Since the start of the COVID-19 pandemic, as in many other countries around the world, Japan has seen an increase in the number of businesses that have experienced serious cash flow problems. However, the number of bankruptcy and insolvency cases in Japan has not necessarily increased in the same way due to the level of support provided by the Japanese government and the banking industry. For example, with government encouragement, banks have taken action to reschedule corporate debt repayments and provide new business loans. The government itself has also positively rescheduled the tax payments imposed on companies facing capital problems and provided various subsidies so that these companies can continue to operate.
Despite their best efforts, the Japanese government and the banking industry cannot support all businesses indefinitely. Additionally, many of the supported companies now have, ironically, excessive debt problems. In order to face their current cash flow challenges, many companies will need to think about how to fundamentally revamp their business models. For example, many restaurants don’t expect to reach pre-COVID-19 attendance levels in the short term and instead look to the restaurant industry. This type of fundamental change in business is not easy, and many may consider winding up their business or, at worst, filing for bankruptcy. Therefore, many restructuring professionals in Japan (e.g. lawyers, CPAs, and tax accountants) predict that the number of bankruptcy and insolvency cases in Japan will increase in the near future.
II. Overview of Japanese restructuring and insolvency proceedings
The Japanese restructuring includes out-of-court proceedings and legal proceedings.
There are several forms of out-of-court proceedings in Japan which all follow the same basic rules. In principle, a debtor will stop repaying its bank loans, which will be the subject of negotiations and the development of a separate repayment plan, but will continue to pay all other debts in accordance with its obligations. The repayment plan will include remission or rescheduling of debts owed to banks provided that, if the repayment plan includes remission of unsecured debts, the total repayment amount for each bank under the repayment plan must be greater than to the amount of the distribution that would otherwise be received in a bankruptcy. The procedure is closed with only the banks and the debtors involved, and the repayment plan only becomes binding if all the banks agree.
On the other hand, in the case of civil pardon proceedings (i.e. a major form of court proceedings and debtor seizure proceedings in Japan), a debtor is obliged to stop essentially all payments, including bank loans and all other debts and obligations prior to certain exceptions, such as taxes and employee salaries. The repayment plan (i.e. the rehabilitation plan) will include the forgiveness of previous debts and obligations in respect of which the debtor is obligated to stop payments. The repayment amount in accordance with the repayment plan must be greater than the distribution amount that would otherwise be received in the event of bankruptcy. For the repayment plan to be binding on the parties, the consent of the majority of voting rights holders and at least half of the total amount of voting rights is required, as well as court approval. The consent of all creditors is not required. Finally, legal proceedings take place in public.
Since the business value of a debtor is more easily retained due to the closed nature of out-of-court proceedings compared to court proceedings, debtors typically attempt to pursue out-of-court proceedings at first instance. If extrajudicial proceedings are not possible, the debtor will consider legal proceedings. In general, restructuring may involve the sale of the debtor’s business through extrajudicial and judicial proceedings. In Japan, a significant number of restructuring cases result in the sale of the debtor’s business.
If the debtor cannot initiate civil reorganization proceedings, he will be forced to initiate bankruptcy proceedings. In bankruptcy proceedings in Japan, a trustee is appointed by the court to liquidate all assets and, to the extent possible, make distributions on previous debts. The debtor company ceases to exist after the conclusion of the bankruptcy proceedings.
III. Outlook for COVID-19 Debtors and Debtor Business Buyers
As a result of the support described above, excessive debt, including tax debts and overdue loans made after the onset of COVID-19, created additional restructuring barriers for debtors. For example, a debtor is required to pay taxes as part of a civil rehabilitation proceeding, which means that if a debtor owes excessive taxes, he may not be able to initiate out-of-court proceedings or proceedings. of civil rehabilitation, and will have no other choice but to file for bankruptcy.
Late bank loans made after the onset of COVID-19 can also raise problems for debtors trying to restructure their businesses. Many banks that provide such late bank loans expect to be treated as a senior creditor. Ideally, the debtor and the banks should agree on the priority and treatment of the new loan before the execution of the overdue bank loan; however, this is not always the case. This kind of situation can make it difficult for debtors to successfully obtain the required consent from all banks in out-of-court proceedings.
