Acquired Debt from a Japanese Company? What You MUST Know About Perfection Against Debtors and Third Parties in Japan

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read

The acquisition of debt, or receivables (referred to as saiken in Japanese), is a significant aspect of modern finance and commerce. For businesses looking to engage in such transactions involving Japanese companies or assets, a thorough understanding of Japan's legal framework governing the assignment of claims (saiken jōto) is paramount. The Japanese Civil Code, particularly after its significant revisions effective April 1, 2020, lays down specific rules concerning how an assignment must be "perfected" to be effective against the debtor (saimusha) and, crucially, against other third parties (daisansha). Failure to comply with these perfection requirements can lead to the assignee finding their acquired rights unenforceable or subordinate to others.

This article explores the core principles of assigning claims under Japanese law, with a particular focus on the critical perfection requirements against debtors and third parties.

The Basics of Assigning Claims (Saiken Jōto) in Japan

Under Japanese law, a "claim" or "receivable" generally refers to the right to demand a specific act (performance) from another party. This most commonly involves the right to demand payment of money, such as a sales credit or a loan receivable.

The fundamental principle enshrined in Article 466(1) of the Japanese Civil Code is that claims are freely assignable. An assignment itself is typically effected by an agreement between the assignor (jōto-nin – the original creditor) and the assignee (jōto-uke-nin – the party acquiring the claim). However, while the assignment agreement may be valid between the assignor and assignee, making this assignment effective and enforceable against the debtor and other potential claimants requires further steps known as perfection (taikō yōken).

Agreements Restricting Assignment (Jōto Seigen Tokuyaku): A Shift in Paradigm

It has been common for contracts in Japan to include clauses that restrict or prohibit the assignment of claims arising from that contract (a jōto seigen tokuyaku). Historically, the treatment of assignments made in breach of such restrictions was complex, often rendering the assignment ineffective if the assignee was aware of the restriction.

The revised Civil Code has significantly altered this landscape. Article 466 now provides:

  • Effectiveness of Assignment Despite Restriction (Art. 466(2)): An assignment of a claim is effective even if the parties (original creditor and debtor) had agreed to restrict its assignment. This marks a major shift towards promoting the transferability of claims as assets.
  • Debtor's Right to Refuse Performance to Certain Assignees (Art. 466(3)): However, the debtor retains certain protections. The debtor can refuse to perform their obligation (e.g., make payment) to an assignee if that assignee knew (had actual knowledge of) the assignment restriction, or was grossly negligent in not knowing about it. The debtor can also assert any defenses against such an assignee that they could have asserted against the assignor.
  • Debtor's Rights When Facing Demand from an "Aware" Assignee (Art. 466(4)): If an assignee who knew or was grossly negligent in not knowing about the restriction demands performance, and the assignor has not yet fulfilled their own obligations to the debtor under the original contract (e.g., if the assignor was supposed to deliver goods and has not), the debtor can demand that the assignee deposit a sum equivalent to the performance with an official depository.
  • Debtor's Right to Deposit (Art. 466-5, introduced in 2020 revisions): If a claim subject to an assignment restriction is assigned, the debtor may deposit the object of their performance with an official depository (kyōtaku). The assignee who knew or was grossly negligent about the restriction can only claim this deposited amount by obtaining the consent of the assignor or by presenting a final and binding judgment ordering the assignor to allow the payment.

These provisions aim to strike a balance: facilitating the use of receivables as collateral or for securitization, while still offering some protection to debtors who may have legitimate reasons for restricting assignment (e.g., maintaining a specific relationship with the creditor).

For assignees, this means that while an assignment restriction no longer automatically voids the assignment, due diligence regarding such restrictions remains crucial. An assignee who proceeds despite knowledge (or gross negligence in not knowing) of a restriction may face refusal of payment from the debtor or be forced to deal with funds deposited with a public authority. The debtor's explicit consent to the assignment can, however, override the effect of an assignment restriction.

