Debt Recovery in Japan

• Japan's accounting system is outstanding with only a handful of invoices left unpaid due to strong cultural peculiarity. Excessive DSOs and major differences in compensation can, nevertheless, be found from one industry to another.

• While domestic courts tend to be fairly efficient in delivering timely judgments, tribunals are time-consuming, costly and complex. Hence it is essential to conduct well-orchestrated pre-legal collection actions.

• Similarly, debt collection by insolvent debtors is a daunting process generally and, while insolvency proceedings may deliver returns, they will stretch over the years and generate significant costs.

1. Summary

1.1. General financial information

1.1.1. In Japan, financial information is fairly available. Data can be obtained through various private providers, and the listed companies disclose their financial information on a quarterly basis. Nevertheless, the non-listed companies have no duty to report their financials.

1.2. Key legal structures

1.2.1. Corporate debt responsibility is defined by legal structures, which can be summarized as follows:

• Sole proprietorship is possible for independently operated small businesses for which no contractual arrangement is needed. In this case, the owner shall be held liable for all commercial debts. Two or more parties may also decide to share rights and liabilities by Commercial Partnerships (Go-mei Gaisha), in which case the partners may be collectively and separately responsible for the other spouses ' acts. Additionally, Limited Liability Partnerships (Go-shi Gaisha) sell the partners limited liability.

• Limited Liability Companies (Godo Kaisha, GK) governed by the Companies Act of 2005 are the most preferred legal entities since they do not need any fixed capital funding while the responsibility of the members is limited to the donation. Joint-Stock Corporations (Kabushiki Kaisha, KK) are used for larger structures that require a minimum amount of capital (JPY 1, to be raised to JPY 10 million within five years of incorporation), to be split into tradable securities. The owners ' responsibility in those companies is limited to the amount of their stock.

• Foreign companies can settle in Japan through Representative Offices that are not allowed to generate income and thus serve merely as liaison offices or market research. Branch offices are more prevalent despite the fact that such companies are not separate from the legal structure of the parent company and therefore provide no restrictions on liability. Subsidiary corporations are set up for this function by limited liability companies.

1.3. Regulatory framework

1.3.1. Japan has a system of civil law in which the courts are not constrained by precedents but nevertheless tend to take significant Supreme Court decisions as guidance. Justice is made through a plethora of Summary Courts (438 in all) at the local level, 50 District Courts (Chiho Saibansho), eight High Courts (Fukuoka, Hiroshima, Osaka, Nagoya, Sapporo, Sendai, Takamatsu, Tokyo) serving as Courts of Appeal, and a Supreme Court functioning in last resort.

1.3.2. Claims over JPY 1.4 million and real-estate lawsuits must be put to District Courts. District courts also have jurisdiction over design and trademark rights disputes, but the Tokyo and Osaka District Courts have exclusive jurisdiction over disputes arising from, patent rights, utility model rights, etc.

2. Receiving payments

2.1. DSO - Days Sales Outstanding

2.1.1. The payment culture in Japan is excellent, and due to strong cultural characteristics only a minority of invoices remain unpaid, not to mention the fact that a debtor who fails to pay twice over six months may be banned from the banking system.

2.1.2. Having said that, while payments will take place on average within 30 days, terms can stretch to 60 days and while there is a variation in DSO from one sector to the next, the average is 69 days. In fact, only 45 percent of purchases are made according to the conditions agreed by the parties and it is possible to observe gaps of up to 10 days.

2.2. Late interests

2.2.1. The law allows the claimant to charge interest on late payment, since the latter is held liable for failure to comply with its contractual obligations (Civil Code, Book III Claims, Section 404, 412, 419). Therefore, the Commercial Code allows a legitimate interest rate of 6 per cent to be added to a charge resulting from business transactions between firms or between companies and individuals.

In addition, interest on late payment may even be included in the principal if payment is still in arrears after one year, given the debtor has been sent a notice to pay (Civil Code Section 405).

2.3. Costs of debt collection

2.3.1. Likewise, the law allows compensation for damages arising from late payment, but the arrangement must include a clause as to what interest should be charged and how (Article 412 of the Civil Code).

2.4. Protecting ownership

2.4.1. Although the Japanese Civil Code does not recognize this option, Japanese courts have acknowledged a seller's right to retain possession of property until the buyer has paid the payment in full, as long as a written agreement between the parties has been established. Thus the clauses on conservation of title (RoT) are fairly common in supply contracts.

