Analysis and final revision: October 27, 2026
Original research dates: Japanese edition, October 9, 2026; English edition, October 11, 2026
SAKURA Law Office | Managing Partner Kenshiro Michishita
The most valuable assets of a business are not necessarily those most easily sold at auction. A manufacturer’s engineering knowledge, a software company’s customer relationships and recurring revenue, a regional enterprise’s brand, and the accumulated capabilities of its employees may support substantial future cash flow without being readily susceptible to individual security interests. Japan’s lending practices have nonetheless historically placed considerable weight on real estate collateral, readily identifiable assets and personal guarantees from business owners. The result has sometimes been a mismatch between a company’s ability to create economic value and its ability to obtain debt financing on commercially sustainable terms.
The Act on the Promotion of Cash Flow-Based Lending (Act No. 52 of 2024; the “Act”), whose principal provisions took effect on May 25, 2026, introduces a new proprietary security right over the total assets of a company, including assets it acquires in the future. The Financial Services Agency (“FSA”) uses the English term Enterprise Value Charge (“EVC”) for this right, known in Japanese as kigyō kachi tanpoken (企業価値担保権). The statutory design seeks to support credit decisions based on the business as an operating enterprise rather than merely the separately realizable value of particular properties. It does not, however, give borrowers a statutory entitlement to financing, nor does it transform a lending institution into the owner or manager of the borrower’s business. [1,6,27,28,29]
An EVC is also not the Japanese equivalent of every floating charge or all-assets debenture encountered in other jurisdictions. Its creation requires a prescribed trust arrangement, the relevant corporate approvals and registration in the company’s commercial register. Rules restricting enforcement of certain personal guarantees, use of duplicate collateral for the same debt, dealings outside ordinary business, and enforcement through a court-supervised process materially affect the rights of lenders, borrowers, other creditors and prospective purchasers. The creation of the security right is therefore only the beginning of the transaction analysis. The parties must also understand how the company will fund growth, deal with existing creditors, obtain consents for material transactions, address deteriorating performance and preserve value on an eventual restructuring or disposal.
This Legal Update analyses the framework through the decisions that companies, lenders, investors and transaction advisers must make, with an analysis date of October 27, 2026. It draws on the statutory and subordinate materials that could be verified, the FSA’s May 2026 policy statement and guidelines, its model trust documentation, the Legal Affairs Bureau’s registration guidance and the Ministry of Health, Labour and Welfare’s revised business-transfer guidelines. Binding statutory obligations are distinguished from supervisory expectations, nonbinding model documents and practical recommendations. The effectiveness of an EVC depends on identifying the legal rights, contractual restrictions, enterprise risks and stakeholder interests that must operate together throughout the financing.
Executive Summary
Under Article 7 of the Act, an EVC is a proprietary security right over the whole of a company’s assets, including property subsequently belonging to the company, to secure the specified and unspecified secured claims recognised by the statute. Its subject matter differs from shares pledged by the shareholders, mortgages granted over particular real estate and standalone security over receivables or intellectual property. The company, not its individual shareholders, grants the EVC. Eligibility is confined to companies under the Companies Act; sole proprietors and general incorporated associations cannot grant one. Neither an employee’s abilities nor a third party’s intellectual property becomes company-owned property simply because its contribution is reflected in enterprise value. The statutory charge helps align financing with going-concern value; it does not dispense with underwriting, ownership analysis or the restrictions contained in commercial contracts. [1,29]
The EVC is established through a statutory trust agreement involving an appropriately authorised EVC trustee and becomes effective through the prescribed commercial registration, subject to the Act’s express exceptions. Article 10 requires the corporate decision or resolution appropriate to the borrower’s form and governance structure; not every company is required to obtain the identical shareholder approval. Articles 9, 11, 12 and 13 require careful treatment of the secured-claims ceiling, overlapping collateral, personal guarantees and the prohibition on granting an EVC for another person’s debt. The lender’s facility agreement, the trustee’s agreement, existing debt instruments and registry particulars must accordingly be reviewed as a single financing structure. [1,29]
An EVC does not ordinarily prevent the borrower from using and disposing of assets in the course of its business. Article 20 nevertheless subjects specified extraordinary transactions, including significant disposals and transfers of all or an important part of the business, to statutory consent requirements, with particular rules concerning the effect of noncompliant acts and protection of certain third parties. The FSA’s May 18, 2026 statement emphasises ongoing dialogue, realistic business planning and timely assistance when a borrower encounters difficulties. Those supervisory considerations should inform covenant drafting and the monitoring relationship, but are not statutory commands requiring lenders to extend or reschedule credit. [10,29]
If enforcement becomes necessary, the EVC follows a distinct court-supervised procedure directed at preserving and realising the value of the business as an integrated operation. The position of employees, trading counterparties and other creditors must be considered; an EVC is not a device by which a lender may automatically transfer every contract or employment relationship to a purchaser. The revised Guidelines on Matters to Be Considered by Companies in Business Transfers and Mergers, applicable from May 25, 2026, reinforce the significance of consultation and information-sharing in the context of an EVC realisation. The regime therefore raises issues that belong in the initial financing and acquisition documentation—not matters to be left exclusively for a future distressed sale. [23,24,29]
1. Security over Enterprise Value: The Statutory Asset Pool and Its Limits
The Act responds to a structural weakness in traditional collateral-based finance. Banks have always been free to evaluate business plans, competitive advantages and cash-flow prospects when deciding whether to lend. Yet security and recovery analysis have often depended on assets that could be identified, valued and sold separately, supplemented by a business owner’s guarantee. Those practices can disadvantage growing companies whose value lies in know-how, customer access, technology, organisational capacity or future operating performance rather than unencumbered land. The policy objective is to make an economically coherent business a more meaningful subject of secured lending while encouraging lenders to understand and support its continuing operation. [6,7,10]
Article 7(1) authorises the whole of a company’s assets, including assets that will belong to it in the future, to stand as a single pool of security for the categories of claims specified by the Act. Article 7(4) expressly characterises the EVC as a proprietary right. It is accordingly more than an analyst’s projection of future EBITDA or a contractual undertaking to maintain business value. Equally, it is not an aggregation of conventional mortgages or pledges, each endowed with its own separate enforcement power. The Act defines how the right is created, ranked, exercised and realised; general concepts taken from foreign law cannot replace those provisions. The treatment of proceeds in an enforcement proceeding must be understood from the statutory framework, not from a simplified assumption that the lender owns the business’s future profits. The definition in Article 2(2) refers to a company under Article 2(i) of the Companies Act: a stock company, general partnership company, limited partnership company or limited liability company. Separate legal personality alone does not make a general incorporated association eligible. [1,11,29]
Consider a software company whose revenue depends on copyrighted source code, cloud infrastructure, customer subscriptions and engineering teams. Separate asset security may require difficult identification of intellectual property ownership, restrictions on transfers of licences, assignment consent under commercial contracts and asset-specific perfection. A financing supported by an EVC can place the combined productive capacity of the enterprise at the centre of the credit assessment. Nevertheless, it does not confer a property right over software licensed by another party, transform an employee’s knowledge into assignable property, or override statutory rules governing contractual transfer. A serious legal due diligence therefore still needs to establish which rights and assets the company actually owns and how they may be preserved if its business is transferred.