Perfection Against the Debtor (Saimusha Taikō Yōken): Making the Assignment Binding on the Obligor

Even if an assignment is valid and there are no effective assignment restrictions, for the assignee to be able to safely demand performance from the debtor, the assignment must be perfected against the debtor. This is stipulated in Article 467(1) of the Civil Code. Perfection against the debtor serves to:

  • Protect the debtor from the risk of having to pay twice (once to the original creditor and again to the assignee).
  • Provide clarity to the debtor as to whom they should rightfully render performance.

There are two methods to achieve perfection against the debtor:

  1. Notice (tsūchi) from the Assignor to the Debtor: The assignor must notify the debtor of the assignment.
    • Content and Form: The notice should clearly identify the assigned claim and the fact of its assignment to the specified assignee. While there are no overly strict statutory forms for the notice itself for debtor perfection (unlike third-party perfection, discussed later), it must be clear and unequivocal.
    • Who Gives Notice: Crucially, the notice must originate from the assignor. A notice given solely by the assignee is generally insufficient for perfecting against the debtor. However, the assignee can deliver a notice prepared or authorized by the assignor.
  2. Consent (shōdaku) from the Debtor: The debtor may consent to the assignment.
    • Nature of Consent: This consent can be given to either the assignor or the assignee. Consent implies acknowledgment and acceptance of the assignee as the new creditor.

Consequences of Non-Perfection Against the Debtor: If the assignment is not perfected against the debtor through either notice or consent, the debtor can continue to treat the assignor as the rightful creditor. Any payments made by the debtor to the assignor in good faith before perfection will validly discharge the debt, and the assignee will have no recourse against the debtor for such payments (though they may have a claim against the assignor). The assignee simply cannot assert their acquired rights against the debtor until such perfection is complete.

This requirement is often characterized in Japanese legal practice as a "rights defense" (kenri kōben) for the debtor. This means the debtor must actively raise the lack of proper notice or consent as a defense if sued by the assignee.

Furthermore, Article 468(1) of the Civil Code provides that the debtor can assert against the assignee any defenses that they could have asserted against the assignor, provided those defenses arose before the debtor received notice of the assignment or gave consent. For example, if the goods delivered by the assignor were defective, the debtor can raise this defense against the assignee who is demanding payment.

Perfection Against Third Parties (Daisansha Taikō Yōken): Winning the "Race of Diligence"

Beyond making the assignment effective against the debtor, it is often critical to perfect the assignment against "third parties." This is essential for establishing priority if there are competing claims to the same receivable. Third parties in this context can include:

  • Other assignees of the same claim (in cases of double assignment).
  • Attaching creditors of the assignor (creditors who seek to seize the assignor's assets, including the claim).
  • A trustee in bankruptcy if the assignor becomes bankrupt.

Article 467(2) of the Civil Code dictates the requirements for third-party perfection: the notice to the debtor (from the assignor) or the debtor's consent must be effected by an "instrument with a certified date" (kakutei hizuke no aru shōsho).

What is an "Instrument with a Certified Date"?
This is a document whose date of creation or existence is officially certified by a public authority, making it difficult to fraudulently backdate. Common examples include:

  • Content-Certified Mail (naiyō shōmei yūbin): Mail sent through the Japanese postal system where the post office certifies the content of the letter and the date it was sent. The date of delivery of this notice to the debtor often becomes the critical certified date.
  • Notarized Document (kōsei shōsho): A document prepared by or authenticated by a Japanese notary public (kōshōnin). The date of notarization serves as the certified date.
  • Other official certifications of date by public offices.

The Rule of Priority: The perfection against third parties establishes priority among competing claimants. Generally, the principle is "first in time, first in right," based on the earliest certified date. This means:

  • If notice is used: The date the notice with a certified instrument (e.g., content-certified mail) reaches the debtor is paramount.
  • If consent is used: The certified date on the instrument evidencing the debtor's consent is key.

Consequences of Failing to Perfect Against Third Parties: If an assignee fails to obtain perfection with a certified date, their claim may be subordinate to a subsequent assignee of the same claim who does perfect with a certified date, or to an attaching creditor of the assignor, or to the assignor's bankruptcy trustee.

