Due to factors such as the COVID-19 pandemic, many businesses are struggling to repay bank loans, pay rent, or cover employee salaries. Business owners in such situations have several options, including liquidation procedures (bankruptcy and special liquidation), rehabilitation procedures (civil rehabilitation and corporate reorganization), and private restructuring. It is crucial to act early to minimize losses for all parties involved.

About Liquidation Procedures

Bankruptcy Filing

Bankruptcy is one of the legal liquidation procedures. By filing for bankruptcy with the court, a company becomes a bankrupt entity, and a bankruptcy trustee is appointed to take over management responsibilities. In principle, debt repayments by the bankrupt company are prohibited (as well as compulsory enforcement of claims), and the trustee investigates the company’s assets and liabilities. Ultimately, if there are no distributable assets, the bankruptcy proceedings are terminated. If assets are available, repayments are made according to the priority of debts, following a creditors' meeting.

Does the Executive Also Need to File for Bankruptcy?

If a company representative has provided a personal guarantee for bank loans, they are generally required to file for bankruptcy as well. However, under the "Executive Guarantee Guidelines" formulated by the Small and Medium Enterprise Agency and the Financial Services Agency, executives may be exempt from filing for bankruptcy and released from joint guarantee obligations under special circumstances, such as when early bankruptcy filing increases the assets available for creditors. Our attorney, Shunichi Yoda, was involved in the operation of these guidelines at the Ministry of Economy, Trade, and Industry, giving him both the perspective of a policy designer and practical experience as a lawyer.

Can Employee Salaries Still Be Paid?

Employee wage claims are prioritized bankruptcy claims and, in principle, are paid through bankruptcy proceedings. However, since many bankrupt companies lack sufficient funds, bankruptcy filings often take place after payday. If a bankrupt company cannot pay salaries, employees may receive wage protection payments from the Organization for Workers’ Health and Safety. If repayment through bankruptcy is not possible, repayment to the organization is not required.
Our firm has extensive experience in bankruptcy filings and has been continuously appointed as a bankruptcy trustee by the 20th Civil Division of the Tokyo District Court.

Special Liquidation

When a company has only a few creditors (such as when liquidating a subsidiary or a joint venture), special liquidation procedures may be used.
Unlike bankruptcy, special liquidation does not require an external bankruptcy trustee.
Instead, a company’s legal representative acts as the liquidator.
While debt repayment is prohibited, the restrictions are not as stringent as those in bankruptcy proceedings. Under the supervision of the court, the liquidator may either negotiate settlements with creditors (settlement type) or convene a creditors' meeting to approve an arrangement (arrangement type).
Our firm has experience with both settlement-based and agreement-based approaches, enabling smooth company liquidation.

Rehabilitation Procedures

If a business wants to reduce its debt and rebuild operations, it may pursue rehabilitation procedures or private restructuring.

Civil Rehabilitation

Civil rehabilitation is a common rehabilitation procedure that temporarily halts debt repayments while creditors vote on a rehabilitation plan, which typically includes partial debt forgiveness. If cash flow remains tight, additional measures, such as seeking sponsors, business transfers, or a complete capital reduction, may be considered within the process. Unlike corporate reorganization, civil rehabilitation allows the existing management team to maintain control (DIP-type rehabilitation).
Additionally, small commercial debts can be prioritized for payment under a rehabilitation plan approved by creditors.
If executives have provided personal guarantees, they typically need to file for bankruptcy; however, as in bankruptcy proceedings, the Executive Guarantee Guidelines may help avoid this requirement.

Corporate Reorganization

If essential company assets are secured by creditors, civil rehabilitation may not prevent their seizure, making corporate reorganization a better option. Corporate reorganization also suspends debt repayments and allows for debt reductions through an approved reorganization plan.
Unlike civil rehabilitation, corporate reorganization is typically used by larger companies, involves a court-appointed trustee rather than existing management (though some DIP-type reorganizations are now permitted), and offers more control over secured claims.

Private Restructuring

Private restructuring options include those supervised by the Small and Medium Enterprise Rehabilitation Support Council, business revitalization ADR, and purely private arrangements.
Council-supervised and ADR restructuring involve oversight by public institutions, while purely private restructuring is managed by main banks, attorneys, and tax professionals.
The main advantage of private restructuring is that it avoids public notices in the official gazette, minimizing reputational risks. Additionally, since it generally only affects financial institutions, it has less impact on business partners.
Our attorney, Shunichi Yoda, has experience overseeing the Small and Medium Enterprise Rehabilitation Support Council at the Ministry of Economy, Trade, and Industry and has handled many private restructuring cases.

Our Firm's Experience

Our firm has extensive experience acting as bankruptcy filing agents, being appointed as bankruptcy trustees by the Tokyo District Court’s 20th Civil Division, serving as civil rehabilitation filing agents and supervisory committee representatives, representing sponsors in corporate reorganization proceedings, and acting as debtor representatives in private restructuring cases.