2.4.2. Japan also acknowledges a constitutional privilege to possession (ryuchi-ken), which varies from the terms of RoT insofar as it requires a borrower to hold a debtor's property until the debtor is released of his obligation to pay.

2.4.3. It should be noted that, insofar as notaries have the right to authenticate contracts, they are often granted the same importance as definitive and enforceable court decisions. Hence, it is important to consider carefully how contracts should be drawn up.

2.5. Payments

2.5.1. Many domestic sales in Japan take place on open account, ensuring the products are imported and distributed before payment is due. Instead, domestic transactions are charged by promissory notes (Yakusoku Tegata) since, if left unpaid, they can be used as enforceable debt identification terms, but swap bills (kawase tegata) are not usual in reality.

2.5.2. Bank transfers(furikomi) are among the most common means of payment for international transactions as they are fast, safe and supported internationally and domestically by an increasingly established banking network. Export transactions are usually guaranteed via Export Credit Insurance, which helps to minimize the risk of sudden or unexpected insolvency of customers.

2.5.3. Additionally, Standby Letters of Credit (a bank promising the credit worthiness and repayment ability of the debtor) are often used in export deals because they provide effective assurances that can be enabled as a' payment of last resort' if the borrower fails to fulfill a contractual obligation. In comparison, the use of irrevocable and verified Documentary Letters of Credit (a debtor assurance that a certain amount of money is made available to a borrower through a bank once certain requirements expressly decided by the parties have been met) is gradually being depended on. One in five sales were charged in full and down payments for local partners may be arranged.

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3. Collecting payments

3.1. Amicable action

Negotiating and pre-legal recovery actions should always be addressed in the first place since the pursuit of legal action in Japan is difficult and it is important to be mindful of the debtor's operation and solvency status: if the corporation is no longer in business or if insolvency proceedings have been launched, it is generally impossible to do so.

It is important to stress that there are no specific debt collection procedures in Japan. Therefore, while domestic courts appear to be fairly efficient in providing prompt rulings, tribunals are often unavoidable, time-consuming, and expensive (all records must be translated into Japanese). In such cases, analysis of the evidence available when seeking the launch of legal action is key.

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3.2. Legal proceedings

3.2.1. Ordinary proceedings. The collection process also ends with the submission to the claimant of a recorded Demand Letter (Naiyo Shomei) demanding reimbursement of the principal and the interest.

3.2.2. A fast-track process to receive a Request for Payment (Tokusoku Tetsuzuki) may be introduced when the debt is certain and unchallenged. Court clerks typically make a payment warrant (Shiharai Meirei) within one week (within three to six months, Summary Courts made instructions under the former procedure).

3.2.3. However, any debtor contestation formulated within two weeks leads to bringing the claim through ordinary legal action before the courts. Before the ordinary judicial process, the parties are bound by no obligation to cooperate and, although the court may allow a party to request that the other party (or a third party) provide documents in its possession, there is no penalty for non-compliance.

3.2.4. If the debt does not exceed JPY 300,000 (about EUR 2,100), a Small Claims proceeding may also be initiated before the Summary Courts, which will render a decision on the date set for oral argument, otherwise the proceeding would lead to ordinary litigation too.

3.2.5. Normally, ordinary legal action should begin if nice selection failed. The creditor would file with the District Court a claim (sojo) which would then be serving the defendant with a summons to appear. The court has authority to decide on delays, but the debtor's failure to bring a defense is considered as an endorsement of the claim's facts. Hearings are then arranged to dig at evidence and meet opinions from third parties.

3.2.6. Furthermore, in practice, the courts tend to offer negotiating opportunities and the parties often reach a compromise. The courts may otherwise grant relief in the form of a declaratory judgment (kakunin hanketsu), particular results (kyufu hanketsu), penalties, etc. Nevertheless, the court has no power to grant punitive damages.

3.2.7. Necessary documents. Power of Attorney (issued by representative directors, if any, or directors authorized by the company to do so), copy of defendant company registry, and documents showing details of the claim (originals if possible).

3.2.8. Time limits. Article 522 of the Commercial Code states that whilst a five-year time limit is applicable to a petition resulting from a commercial transaction, where other legislation or regulations provide for a prescribing duration of less than five years, such rules shall apply. In other words, claims must be brought before the courts within five years but there would be exceptions.