It is essential to distinguish the company from its shareholders. Shares are property of their holders, and security over those shares may give a secured lender rights against the shareholder’s equity interest under a different legal instrument. By contrast, the borrower company itself grants the EVC over its assets. The charge does not automatically transfer shareholder voting rights to the trustee or confer direct corporate control upon the lending bank. In acquisition financing, venture debt or private credit, a share pledge and an EVC may be considered separately or together, but the identity of the security provider, the relevant approvals, ranking, enforcement route and creditor constituencies must each be analysed on their own terms.
Nor is enterprise value an immutable amount. Customer concentration, recurring revenue, key personnel, intellectual property validity, product development, regulatory approvals, cash conversion and industry conditions all affect the present and expected earnings capacity of a business. The FSA’s 2025 materials on credit assessment and its 2026 policy statement explain why the EVC should not mechanically be treated as an ordinary readily realisable collateral asset, while also cautioning against treating EVC-backed lending in exactly the same manner as wholly unsecured lending. The accounting, provisioning and prudential significance depends on the lender’s actual risk management and the financial condition of the borrower rather than on the mere existence of a registration. This does not exclude consideration of assets within the charged pool that satisfy the established requirements for ordinary collateral, such as qualifying real estate, when estimating recoveries. Their value need not be ignored merely because no separate asset-specific mortgage has been taken. [8,10,20]
The new right is thus an instrument of financing policy, not an automatic credit subsidy. Companies seeking to use it should present a credible account of how proposed borrowing will create cash flows, how those cash flows will meet repayment obligations, and which changes to the business could undermine the underlying assumptions. Lenders retain discretion to decline a loan, apply credit standards and consider alternative security. The stronger case for an EVC is not that the borrower possesses intangible assets in the abstract, but that its integrated business is capable of being understood, monitored and—if necessary—preserved as a going concern.
2. Establishment, Trust Structure and Commercial Registration
An EVC financing cannot be implemented solely by adding an all-assets clause to a loan agreement. Articles 6(3) and 8 require the statutory trust structure, with the debtor company as settlor and an EVC trust company as trustee. Beneficiaries include both specified secured creditors and the unspecified secured creditors defined by the Act; a trust agreement lacking the mandatory contents in Article 8(2) does not take effect. The latter creditor category follows the liquidation-and-bankruptcy definition in Article 6(5), rather than automatically placing every ordinary supplier on the same footing as the financing bank during normal operations. The trustee holding the charge, the beneficiary holding the loan claim and the court-appointed administrator in enforcement are different legal capacities. Facility and trust documentation must allocate authority consistently among the relevant parties. [1,11,29]
Trustee eligibility is governed by Article 32’s licensing framework and Article 33’s deemed-licensing arrangements. The latter distinguish prescribed trust companies and trust banks from other eligible institutions, including certain banks, that may rely on the required notification. A bank does not establish its eligibility merely by agreeing to lend, but it is equally inaccurate to assert that every bank must obtain a new individual licence. The FSA published model EVC trust documentation on March 11, 2026 and revised it on May 18 and May 22. Its alternative trust structures and supplementary lending terms are nonbinding drafting examples, to be adapted to the business, facility size, participating lenders and existing indebtedness. [3,12,13,15,29,32]
The optional nature of the model forms must be distinguished from mandatory explanation and documentation duties. Article 40(1) applies relevant provisions of the Trust Business Act, including Articles 25 and 26. The trustee must satisfy the applicable requirements concerning explanation of the trust, its terms, beneficiaries and operation, and delivery of the prescribed information. The FSA’s illustrative customer document assists implementation; renaming a template does not establish that the underlying duties have been discharged. [14,15,29]
Corporate authority is a separate requirement under Article 10. In an ordinary stock company with a board, a board resolution is the starting point, subject to the statutory alternative where the articles of incorporation provide for shareholder approval. In companies with an audit and supervisory committee or nomination and other committees, valid delegation under the specified Companies Act provisions also matters. Different rules govern companies without a board and membership companies. Neither shareholder nor board approval should therefore be imposed indiscriminately on every entity. The approval materials should explain the financing purpose, whole-asset scope, implications for future borrowing and disposals, guarantees, material terms and enforcement risk. The articles of incorporation and any relevant delegation must be examined before identifying the authorised decision-maker. [1,29]
Registration is constitutive, not merely a step to make an otherwise effective charge opposable to third parties. Under Article 15, creation, transfer or alteration of the EVC is generally ineffective unless registered in the commercial register at the location of the company’s head office, subject to exceptions for universal succession, merger of rights in the same person and extinction of specified secured claims. The priority between separate EVCs is determined by the order of registration under Article 16. This is not a mortgage registered separately against each parcel of land. The loan agreement, trust deed and commercial registry should be reconciled on matters such as the trustee, secured obligations, any registered ceiling, ranking, amendments and release. The Legal Affairs Bureau’s May 21, 2026 public guidance specified paper-only registration applications at that time and provided forms and documentary requirements; the permissible filing method should be reconfirmed at completion rather than assumed to remain static. [1,5,22,29]
Article 9 contains a distinctive statutory mechanism concerning the maximum amount secured by the EVC. A ceiling is not necessarily mandatory from the outset; the debtor may demand that one be fixed in the statutory manner. But the company cannot arbitrarily impose an amount below the required statutory minimum, which is calculated by reference to existing specified secured debts and the prescribed next two years of interest and other periodic payments, relevant damages and amounts under qualifying undrawn commitments. Changes to or abolition of a fixed ceiling require consent from interested persons. The legal maximum, the revolving or term facilities contemplated by the loan documentation, the secured-claim descriptions in the trust, and the particulars filed at the register should therefore be tested against each other. A larger contractual facility does not oblige a bank to advance additional money unless its lending commitments actually so provide. [1,29]
