Permission for Extinguishment of Security Interests
In insolvency proceedings, the most important restriction imposed on security interests is the permission for extinguishment.
In bankruptcy proceedings, if it is in the common interests of bankruptcy creditors to extinguish the security interests and sell the collateral, the bankruptcy trustee may file a petition with the court seeking permission for extinguishment of security interests. If successful, the security interests will be extinguished once a sum is received by the court.
In civil rehabilitation proceedings, if the collateral is indispensable to the continuation of the rehabilitation debtor’s business, the rehabilitation debtor or trustee may file a petition with the court seeking that the extinguishment of security interests be terminated by paying the amount of money equivalent to the value of the collateral.
In corporate reorganization proceedings, upon the petition of a trustee, if the court finds that it is necessary for the reorganization, it may order that all security interests that exist on the collateral be extinguished by paying to the court the amount equivalent to the value.
Title-based security holders as well as secured creditors are subject to extinguishments of their interests.
Stay of Exercise
In corporate reorganization proceedings, once an order of commencement of proceedings is made, commencements of exercise of security interests are not allowed; proceedings for exercise that have been initiated are stayed.
In civil rehabilitation proceedings, secured creditors are generally allowed to exercise their security interest; however, if it conforms to the common interest of rehabilitation creditors and is not likely to cause undue damage to the secured creditor, the court may order the stay of exercise of the security interest.
These rules apply to title-based security holders as well as secured creditors.
Haruna Fujisawa (Ph.D in Law) is a Professor at the College of Law and Politics of Rikkyo University, Japan. She teaches courses on the Civil Code. Her main research subject is secured transactions law.