3.2.9. Provisional measures. Under the Civil Provisional Remedies Act of 1989, provisional measures in the form of preliminary injunctions may be awarded against the debtor to preserve the status quo pending a final and enforceable judgment. Courts usually give temporary attachment measures (kari-sashiosae) to prohibit the defendant from disposing of his properties or to preserve facts (shoko hozen) but the complainant must first show that irreparable harm is likely to occur unless the precautionary measure is issued. Interim measures may occasionally be obtained on the same day in emergency situations, but the courts would order the creditor to provide cost counter-security to protect the debtor against irresponsible action.

3.2.10. Those judgments would often be made ex parte by the courts (without the parties present) but the claimant may object or seek the revocation of the interim order by different processes (respectively' hozen Igi' and' hozen torikeshi'). The form of appeal does not, however, revoke the precautionary request.

3.2.11. Appeal lodging. The defeated party may lodge an appeal against the first instance decision rendered by District Courts within two weeks of notification of the judgment. The High Courts would then perform review hearings which are able to deal with mistakes in truth or statute. Likewise, judgments made by the High Court in the second instance may be appealed to the Supreme Court, but the Supreme Court may find only procedural errors, misinterpretation or any other contravention of the law or constitution which specifically affects the judgment, etc.

3.2.12. Enforcing court decisions. Once a judgment is definitive (i.e. if no appeal is lodged within two weeks) compliance can proceed. If the debtor fails to comply with the judgment on a demand for payment of money, mandatory compliance would be enforced by execution of real property (an appeal is made to the court and an execution court issues an order for the implementation of a compulsory auction); I execution of movables (an application is made to the Marshal Court and the execution starts by forfeiture of the debtor's properties).

3.2.13. Duration of legal action. Lawsuit Expedition Law No. 107 of 2003 stipulates that first-instance decisions must be rendered within a maximum of two years, but in practice, simple claims brought before District Courts may take one year, while complex claims may take longer. Appeal trials can take a further 10 months, for example.

3.2.14. It is difficult to say whether it would take more time for trials to contend with cases concerning an international entity than coping with disputes affecting only domestic parties. It should be remembered, though, that all records must be interpreted, and this often delays the prosecutions.

3.2.15. Costs of legal action. As a general rule, the losing party may be required to pay court fees and annex expenses but the expenses of the successful party will stay uncompensated for it in action. Indeed, while legally recoverable, recovering those costs requires too many formalities and the process is complicated and time consuming overall. Court costs usually consist of an application fee (calculated on the basis of petition amount) and postal stamp fees (JPY 5~6,000 per defendant). The legal costs will represent around 15 percent of the loan on average.

4. Managing insolvent debtors

4.1. Insolvency in Japan

4.1.1. Methods of alternative dispute resolution (ADR). As in most nations, methods of alternative dispute resolution in Japan would include conciliation, mediation and arbitration (chusai, like described in Act No 138 of 2003, based on the 1985 UNCITRAL Model Law on International Commercial Arbitration). Nonetheless, the 2004 Act on the Promotion of the Use of Alternative Dispute Resolution only came into effect in 2007, since ADR is not common and, provided that courts are fairly reliable, traditional arbitration is the most prevalent means of resolving large commercial conflicts. ADR, it should be noted, is usually only feasible when the contracting parties have accepted such a probability.

4.1.2. Foreign forums. It is not appropriate to use a global tribunal, as the national courts are fairly reliable. Nevertheless, Japanese law allows the parties to a settlement to choose the statute relevant to this contract through mutual agreement, and to choose the court that will have authority over the conflicts. As a rule, domestic courts generally respect the written agreement of the parties to settle their commercial conflicts in an international arbitration (i.e. under foreign law or before a foreign tribunal), except, for example, Japanese law provides special authority to Japanese courts (usually in consumer and labour matters).

4.1.3. Nevertheless, it is important that the arrangement be distinguished by an external relation (e.g. one party has chosen domicile in another country or the place of execution is situated abroad) and that a provision of jurisdiction be drawn up for this reason.

4.1.4. Enforcing foreign awards. In Japan, imposing global directives is usually time-consuming, expensive and haphazard. As in most nations, in order to become enforceable, Japanese courts must first accept the international ruling through an exequatur process (Article 118 of the Code of Civil Procedure).

