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Insolvency Proceedings

Three Types of Insolvency Proceedings

In Japan, there are three main types of insolvency proceedings: bankruptcy proceedings, civil rehabilitation proceedings, and corporate reorganization proceedings.

Bankruptcy proceedings are liquidation proceedings; however, civil rehabilitation and corporate reorganization proceedings are reorganization proceedings.

Civil rehabilitation proceedings are basically debtor-in-possession procedure, and are appropriate for reorganizations of relatively small companies and individuals. Characteristically, civil rehabilitation proceedings allow secured creditors to exercise their security interest outside of the proceedings. In contrast, corporate reorganization proceedings involve large companies.

Treatment of Security Interests in Insolvency Proceedings

In bankruptcy proceedings and civil rehabilitation proceedings, secured creditors are thought to have “the right of separate satisfaction.”[1] The security interests are exercised outside of the proceedings. In contrast, in corporate reorganization proceedings, secured creditors are thought to have “secured reorganization claim.”[2] The secured creditors are prohibited from exercising their security interests and are repaid through the proceedings.

Property possessed but not owned by the debtor is not affected by the commencement of insolvency proceedings. That property owner may segregate their property from the estate.[3]

Although title-based security holders nominally have ownership, they actually are secured creditors. Therefore, the Supreme Court has found that they have “the rights of separate satisfaction” or “secured reorganization claims” in insolvency proceedings.[4]

Article 65(1) of Bankruptcy Act (Hasan Ho) states, “The right of separate satisfaction may be exercised without going through bankruptcy proceedings.”

In stark contrast to the rules of Cape Town Convention, in the Japanese law, even title-based security holders are restricted in exercising their security interests through the insolvency proceedings.

  • [1] Article 2 (9) of Bankruptcy Act (Hasan Ho) states, “The term “right of separate satisfaction” asused in this Act means a right that a person who holds a special statutory lien, pledge, or mortgageagainst property that belongs to the bankruptcy estate may exercise at the time of commencementof bankruptcy proceedings pursuant to the provision of Article 65(1) against the property that is thesubject matter of these rights.”
  • [2] Article 2(10) of Corporate Reorganization Act (Kaisha Kosei Ho).
  • [3] Article 62 of Bankruptcy Act (Hasan Ho), Article 52(1) of Civil Rehabilitation Act (Minji SaiseiHo), Article 64(1) of Corporate Reorganization Act (Kaisha Kosei Ho).
  • [4] Supreme Court, April 28, 1966, Minshu Vol.20, No.4, p.900.
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