The PDF examples illustrate a scenario where a claim is assigned to Plaintiff, but the original creditor (A) had also assigned it to another party (B) and notified the debtor of that assignment via content-certified mail. In such a case, B would likely have priority over the Plaintiff if B’s certified date was earlier.

If multiple assignees exist and none have perfected with a certified date instrument, the situation can be complex. One interpretation suggests the debtor, faced with multiple unperfected (against third parties) assignees, might be able to refuse payment to any of them until the priority is clarified, possibly by depositing the funds with an official depository (kyōtaku) to avoid the risk of paying the wrong party.

Special Regimes for Perfection: The Claim Assignment Registration System

Recognizing the practical difficulties and paperwork involved in sending individual notices with certified dates for bulk assignments (common in securitization or when using a portfolio of receivables as collateral), Japan has a special law: the Act on Special Provisions of the Civil Code Concerning the Perfection Requirements for the Assignment of Movables and Claims (Dōsan oyobi Saiken no Jōto no Taikō Yōken ni kansuru Minpō no Tokurei-tō ni kansuru Hōritsu), often referred to as the Saiken Jōto Tokureihō.

This Act allows for:

  • Registration of Claim Assignments by Corporations: If the assignor is a corporation, it can register the assignment of claims (including future claims) in a publicly accessible claim assignment register maintained by the Legal Affairs Bureau (Hōmukyoku).
  • Third-Party Perfection via Registration: Once registered, the assignment is deemed to have been perfected against third parties with a certified date (the date of registration). This provides a powerful and efficient alternative to the traditional method of notice/consent with a certified date instrument, especially for large portfolios of receivables.
  • No Debtor Perfection: Importantly, this registration only achieves perfection against third parties. It does not perfect the assignment against the debtor. The assignee must still separately notify the debtor or obtain the debtor's consent (though this notice/consent for debtor perfection does not need a certified date) to enforce the claim against the debtor. The debtor is not obligated to check the registry.

Practical Due Diligence and Safeguards for Assignees

When acquiring claims governed by Japanese law, assignees should undertake rigorous due diligence and implement safeguards:

  1. Investigate the Underlying Claim: Verify the existence, validity, and enforceability of the claim, and assess the debtor's creditworthiness.
  2. Check for Assignment Restriction Agreements: While no longer an absolute bar, understand the implications if restrictions exist, especially concerning the assignee's knowledge.
  3. Ensure Prompt and Proper Perfection:
    • Against the Debtor: Secure the assignor's cooperation to send a clear notice to the debtor immediately, or obtain the debtor’s direct consent.
    • Against Third Parties: Use instruments with certified dates (content-certified mail for notice, notarized documents for consent) without delay. For corporate assignors, strongly consider using the claim assignment registration system under the Special Act for robust third-party perfection.
  4. Obtain Representations and Warranties: Seek contractual assurances from the assignor regarding the claim's validity, the absence of undisclosed prior assignments, and their cooperation in perfection.
  5. Consider "Future Claims" (Shōrai Saiken): The assignment of future claims is generally permissible in Japan. However, the specifics of identification and perfection for future claims require careful attention, especially concerning the registration system which explicitly accommodates them.

Conclusion: Navigating the Waters of Japanese Claim Assignments

The Japanese legal framework for the assignment of claims, particularly its dual-layered perfection requirements (against the debtor and against third parties), is designed to balance the interests of debtors, assignors, assignees, and other stakeholders. While the Civil Code promotes the free transferability of claims, the procedures for ensuring that such transfers are robust and hold priority are precise and demand careful execution.

For any entity involved in acquiring debt from Japanese companies or dealing with Japanese receivables, a proactive and meticulous approach to perfection is not just advisable—it is essential. Given the nuances, especially with the interplay of the Civil Code, the Special Act on Claim Assignment Registration, and evolving case law, seeking expert Japanese legal counsel is a critical step to safeguard one's interests in these transactions.