4.1.5. For starters, the court will check whether the ruling in the authorizing jurisdiction is definitive and enforceable, whether the parties have benefited from a due process of law and whether compliance would be inconsistent with Japanese public policy. Furthermore, the reciprocity aspect means that the international ruling would not be followed by domestic courts unless the awarding nation has a mutual acknowledgement and compliance arrangement with Japan.

4.1.6. Japan is a signatory of the 1958 New York Convention on the Recognition and Conduct of International Arbitral Awards. Domestic courts should therefore therefore accept and execute rulings made in international arbitration proceedings.

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4. Managing insolvent debtors

4.1. Insolvency in Japan

4.1.1. In Japan, insolvency is both a matter of cash flow and balance sheet. In other terms, a debtor would be declared to be insolvent if incapable of paying his creditors owing as they, but also when the profits of the company struggle to account for his liabilities. A debtor is also punished after dishonoring bills by having their bank transactions suspended.

4.1.2. Insolvency cases normally take place before the District Courts which coexist with separate prosecutions. Whatever the case, the court will have to agree on a period of time (up to four months) during which investors will lodge a lawsuit.

4.1.3. In practice, debt collection from insolvent debtors is most challenging: the dividend rate in the bankruptcy proceedings is on average 10 percent less than the claim amount and could reach 15 percent to 20 percent of the claim amount in the corporate rehabilitation process.

4.2. Insolvency proceedings

4.2.1. Out-of-Court proceedings. They focus on several out- of-court schemes to provide fresh cash to businesses in trouble. In 2001, the National Bankers' Association, the Confederation of Managers' Association and other related organizations established out-of-court Multi-Financial Creditors Workout Rules. In fact, the 2007 Modified Industrial Revitalization Law provides for Alternative Dispute Resolution (BRADR) procedures for company reorganization. In addition, a private sector organization (Japan Association of Turnaround Professionals, JATP) recommends neutral third party experts in a fair and independent manner in charge of leading such workouts. Creditors' mutual consent is required to be approved for the out-of-court reorganization agreement.

4.2.2. Debt restructuring. On the one side, civil rehabilitation proceedings (under the 1999 Civil Rehabilitation Act) may be launched upon debtor's order. The latter files a petition with the court to obtain a protection remedy which temporarily prevents the payment of debts to unsecured creditors. A trustee is appointed, and the funds can be suspended until the debtor becomes stable again.

4.2.3. On the other side, corporate restructuring proceedings (under the 2002 Corporate Reorganization Act) seek to reach a recovery agreement with all stakeholders in order to allow the debtor's economic activity to begin. All management prerogatives are passed to a court-appointed administrator during this process, while a suspension is put in place to protect the delinquent business from any compliance allegations.

4.2.4. Nevertheless, the courts have recently introduced a debtor-in-possession concept which requires directors to remain in power during the proceedings. In certain cases, forced reorganization proceedings may also be launched at the behest of a borrower owed a loan equal to at least 10 percent of the value of the company.

4.2.5. Winding up proceedings. Bankruptcy under Hasan-ho statute n° 75 of 2004 is meant to gain cash from the disposal of the debtor's properties and may arise at the behest of the debtor (voluntary liquidation) or the creditors (involuntary liquidation). The court normally appoints a liquidator to sell the company's assets and distribute the proceeds on a pro rata basis to the various creditors. For very complex insolvency situations a special liquidation procedure may also be carried out. Alternatively, the bankruptcy proceedings assign liquidation specific to persons.

4.2.6. Priority rules.  Generally, priority rules apply when transferring the profits to the creditors. New cash suppliers will usually be regarded as having a favorable position during reorganization proceedings. Consequently, they would have precedence over unsecured cases generally. Often, revenue statements are called favorable claims.

4.2.7. Cancelation of suspicious transactions. During reorganization and liquidation cases, creditors and liquidators are usually allowed to order the court to void those transactions that were made previous to the insolvency proceedings. In particular, any measure taken by the debtor that is deemed to be detrimental to the creditors would typically be void (unfair loans, inappropriate debt repayment, suspicious disposal of assets, fraudulent transactions, free acts etc.). However, the law does not provide any precise periods of suspicion during which those transactions may be considered doubtful.

4.2.8. Duration of insolvency process. This takes an average of two or three years for bankruptcy proceedings, with five to ten years for company recovery.