Commercial documentation should allocate functions among the different instruments. The facility agreement normally addresses interest, maturity, repayment, covenants, information rights, events of default and acceleration; the trust instrument must address holding and administration of the charge, beneficiaries, trustee duties, instruction thresholds, transfers of participations, costs and release. In a syndicated loan or private-credit transaction, majority-lender instructions, reserved matters, conflicts between beneficiary groups and trustee duties must be considered carefully. A procedure that works when a single bank is lender may fail when creditors disagree over a refinancing or proposed asset sale. The transaction timetable should also allow for existing lenders’ consents, legal opinions, document originals and registration requirements rather than treating completion as a simple exchange of electronic signatures. [12,13,15]
Finally, the economic case must be assessed in full. Trustee fees, ongoing reporting, specialist valuations, legal and registration expenses, refinancing costs and future consents may be material. Those costs may be offset in particular cases by avoiding repeated asset-by-asset security exercises. Whether an EVC is efficient therefore depends on the borrower’s financing horizon, likely future investment rounds, corporate reorganisations and the lender’s monitoring expectations. The law makes the structure available; it does not determine which financing structure is optimal for a particular company.
3. Personal Guarantees, Existing Security and the Rights of Other Creditors
Reducing dependence on owners’ personal assets is an important policy aim, but Article 12 does not categorically prohibit the conclusion of, or automatically invalidate, every guarantee. It restricts the exercise of rights under defined arrangements relating to specified secured claims. These include personal guarantees, security over an individual’s principal residence and other prescribed living assets, and certain corporate-guarantee, recourse and joint-debtor structures exposing individuals indirectly. The restrictions in paragraphs (1) and (2) continue after a creditor ceases to be a specified secured creditor. Removing the EVC alone should therefore not be assumed to revive unrestricted enforcement of the associated personal guarantee. Separate debts and the exact contractual arrangements require individual assessment. [1,4,29,31]
The exceptions in Article 12(4) depend on the specific requirements in Article 2 of the joint ministerial ordinance. For relevant individuals who are officers or equivalent persons when the arrangement is concluded, the ordinance provides, among other categories, for arrangements subject to a condition precedent involving prescribed disclosure breaches or agreed conduct damaging the business or its assets, and arrangements subject to a condition subsequent based on compliance with agreed requirements for faithful business management. The exception concerning incorrect or incomplete disclosures excludes specified cases where the debtor neither knew nor could have known of the problem despite exercising due care. The agreed information, asset-holding or other qualifying conditions also matter. Each category requires examination of the parties, drafting and actual conduct; neither every missed target or minor reporting delay nor a generic reference to “fraud” adequately states the law. [4,31]
Public credit guarantees require a separate analysis. FSA and Small and Medium Enterprise Agency materials address cases where a credit guarantee corporation’s recourse claim is backed by a personal guarantee or living-asset security: the guaranteed loan may need to be kept outside the specified secured claims, or the corporation’s agreement obtained to release the relevant personal support. The materials also identify distinct constraints concerning guarantees using unsecured credit-insurance arrangements. They do not say that every publicly guaranteed loan must invariably be excluded. Guarantee, recourse, insurance and collateral arrangements must be mapped together. [18]
Article 13 contains another fundamental constraint: an EVC cannot be granted to secure someone else’s debt. This matters especially for leveraged acquisitions and group finance. A holding company cannot simply charge all of its own assets under the new regime as security for an operating subsidiary’s borrowing, nor can a target company automatically be required to provide an EVC for debt incurred by an acquisition special-purpose company. The allocation of borrowing, security and repayment responsibility must be tested at each legal-entity level. Where an acquisition structure also involves company guarantees, shareholder distributions or post-closing mergers, company-law restrictions and the commercial purpose of the arrangement remain relevant alongside the statutory prohibition. [1,29]
The position of overlapping security interests is likewise more subtle than an assumption that the new charge sweeps away everything in its path. Article 11 prohibits enforcement by a specified secured creditor, including a subrogated person, of defined duplicate security over the debtor’s property securing the same specified claim. This protects the integrated value of the business against the risk that a lender invoking the EVC framework will nevertheless strip out its most valuable assets through separate enforcement when the borrower encounters difficulties. It does not, however, extinguish all pre-existing mortgages or pledges held by other creditors, automatically subordinate tax claims or make the contractual interests of every creditor identical. Priority and enforcement rights must be evaluated by reference to the particular assets, claims, perfection steps and applicable legal provisions. The rule does not, by itself, place every security interest granted by a shareholder or other third party in the same category. The EVC statute’s priority rules likewise require a full security and creditor review. [1,29]
Article 16’s rule between EVCs must be distinguished from Article 18’s rules for other rights. For the pledges, mortgages and other security specified in Article 18(1), the general comparison is between the other interest’s perfection and the EVC’s registration. Article 18(5) provides a separate rule where the debtor subsequently acquires property already subject to another security interest. General and special statutory liens, taxes and common-benefit claims in enforcement also require distinct treatment. Registration dates alone cannot determine the position of every creditor; the particular claim, asset and procedure must be identified. [1,29]
In practice, existing debt documentation is often the principal obstacle to implementation. A company may have mortgages, assignments of receivables, intellectual property security, negative pledges, change-of-control undertakings, cross-default provisions and financial covenants under different loans. Statutory permission to use an EVC does not permit unilateral amendment of those contracts. The feasible structures may include refinancing and releasing existing security, bringing lenders into a coordinated financing, or retaining some pre-existing security while expressly agreeing on priority, information rights, releases and potential enforcement. For borrowers already operating with multiple credit facilities, the financial model should show not just the proceeds of the new borrowing but the costs and cash-flow effects of each consent, release and early repayment.
