in the event of a default are considered to be invalid.

  • [1] Supreme Court, March 25, 1971, Minshu Vol.25, No.2, p.208.
  • [2] Supreme Court, January 22, 1982, Minshu Vol.36, No.1, p.92.
  • [3] Supreme Court, February 12, 1987, Minshu Vol.41, No.1, p.67.
 
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