Business Transfers in Japan: What Happens to Debts When the Creditor is Unclear Post-Acquisition?

Business transfers, or jigyō jōto (事業譲渡) as they are known in Japan, are a frequently utilized method for corporate restructuring and M&A activity. Unlike statutory mergers where all assets, liabilities, rights, and obligations of a company are comprehensively succeeded to by another, a business transfer allows for a more selective approach. The parties to a business transfer agreement can define the specific scope of the business, assets, and liabilities to be transferred. This flexibility, however, can sometimes lead to complexities for third parties, particularly debtors of the transferring company. If the rightful creditor for a pre-existing debt becomes ambiguous after a business transfer – especially when other claimants like tax authorities enter the picture – debtors can find themselves in a precarious position. This article examines such scenarios and explores a debtor's potential recourse through Japan's deposit system, specifically a "deposit due to an unascertainable creditor."

The Mechanics of Business Transfers (Jigyō Jōto) in Japan

A business transfer in Japan is fundamentally a contractual agreement between a transferor company and a transferee company, wherein an entire business or a distinct part of it is transferred. The Companies Act (会社法 - Kaishahō) provides the main legal framework.

Key Distinctions from Mergers:

• Selective Succession: The most significant difference is that a business transfer does not automatically entail the transfer of all rights and obligations. The specific assets, liabilities, and contracts being transferred must be identified in the business transfer agreement.
• Individual Perfection Requirements: Because it's not a universal succession, the transfer of individual assets (like real estate, movable property, or receivables) requires adherence to the specific perfection requirements applicable to each asset type to be effective against the debtor or other third parties. For example, transfer of real estate requires registration, and transfer of receivables requires notice to or consent from the debtor under the Civil Code.

Assumption of Debts:
The Companies Act has specific provisions regarding the transferee's liability for the transferor's debts, which often depend on whether the transferee continues to use the transferor's trade name:

• Use of Transferor's Trade Name (Companies Act Article 22): If the transferee company continues to use the trade name of the transferor company, the transferee is also presumed to be liable for the debts of the transferor arising from its business. The transferee can avoid this liability if, without delay after the transfer, it registers that it will not be liable or if both the transferor and transferee notify third-party creditors that the transferee will not be liable. Creditors generally have two years from the public notice of the transfer or the notification to make their claim against the transferee under this provision.
• Non-Use of Transferor's Trade Name (Companies Act Article 23): If the transferee does not continue to use the transferor's trade name, it is generally not liable for the transferor's debts unless the transferee explicitly advertises its intention to assume such debts. If such an advertisement is made, creditors again have a two-year window to make their claims.

Spotlight on Receivables: The Linchpin of Civil Code Article 467

When a business transfer includes the transfer of existing receivables (e.g., accounts receivable owed to the transferor by its customers), these fall under the category of "nominative claims" (shimei saiken 指名債権). The effective transfer of such claims, particularly their enforceability against the original debtor and other third parties, is governed by Article 467 of the Civil Code (債権の譲渡の対抗要件 - saiken no jōto no taikō yōken).

Article 467 of the Civil Code stipulates that the assignment of a nominative claim cannot be asserted against the obligor or other third parties unless:

1. The assignor (the transferring company) has given notice of the assignment to the obligor; OR
2. The obligor has given its consent to the assignment.

Crucially, for this notice or consent to be effective against third parties (other than the obligor itself), the notice or consent must be evidenced by an instrument bearing a certified date (kakutei hizuke 確定日付). A certified date can be obtained, for example, through a notary public or by using content-certified mail.

Consequences of Non-Perfection:
If the assignment of a receivable is not perfected in accordance with Article 467 (i.e., no notice with a certified date from the assignor to the debtor, or no consent with a certified date from the debtor), the transferee company cannot legally assert its claim against the debtor. The debtor can, in such a situation, still validly discharge its debt by paying the original creditor (the transferor). Furthermore, other third parties, such as a creditor of the transferor who subsequently seizes the receivable, may also have a superior claim if the assignment to the transferee was not properly perfected against them.