Article 19 provides for objections in prescribed circumstances to competing enforcement actions that threaten business continuity, but it should not be presented as a general injunction making every other creditor’s rights unenforceable. The statutory prerequisites and the actual enforcement process remain decisive. The FSA also recognises that a coordinated group of lenders may participate in an EVC financing, while noting the potential for slow decision-making if consent structures are overly complex. The choice between a single relationship bank and a broader lending group accordingly entails a genuine trade-off: speed and concentrated business understanding must be balanced against funding diversification and the risk of dependence on one institution. [1,8,29]
An effective intercreditor framework should establish how additional borrowing is permitted, when other lenders may join the structure, which decisions require a qualified majority or unanimous consent, and how repayments, security releases and refinancing are handled. It should distinguish a right to receive information from a right to veto an operational decision. Without such distinctions the lender may obtain nominally extensive collateral while the borrower loses the ability to undertake rational growth investments. A properly designed EVC financing should use coordination to preserve financeability, not to impose a permanent lock on the borrower’s business.
Refinancing and exit should also be operationally defined. Under Article 28(1), the debtor may demand crystallisation of the secured principal at any time, with crystallisation generally occurring one week after the demand. Article 30 extinguishes the EVC when all crystallised specified secured claims have been extinguished. The demand does not itself forgive debt or promise replacement funding. Repayment money, accrued interest, undrawn commitments, cancellation of the registration and other contractual steps must be reconciled so that the statutory exit route can support an executable refinancing. [1,29]
4. Covenants and Corporate Autonomy:
Monitoring a Going Concern Without Displacing Management
The statute expressly contemplates that the borrower remains an operating company after the security right is created. Article 20(1) generally permits it to use, enjoy the benefits of, and dispose of its assets in the continuing course of business. A manufacturer may buy inputs and sell products; a subscription business may enter into and renew customer contracts; a technology company may offer licences within its normal commercial activity. The lender or trustee does not, simply by obtaining an EVC, acquire possession of the borrower’s equipment, control over its receivables or a right to make daily commercial decisions. Ongoing business activity is not incidental to the security; it is the means by which the collateral’s underlying economic value is maintained. [1,29]
The freedom to operate is not unlimited. Article 20(2) requires the consent of all relevant EVC holders—that is, the trustees holding the charges for prescribed transactions outside ordinary business, including certain disposals of significant assets, transfers of all or an important part of the business, and specified transfers of goods or services for grossly inadequate consideration without proper reason. Article 20(3) addresses the effect of a transaction undertaken in breach of those restrictions, while protecting specified third parties who lacked knowledge and were not grossly negligent. A financing party cannot safely reduce these provisions to a general statement that “all asset sales require bank approval”, any more than a borrower can assume that a transaction becomes valid whenever its board considers the price attractive. Statutory consent, corporate authorisation, contractual bank consent and counterparty approval are legally distinct and may all be relevant to the same proposed transaction. Agreement from a lead bank or a single beneficiary is not automatically a substitute for the statutory consent. [1,29]
Suppose that a company proposes to dispose of a loss-making business, transfer a key patent to an affiliate or sell an important customer portfolio. Such a transaction might preserve value by enabling strategic refocusing, or impair value by removing the very activity expected to support repayment. The label attached to the transaction is not conclusive. Counsel should examine whether it is ordinary in the company’s particular business, the materiality of the assets, commercial consideration, the effect on operating cash flows, and whether an equivalent revenue-generating capacity will remain. Agreements should set out workable procedures for requesting consent, the information needed for assessment and the persons authorised to respond. Internal approval matrices should make clear when finance and legal teams must escalate a decision before a business unit signs binding documents.
The FSA’s May 18, 2026 statement on cash flow-based lending places significant weight on trust, continuing engagement and a realistic understanding of business performance. It rejects the idea that lenders must follow a mechanically uniform checklist of business plans or monitoring measures. A plan need not be an elaborate report commissioned from external consultants, provided it permits the company and lender to understand the proposed actions, the basis for the forecast, progress against milestones and contingency responses. That approach has practical implications for covenant design. Information rights tied to a borrower’s business model can be more useful than a large set of generic reporting obligations whose volume obscures the emergence of actual financial difficulties. [9,10]
Covenants should be calibrated as mechanisms for timely decision-making rather than merely additional triggers for acceleration. Appropriate subjects may include forecasts and liquidity, customer concentration, development milestones, maintenance of key licences, material intellectual property, investment commitments and the need for future funding. A shortfall in a quarterly target should not automatically be equated with deliberate dissipation of collateral. Subject to the lender’s legitimate credit concerns, the parties may negotiate materiality thresholds, cure periods, information requests, waiver procedures, updated business plans and early consultations. A covenant that is facially stringent but impossible to administer may reduce transparency and, ultimately, recoveries. The appropriate level of monitoring also changes as a borrower moves from growth investment to stable recurring revenues or a period of distress.