In addition, many debtors are forced to initiate bankruptcy proceedings because they cannot complete the restructuring proceedings due to insufficient capital or their inability to prepare a satisfactory repayment plan to obtain the bankruptcy. consent of creditors required.
In light of the above trends, it is important that debtors consider their restructuring options and consult with experienced professionals as early as possible. The sooner a debtor considers restructuring, the easier it will be to complete the restructuring process. If a debtor plans to restructure several months before finding himself unable to make his monthly repayments, he has time to negotiate in an amicable procedure; But if a debtor only considers restructuring one day before they are unable to pay the majority of their debts and obligations, it may be difficult to initiate extrajudicial proceedings and, at worst, they will not have no choice but to file for bankruptcy at that time. The process of selling a debtor business also typically takes several months.
(ii) Buyers of debtor companies
Restructuring a debtor is also an opportunity for an acquirer to buy out the business from the debtor. It is important to offer the appropriate consideration for the business, as the debtor will have to pay some debts and obligations using the consideration paid by the buyer. These debts and obligations include secured debts and unpaid taxes and wages.
In the case of out-of-court proceedings, in addition to the payment of secured claims and unpaid taxes and wages, the debtor is generally required to use the remaining consideration to pay all other debts and obligations (except bank loans) and a certain portion of outstanding unsecured bank loans. The payment of unsecured bank loans must be at least more than the amount that would be distributed in the event of the debtor’s bankruptcy. Liquidation fees and expenses must also be paid in full if the debtor liquidates and sells the entire business. Usually, the consent of all banks is required to purchase the debtor’s business. The buyer should also take into account the alleged risk of cancellation in the context of subsequent legal proceedings arising after the closing of the business transfer.
In the event of civil reorganization proceedings, as mentioned above, unsecured debts of the debtor may be partially written off provided that the amount repaid is at least greater than what would otherwise be distributed in bankruptcy proceedings. Post-petition claims, however, must be paid in full. The process of obtaining consents or hearing unsecured creditors prior to the transfer of the debtor’s business will depend on the structure of the business transfer. If the debtor includes the business transfer provided for in the repayment plan, the consent of the majority of creditors and at least half of the total amount of voting rights is required. On the other hand, court approval is required if the debtor plans to finalize the business transfer before finalizing the repayment plan. The court will decide whether or not to approve the business transfer after having convened a hearing with the creditors and certain other parties related to the proposed business transfer.
If a debtor cannot meet the above requirements to sell the business through out-of-court or civil reorganization proceedings, they may still be able to sell the business through bankruptcy proceedings. However, a business transfer in bankruptcy proceedings tends to have difficulty retaining the value of the business.
If the debtor can identify a buyer before the restructuring process begins, debtor restructuring becomes much easier as creditors, suppliers and customers will be less concerned about potential continuity issues resulting from the restructuring. That said, care should be taken to ensure that the buyer is identified through appropriate means, such as an auction process. If the buyer is identified by other means and the debtor subsequently initiates legal proceedings, the court and creditors may require the debtor to take appropriate means at that time to confirm the suitability of the buyer. Regarding out-of-court proceedings, it is important that the sale of the business is accepted by all banks.
Restructuring and insolvency cases are expected to increase in Japan in the near future, and under the current circumstances of COVID19, restructuring may prove more difficult for the various reasons outlined above. Debtors would be well advised to consider restructuring as soon as possible in order to ensure sufficient capital and time to find, negotiate and implement the best restructuring plan with creditors and / or to find the most suitable buyer. appropriate.
Buyers of debtor businesses should carefully assess the target business and come up with an appropriate price after taking into account any additional considerations under the current circumstances. Buyers should also be aware that distressed businesses can also be acquired in bankruptcy proceedings as well as out-of-court and civil reorganization proceedings, although this can pose additional challenges in a proceeding. bankruptcy. Buyers would benefit from knowing all the options available when considering acquiring a struggling business in today’s market.