When Creditors Collide: A Debtor's Post-Transfer Predicament

Consider a common scenario:

1. A debtor company (let's call it "Debtor Corp") owes a sum to "Transferor Ltd."
2. Transferor Ltd. enters into a business transfer agreement with "Transferee Inc.," intending to transfer the business segment that generated the receivable from Debtor Corp, along with the receivable itself.
3. Subsequently, Debtor Corp is faced with conflicting instructions or claims:
   • Demand from Transferee Inc.: Transferee Inc. contacts Debtor Corp, informs them of the business transfer, and demands payment of the outstanding amount.
   • Lack of Formal Notice/Consent: However, Debtor Corp has not received any formal notice of assignment bearing a certified date directly from Transferor Ltd., nor has Debtor Corp given its formal consent to such an assignment.
   • Intervention by a Third Party: Around the same time, a national tax authority, pursuing delinquent taxes owed by Transferor Ltd., serves a seizure order (sashiosae meirei 差押命令) on Debtor Corp. This order identifies Transferor Ltd. as the delinquent entity and instructs Debtor Corp (as a third-party obligor) to pay the seized portion of the debt it owes to Transferor Ltd. directly to the tax authority.
   • Transferor Ltd.'s Position: Transferor Ltd. might become uncooperative, simply state it can no longer receive the payment, or provide ambiguous information.

Debtor Corp is now in a bind: Transferee Inc. is demanding payment based on the business transfer, while the tax authority has a legally binding seizure order based on Transferor Ltd.'s tax delinquency. Paying the wrong party could mean having to pay the debt twice.

The "Unascertainable Creditor" Deposit (債権者不確知供託 - Saikensha Fukakuchi Kyotaku): A Potential Safe Harbor?

In situations of genuine uncertainty about the identity of the rightful creditor, Article 494 of the Japanese Civil Code offers a potential remedy:

"When an obligor is unable, without negligence on the obligor's part, to ascertain who the obligee is, the obligor may be discharged from the obligation by depositing the subject-matter of the obligation with an official depository."

This is known as a "deposit due to an unascertainable creditor." The core conditions are:

1. The obligor (debtor) is genuinely unable to determine the true creditor.
2. This inability is not due to the obligor's own negligence. The obligor must have exercised reasonable diligence to ascertain the creditor.

Applicability in the Business Transfer Context:
Could Debtor Corp use this provision? It depends crucially on the legal status of the claims.

• If the assignment to Transferee Inc. was not perfected against Debtor Corp (i.e., no notice with certified date from Transferor Ltd. or no consent from Debtor Corp):
  • Legally, from Debtor Corp's perspective, the creditor for the receivable likely remains Transferor Ltd.
  • In this case, the tax authority's seizure order against Transferor Ltd.'s claim would be valid and binding on Debtor Corp.
  • Therefore, the creditor is not truly "unascertainable" for Debtor Corp. The primary obligee is Transferor Ltd., whose claim is now subject to the tax authority's seizure.
  • A saikensha fukakuchi kyotaku naming "Transferor Ltd. or Transferee Inc." would likely be inappropriate. Debtor Corp's duty would be to comply with the seizure order by paying the tax authority (up to the seized amount) or, if other seizures against Transferor Ltd. also exist creating a competition of claims directly against Transferor Ltd.'s asset, potentially making an "enforcement deposit" naming Transferor Ltd. as the original debtor.
• If the assignment to Transferee Inc. was perfected against Debtor Corp:
  • Legally, Transferee Inc. is now the creditor.
  • A subsequent seizure by a tax authority against Transferor Ltd. for that same receivable should, in principle, be ineffective against Debtor Corp, as the asset no longer belongs to Transferor Ltd. vis-à-vis Debtor Corp.
  • However, if, despite a perfected assignment to Transferee Inc., Transferor Ltd. (or the tax authority based on a claim that the transfer itself was invalid or that a prior lien existed) makes a credible conflicting claim that Debtor Corp cannot easily resolve, then a situation of genuine uncertainty might arise, potentially justifying a saikensha fukakuchi kyotaku.

The scenarios outlined in background materials suggest situations where the debtor company was confused by the transferee's claim on one hand and a tax seizure against the transferor on the other, with the transferor providing little clarity. The advice often hinges on whether the transferee had perfected its claim. If not, the transferor (and thus its seizing creditors) likely remains the party to whom the debtor is primarily obligated or whose creditors can attach the debt.