Borrower autonomy remains legally meaningful. The FSA’s implementing guidance distinguishes a lender’s involvement in management improvement from possession of a statutory power to determine working conditions. Granting an EVC does not appoint a bank as the employer, nor does it confer voting rights in the borrower’s shares. The bank’s position may be influential, particularly where it is a principal source of financing, but that makes the separation between advice, contractual consent and management decision-making more—not less—important. Restrictions on abusive use of superior bargaining position, duties of directors under the Companies Act and ordinary employment law may apply on their own terms. Records should indicate when management considered lender proposals, which decisions it reached independently, and the legal basis for any consent or amendment. Nor does the absence of automatic employer status confer immunity from labour law: actual, concrete control over fundamental working conditions to a degree comparable to the employer can require a separate assessment of employer status under the Trade Union Act. The legal position depends on actual involvement, not only the lender’s contractual label. [11,24,26]
Information-sharing arrangements warrant particular care where enterprise value depends upon confidential data. Financial projections may reveal trade secrets; large customer datasets may contain personal information; financing materials may include unpublished M&A proposals or government-protected information. An obligation to report business progress does not, without more, override duties owed to customers, joint-venture partners or regulators. A carefully drafted facility should specify the purpose, permitted recipients, confidentiality protection, data minimisation and appropriate treatment of privileged, sensitive or restricted information. Monitoring that respects the rights of third parties can strengthen the lender’s assessment without generating a separate regulatory or litigation risk for the borrower.
5. Early Financial Deterioration: Restructuring Before Value Is Destroyed
The EVC is frequently discussed in terms of ultimate enforcement, yet the legal design assumes that the value of a viable business may be protected more effectively by action long before enforcement becomes necessary. A missed development milestone, the loss of a major customer, unexpectedly high capital expenditure or a sharp decline in margins can undermine an original credit assessment without necessarily eliminating a company’s longer-term prospects. If a lender treats every forecast deviation solely as a default event, the borrower may become reluctant to disclose emerging problems. By the time liquidity deteriorates irreversibly, the productive capacity supporting the security may already have been lost.
The FSA’s May 2026 policy statement emphasises regular communication, early recognition of difficulties and timely consideration of business improvement. Borrowers should be in a position to explain rolling cash-flow forecasts, business-line profitability, major contract developments, investment needs and realistic repayment sources. Lenders, for their part, should seek to understand the causes of underperformance and the effectiveness of proposed remediation rather than relying exclusively on historic balance-sheet ratios. This may lead to discussion of rescheduling, temporary waivers, additional working capital, non-core disposals, fresh equity or a sponsor investment. Such discussion does not itself constitute a legal requirement that any party agree to the proposed financial support. [10]
It is particularly important not to confuse supervisory encouragement of early support with a duty to lend. Banks remain subject to prudential obligations, credit-risk controls and responsibilities to depositors and other stakeholders. An institution may reasonably decide not to fund a plan whose assumptions are unsupported or whose expected losses would be excessive. The advantage of an EVC-supported relationship lies in facilitating a better-informed assessment of whether the business should be supported, restructured, transferred or wound down. The legal framework cannot remove commercial uncertainty, and it should not be represented to equity investors as a guarantee that a lender will always provide rescue finance.
Default and acceleration provisions can determine how much room exists to reach a solution. Delays in information delivery, modest temporary covenant breaches and deliberate transfers of essential assets are not commercially equivalent. Documentation can provide graduated notification, cure opportunities, waivers, updated reporting and negotiated standstill arrangements where these are compatible with the financing risk. Counsel advising a borrower should identify early whether obtaining a waiver from its EVC lenders would trigger consent or cross-default questions under other bank facilities, bonds or shareholder instruments. A viable turnaround may fail not because of one lender’s refusal but because the combined documentation of different creditors makes coordination impossible within the available liquidity runway.
Restructuring also requires recognition that the EVC’s beneficiaries are not the borrower’s only stakeholders. Wages, taxes, ordinary supplier claims, existing secured obligations and the interests of shareholders remain subject to their respective statutory and contractual regimes. Creating an EVC does not automatically convert all trading liabilities into claims entitled to trust distributions. The borrower should compare its continuing-business value with liquidation value, the effect of new financing on creditor priorities, the viability of a sponsor transaction and the conditions for preserving licences and essential commercial contracts. Contractual workouts, civil rehabilitation, corporate reorganisation and EVC enforcement are different legal processes with different rules; they cannot be treated as interchangeable merely because each may involve a business sale.
A relationship lender may gain significant practical influence as the financing relationship deepens. That influence must not be mistaken for the legal assumption of the directors’ management duties. Management retains its own obligation to evaluate restructuring options, communicate with employees where required and make properly authorised company decisions. Equally, a decision remains subject to judicial and statutory scrutiny even if the bank originally proposed it. Early specialist involvement is therefore warranted whenever a prospective refinancing, asset sale, employee restructuring or sponsor-led rescue may interact with EVC consent requirements or insolvency law. The best result is often a negotiated solution that maintains the operating enterprise; but where recovery or going-concern preservation is no longer realistic, an orderly exit may be the more responsible outcome. [10,11]
6. Court-Supervised Realisation, Business Transfers
and Protection of Employees and Other Creditors
Enforcement is not a power for the financing bank unilaterally to acquire the company and sell its assets at will. An application under Article 83 is made by the EVC holder in accordance with Article 61; where several EVCs exist, only the highest-ranking EVC may be the subject of the application. Following commencement, a court-appointed and court-supervised administrator exercises the statutory powers. Article 157(1) makes a court-authorised transfer of the business the basic realisation method. Article 157(2) nevertheless permits realisation of individual assets where necessary and contains exceptions to permission for ordinary-course voluntary sales and other prescribed cases. Preserving the integrated business is central to the regime, but piecemeal sales are not absolutely prohibited. [1,11,29]
Business contracts are a particular constraint on the preservation of value. The FSA’s guidelines recognise that a company’s contractual relationships contribute to enterprise value, while distinguishing that proposition from an assertion that security creation or enforcement automatically binds a trading counterparty to a new party. A sponsor seeking to acquire the operating business must establish whether customer contracts, leases, licences, franchise arrangements, software and cloud-service agreements, research partnerships and regulatory permissions can be transferred on the proposed terms. Transfers of contractual positions ordinarily raise counterparty consent questions; the precise outcome depends on the contract and applicable law. A court-supervised process does not give the purchaser a universal statutory exemption from those requirements. Consequently, a financially attractive bid may not represent the highest realisable value if the proposed purchaser cannot retain the contracts upon which revenue depends. [11,24]
Regulatory permissions require attention to Article 159 rather than an assumption that every licence either transfers automatically or must be obtained afresh. On the administrator’s application, the court must hear the competent authority; if that authority does not oppose succession, the court must permit it. Subject to the statutory exception where another law prohibits succession, the purchaser then succeeds to the relevant rights and obligations upon payment. Identifying the permissions, engaging the competent authority and obtaining the required court permission should therefore be built into the closing conditions. [1,29]
Employees are equally central. Granting an EVC does not vary employment contracts or make the trustee or bank the employer. Where enforcement is implemented by a business transfer, the legal treatment of the employment relationships must be examined in the context of Japanese labour law and the relevant business-transfer arrangements. In particular, transfer of an employee’s contract is not automatically accomplished by the existence or enforcement of the charge; the applicable consent and protection requirements, including the employee’s genuine consent, must be satisfied. Where a potential purchaser proposes to select only certain employees, its approach requires careful scrutiny for improper discrimination and inconsistency with applicable labour protections. The importance of retention is also economic: in a service, technology or specialist manufacturing business, key employees may hold much of the knowledge and customer confidence needed to sustain going-concern value. Universal succession on a merger and individual transfer through a business sale must not be treated as the same mechanism. [23,24,25]
The Business Transfer Guidelines were amended by notification on January 20, 2026, with application from May 25. Distinct statutory steps must be identified: Article 89(3)(iii) concerns notification of commencement to the relevant union or majority representative; Article 122 requires the administrator to endeavour to provide information necessary for the exercise of workers’ rights; and Article 157(4) requires the court to hear known distribution creditors and the relevant union or representative before authorising the business transfer. Notice is not a hearing, and a hearing does not itself confer a veto over the sale. The revised Guidelines also explain that the administrator succeeds to employer status under the Trade Union Act and must bargain in good faith on matters within the administrator’s authority when lawfully requested. Recommended information-sharing and exchanges of views at the security-creation stage must be distinguished from legal obligations in enforcement. [21,23,24,25,26,29]
Labour and trading claims require analysis separately from the reserve discussed below. Article 127 and related provisions define common-benefit claims, including certain costs of continuing the business. Article 129 gives that status to salary claims for the six months preceding commencement and to retirement-allowance claims within the statutory limit. Article 130 provides for their payment outside the distribution procedure and priority over distribution claims. Pre-commencement supplier claims do not all become common-benefit claims, but Article 93(2) permits court-authorised payment where required for business continuity, protection of trading creditors or smooth and fair administration of the proceedings. Timing, classification and the need for permission are therefore essential. [1,29]
The reserve for unspecified secured claims under Articles 8(2)(i)(c) and 166 is another, distinct protection. It is intended to preserve the amount expected to be required for fair administration of the subsequent liquidation or bankruptcy, not to insure full payment of suppliers or wages. Article 2 of the Enforcement Order applies rates by monetary band to the statutory distributable amount, not gross sale proceeds, with a minimum calculated reserve of JPY 700,000. For example, a distributable amount of JPY 100 million produces a calculated reserve of JPY 5 million before any amount added by the court where particularly necessary. Actual distributions, claim classification, subsequent proceedings and insufficient assets remain relevant. The reserve does not establish that every unsecured creditor will recover in full. [1,2,29,30]
The selection of an enforcement purchaser therefore involves more than comparison of headline prices. The viability of the operating business, certainty of financing, employment arrangements, continued supply, transfer approvals, intellectual property rights and regulatory licences may determine whether a nominal offer can actually be implemented. The court’s assessment and the statutory responsibilities of relevant officeholders must remain distinct from the commercial preferences of any individual secured beneficiary. An appropriately structured closing process should identify assets, liabilities to be assumed, counterparty consents, employee transition arrangements, personal-data protection, restricted information, necessary approvals and the timing of payment. Where the purchaser’s bid depends on a material consent or on the willingness of employees to remain, those contingencies should be addressed transparently rather than hidden within a high nominal purchase price. The administrator formulates and implements the transaction under the statutory duties and necessary court permissions; permission succession follows Article 159 and other applicable law. [11,24,29]
The practical implication is that contingency planning should begin before distress. Loan and trust documentation cannot bind unwilling employees or unrelated contractual counterparties in advance merely through a blanket change-of-control clause. What can be done is to understand the borrower’s value-critical contracts, establish which approvals would be needed on a transfer, identify necessary operational continuity measures and create escalation procedures that make it possible to preserve value without overriding others’ rights. This is where the Act’s credit-policy rationale, the interests of ordinary creditors, employee protections and transactional execution must be reconciled. The better an EVC financing anticipates these requirements, the less likely it is that a theoretically comprehensive security position will prove practically difficult to realise.
7. Boardroom and Transaction Practice: Venture Debt, Acquisitions, Refinancing and Governance
A company considering an EVC should begin with its funding need, not the novelty of the instrument. Venture-backed research and development, capital expenditure by an established manufacturer, financing for business succession, debt refinancing, leveraged acquisitions and the turnaround of a distressed enterprise have different cash-flow profiles, ownership constraints and return expectations. An equity raise may be appropriate where a company cannot yet support scheduled interest payments; a conventional secured loan may be more proportionate where readily realisable collateral is available; venture debt may be attractive where the enterprise can forecast cash flows but seeks to limit shareholder dilution. An EVC expands the financing menu, but it does not make a universal judgment in favour of debt over equity or one lender over another.