Navigating the Maze: Perspectives and Guidance

Let's re-examine the situation from the viewpoints mentioned in the provided context:

• The Debtor Company's Perspective:
  Faced with a demand from Transferee Inc. and a seizure order from the tax authority related to Transferor Ltd., the Debtor Company is rightly concerned about double payment. If Transferee Inc. cannot provide proof of a perfected assignment (i.e., a dated notice from Transferor Ltd. or the Debtor's dated consent), the Debtor's obligation likely still legally runs to Transferor Ltd., making the tax seizure effective. In such a case, the Debtor's primary responsibility is to address the seizure order, usually by paying the tax authority. A deposit for an "unascertainable creditor" might be ill-advised if the lack of clarity stems from the Transferee's failure to perfect its claim.
• The Tax Authority's Perspective:
  The tax authority has seized a receivable believed to be an asset of the delinquent Transferor Ltd. If the assignment to Transferee Inc. was not perfected against the Debtor (and thus against third parties like the tax authority), the tax authority can validly collect from the Debtor. The suggestion by a tax official that the Debtor should make a "creditor unascertainable" deposit should be treated with caution by the Debtor; the Debtor needs to understand its own legal position. If the Debtor validly owes the money to Transferor Ltd. (due to non-perfection of assignment), the tax office can directly enforce.
• The Transferee Company's Perspective:
  Transferee Inc. believes it owns the receivable by virtue of the business transfer agreement. However, their ability to enforce this claim against the Debtor and to preempt the tax authority's seizure against Transferor Ltd. depends entirely on whether the assignment was perfected under Civil Code Article 467. The internal agreement between Transferor Ltd. and Transferee Inc. is not, by itself, sufficient to bind the Debtor or third parties. The fact that Transferee Inc. did not use Transferor Ltd.'s trade name mainly impacts general debt assumption rules and does not cure a lack of perfection for specific assigned receivables.

When is a "Creditor Unascertainable" Deposit Truly Justified?

This type of deposit is not a general remedy for every payment dilemma. It is appropriate when there is:

1. Genuine Ambiguity: After due diligence, the debtor truly cannot determine the rightful creditor. This might occur if, for example, there are conflicting dated notices of assignment, or a legitimate legal challenge to the validity of the business transfer itself which directly impacts the ownership of the receivable.
2. No Debtor Negligence: The debtor has taken reasonable steps to clarify the situation (e.g., requesting clear instructions, seeking proof of assignment) but remains unable to ascertain the correct payee.
3. Example: If Transferee Inc. had provided a seemingly valid, dated notice of assignment from Transferor Ltd., but Transferor Ltd. then disputed the notice's validity or scope, or if a pre-existing, perfected security interest in the receivable held by another party came to light, creating genuine conflict.

Mere inconvenience or a desire by the debtor to avoid making a decision between competing claimants is insufficient. The uncertainty must be objective and not resolvable through reasonable efforts by the debtor.

Best Practices for Debtors in Business Transfer Scenarios

Debtors caught in such situations should consider the following:

• Request Clear Documentation: Upon learning of a business transfer that purportedly includes receivables owed by them, debtors should proactively request clear, formal notice of assignment from the assignor (the transferring company), ensuring it bears a certified date.
• Consider Formal Consent: If appropriate and if the transfer is clear, providing formal, dated consent to the assignment can clarify the situation, but this should be done with an understanding of its legal effect.
• Communicate with All Parties: Engage with both the alleged transferee and any other claimants (like a seizing tax authority) to understand the basis and documentation for their respective claims.
• Seek Immediate Legal Advice: These situations can be legally complex. Obtaining advice from legal counsel in Japan is crucial to understand the debtor's rights and obligations and to avoid missteps that could lead to double payment or other liabilities.
• Evaluate Perfection: The core issue will often be whether the assignment of the receivable to the transferee was properly perfected against the debtor. This is the primary factor determining who the debtor can legally pay.

Conclusion: Clarity in Transfers, Certainty in Payments

Business transfers are a vital part of corporate activity in Japan, but they require careful attention to the legal formalities surrounding the transfer of specific assets and liabilities. For debtors whose obligations are included in such transfers, the paramount concern is ensuring they make payment to the legally entitled creditor. The perfection of the assignment of receivables, as mandated by Article 467 of the Civil Code, is the cornerstone of this certainty.

While a "deposit due to an unascertainable creditor" offers a potential shield, it is a remedy for situations of genuine, non-negligent ambiguity regarding the identity of the obligee. It is not a substitute for due diligence or a universal solution when a business transfer is poorly executed regarding its notice to debtors, or when a transferee fails to establish its perfected claim. Debtors must prioritize understanding the legal status of the claims against them before resorting to a deposit, and seeking professional legal guidance is almost always the most prudent path when faced with conflicting demands post-business transfer.