For a growth company backed by venture capital, EVC lending may provide financing without the immediate dilution normally associated with issuing shares. That potential benefit must be assessed against the requirements of existing investment documents, preference shares, share options, convertible instruments and future financing rounds. A right that extends to the company’s total assets may create additional consent questions when the company plans a material acquisition, divestment or strategic restructuring. Future investors will want to understand the lender’s covenants, consent thresholds, security priority, maximum amount and circumstances in which the charge can be released. A financing that appears cheaper than equity on day one may impose expensive constraints on subsequent corporate transactions if those questions are left unresolved.
Acquisition financing presents an even sharper problem of entity-level structuring. If an acquisition special-purpose company is the borrower and the target business is legally separate, Article 13 prevents the target from merely granting an EVC over its own total assets to secure the acquirer’s debt. The transaction team must analyse whether and how the relevant corporate entities can lawfully become borrowers, whether a proposed post-closing reorganisation is feasible, and how guarantees and traditional security interests interact with the EVC limitations. Article 25 includes special rules relating to mergers involving an EVC. These should be examined in the specific transaction sequence; a general post-acquisition plan to “merge borrower and target later” is not a substitute for analysing the statutory consequences, company-law approvals and the rights of existing lenders. Articles 25(3) and (4) address extension of a disappearing debtor’s EVC to the survivor’s or newly formed company’s total assets and the treatment of other security. Where both merging debtors have EVCs, Article 25(5) prevents the merger without an agreement on post-merger priority among all holders within the statutory scope; specified other security already senior to all relevant EVCs is excluded. Article 26(2) separately prohibits transferring liabilities for specified secured claims to another company through a company split. Merger and company-split routes must therefore be tested separately and in transaction sequence. [1,29]
Due diligence on a target company with an outstanding EVC must go beyond the commercial register. The acquirer should review the facility and trust agreements, the identity and rights of trustees and beneficiaries, maximum-amount provisions, other security, consent rights over transactions outside ordinary business, financial information covenants, restrictions on additional debt, acceleration provisions, relevant guaranties and release procedures. A share purchase normally leaves the target as the same legal company; it does not automatically discharge the EVC. Equally, changes of ownership and management may have contractual consequences even where the security remains registered. The share purchase agreement should address regulatory and lender cooperation, necessary consents, conditions precedent, relevant warranties and the post-closing integration plan. The buyer should avoid committing itself to operational integration that would require the transfer of core business assets before the relevant consent arrangements have been resolved. [1,29]
Lenders should not treat creation of the security as completion of underwriting. If future cash flows and operating value underpin the credit decision, the lender needs internal competence to assess the borrower’s products, customers, technological differentiation, human capital, regulatory risks and management execution over time. The FSA’s approach to valuation and provisions supports business-sensitive evaluation rather than a mechanical designation of the entire enterprise as conventional liquid collateral. Credit committees should receive analysis of downside scenarios, concentration risks, the feasibility of restructuring and the constraints arising from creditor and employee rights. Trustee structures also require appropriate conflict management, recordkeeping and information arrangements; they should not be regarded as a mechanism for transferring all governance responsibility away from lenders. [8,10,16,17,20]
The borrower’s board should, in turn, create a clear decision architecture after the financing closes. The business must know who monitors liquidity and covenant performance, who may begin discussions with lenders, what asset sales require statutory or contractual consent, when a proposal must be presented to the board and what records should be preserved. A material disposal completed without the necessary Article 20 consent can raise questions about the legal effectiveness of the transaction as well as directors’ responsibilities. Legal, finance, corporate development and business management should therefore operate a common review process. It is particularly important to distinguish the lender’s contractual approval from the board’s independent determination that the proposed transaction is in the company’s interests.
Finally, claims about the new regime’s actual effectiveness should remain disciplined. The law has been in force since May 25, 2026, and public materials describe the policy framework, trustee arrangements, registration process and supervisory expectations. Individual lending and enforcement practices are, however, still developing; the absence or existence of a particular practice should not be inferred from the regime’s legislative objectives alone. It would be premature to claim that an EVC invariably lowers interest costs, replaces owner guarantees in every case or guarantees successful recovery on enforcement. The durable value of this reform will depend on whether financial institutions can understand and support viable businesses, whether borrowers can communicate honestly about performance, and whether the legal framework protects the legitimate rights of creditors, employees and contractual counterparties when circumstances deteriorate. Used in that spirit, the EVC is more than a substitute form of collateral: it is an opportunity to create a more informed and sustainable relationship between business finance, corporate governance and the preservation of enterprise value.
Frequently Asked Questions
Q1. What is an Enterprise Value Charge (EVC), and when did it take effect in Japan?
An EVC is a statutory security right over the total assets of a company, including assets that will belong to it in the future, established under the Act on the Promotion of Cash Flow-Based Lending. The principal provisions took effect on May 25, 2026. It is intended to support lending based on a company’s business prospects, but does not guarantee that a bank will extend credit. [1,6]
Q2. How does an EVC differ from a share pledge or a real estate mortgage?
A share pledge burdens shares owned by shareholders, while a mortgage ordinarily covers specified property. An EVC is granted by the borrower company over its entire pool of company-owned assets as an integrated security right. It does not itself transfer shareholder voting rights or make the bank the owner of the company’s business. [1,11]
Q3. Can an individual sole proprietor or a general incorporated association grant an EVC?
No. Article 2(2) refers to companies under Article 2(i) of the Companies Act: stock companies, general partnership companies, limited partnership companies and limited liability companies. Sole proprietors and general incorporated associations are outside that definition. [1,29]
Q4. Is a shareholders’ meeting always needed to create an EVC?
No. Article 10 prescribes the decision process for the company’s form and governance. An ordinary board-governed stock company generally uses a board resolution, subject to the statutory alternative provided in its articles; permitted delegation in qualifying committee structures must also be checked. There is no universal shareholder-approval requirement. [1,29]
Q5. Is signing a loan agreement with a bank sufficient to create the charge?
No. The Act requires a statutory EVC trust agreement involving a qualified trustee, the applicable corporate approvals and registration in the borrower’s commercial register, subject to specific legal rules. The FSA’s model trust documentation is useful drafting guidance, not a substitute for satisfying the statute or an obligatory universal form. [5,12,29]
Q6. Are personal guarantees by business owners completely prohibited?
The Act does not categorically prohibit concluding a guarantee, but Article 12 restricts enforcement of specified personal guarantees, living-asset security and indirect personal exposure, including after the creditor ceases to be a specified secured creditor. Any exception requires satisfaction of the ordinance and the relevant contractual conditions, not merely a generic allegation of default. [4,29,31]
Q7. Can the borrower sell assets or transfer a business after an EVC is registered?
Generally, ordinary-course use and disposal of assets remain possible. Article 20 nevertheless requires statutory consent for certain significant disposals and transfers of all or an important part of the business, and provides specific rules on the effect of noncompliant actions. The applicable lender covenants, Companies Act approvals and contractual third-party consents should be reviewed separately. [1,29]
Q8. Can a company use an EVC when existing bank debt or security is already outstanding?
Potentially, but existing security, negative pledges, early-repayment terms, consent provisions, priorities and Article 11’s restrictions on duplicate-security enforcement must be reconciled. Existing third-party rights do not disappear merely because an EVC is created. [1,29]
Q9. Can an EVC lender direct staffing decisions, salaries or other management decisions?
Not merely by obtaining the EVC. Statutory or contractual consent rights and advice do not themselves confer management authority or the power to determine working conditions. Actual, concrete control over fundamental working conditions may nevertheless require a separate assessment of employer status under the Trade Union Act. Directors retain their own duties. [11,24]
Q10. Does poor financial performance automatically result in enforcement?
No. Performance deterioration must be assessed against contractual defaults, statutory enforcement requirements and available restructuring options. The parties may consider waivers, rescheduling, additional financing or sponsor support, but no such remedy is guaranteed. EVC enforcement itself follows a distinct court-supervised statutory procedure. [1,29]
Q11. Does enforcement automatically transfer employees to a purchaser of the business?
No. A business sale in enforcement requires the applicable conditions, including genuine consent from the employee, for transferring the employment contract. Notice of commencement, the administrator’s information-provision effort duty and the court’s hearing before approval are distinct procedures, not general substitutes for individual consent. [23,24,29]
Q12. What should an M&A purchaser investigate if the target has an outstanding EVC?
The commercial register, loan and trust agreements, trustee and beneficiary structure, other security, secured-amount provisions, covenants, change-of-control conditions, merger and transfer restrictions, release requirements and the post-completion integration plan should all be reviewed. A share acquisition does not itself release the company’s EVC, and a group-level acquisition facility cannot automatically be secured by another company’s EVC. [1,29]
About the Legal Update Series
SAKURA Law Office and Managing Partner Kenshiro Michishita publish the Legal Update series to provide practical legal analysis of corporate and M&A matters, private equity, financing and financial regulation, corporate governance, cross-border transactions, restructuring, dispute resolution, crisis management, intellectual property and other legal issues that bear directly on enterprise decisions. Each edition is prepared with an emphasis on primary legal and regulatory sources, a careful distinction between binding law and supervisory guidance, and the practical consequences for contracts, board decisions and disputes. Information about the firm and the author is available on the official website and the Managing Partner’s professional profile.
Related resources: SAKURA Law Office | Managing Partner Kenshiro Michishita — Profile
How SAKURA Law Office Can Assist
SAKURA Law Office assists domestic and international businesses, investors and financial institutions with evaluating the availability and implications of the EVC regime, designing facility and trust arrangements, reconciling existing collateral and personal guarantees, reviewing corporate approvals and registration requirements, negotiating covenants and ongoing reporting, and planning refinancing or syndicated credit structures. The firm also advises on venture debt, acquisition finance, business succession, sponsor-led transactions, financial distress and enforcement-related issues involving corporate, security, insolvency and employment law. The availability of financing, trustee licensing, registration and enforcement remains subject to the competent authorities, applicable law and the particular facts and agreements; legal counsel cannot guarantee these outcomes.
Contact
SAKURA Law Office
Ark Hills South Tower 4F, 1-4-5 Roppongi, Minato-ku, Tokyo 106-0032, Japan
Managing Partner Kenshiro Michishita
Principal References
2. e-Gov Laws | Enforcement Order, Cabinet Order No. 243 of 2025 (current-law entry; Japanese)
Disclaimer
This Legal Update has an analysis date of October 27, 2026 and draws on official legal and regulatory material verified by that date, including the Act, subordinate instruments, FSA materials, the Legal Affairs Bureau’s registration guidance and the revised Business Transfer Guidelines. The original research dates were October 9, 2026 for the Japanese draft and October 11 for the English draft; both editions now share the same analysis and final-revision date. It provides general legal information, not an opinion on a particular loan, security arrangement, guarantee, acquisition, restructuring or enforcement. Mandatory law, statutory administrative obligations, supervisory guidance, nonbinding models and the practical recommendations in this article have different legal effects.
Creation and enforcement, priority, contractual validity, succession to regulatory permissions or employment contracts, underwriting, credit assessment and provisioning depend on the law at the relevant time, the agreements and the specific circumstances. References include legislation as promulgated, instruments attached to consultation-result publications, historical policy documents and updating webpages; they are not all consolidated statements of current binding law. Authoritative Japanese legal text prevails over explanatory English terminology. Current legislation, administrative materials, filing methods and the competent authorities’ practice should be reconfirmed, with transaction-specific advice, before action is taken.