Concluding a Japanese Bankruptcy Case: "Discontinuance" vs. "Termination"

All Japanese bankruptcy proceedings (破産手続 - hasan tetsuzuki) that involve the appointment of a bankruptcy trustee (破産管財人 - hasan kanzainin) must eventually come to a formal end. The manner in which a case concludes, however, depends significantly on whether the bankruptcy estate (破産財団 - hasan zaidan) possesses sufficient assets to cover administrative costs and make distributions to creditors. The Japanese Bankruptcy Act (破産法 - Hasan Hō) primarily provides for two distinct methods of concluding such cases: "Discontinuance" (異時廃止 - iji haishi) and "Termination" (破産手続終結 - hasan tetsuzuki shūketsu).

Understanding the differences between these two outcomes is crucial for creditors, as it directly impacts the likelihood of receiving any payment on their claims.

I. Discontinuance of Bankruptcy Proceedings (異時廃止 - Iji Haishi)

"Discontinuance of bankruptcy proceedings," or iji haishi, as defined in Article 217 of the Bankruptcy Act, occurs when it becomes apparent after the bankruptcy proceedings have commenced and a trustee has been appointed that the estate lacks sufficient assets to even cover the administrative costs of the bankruptcy procedure itself.

A. Grounds for Discontinuance

The primary ground for iji haishi is the insufficiency of the bankruptcy estate to cover the "expenses of the bankruptcy proceedings" (破産手続の費用 - hasan tetsuzuki no hiyō). These expenses primarily refer to administrative claims (財団債権 - zaidan saiken), which include the trustee's remuneration, court costs, expenses for preserving and liquidating assets, and certain high-priority pre-petition claims like recent taxes or wages. If the estate cannot satisfy these, then by definition, no funds will be available for distribution to any lower-ranking bankruptcy creditors (hasan saiken).

It's important to distinguish iji haishi from "simultaneous abolition" (同時廃止 - dōji haishi). Simultaneous abolition occurs at the very outset of the case, typically for individual debtors with no discernible assets, and in such cases, a trustee is usually not appointed. Iji haishi, on the other hand, happens after a trustee has been appointed and has undertaken some administration, only to find that the realizable assets are inadequate to proceed further with distributions to general creditors.

B. The Discontinuance Procedure

1. Trustee's Assessment and Report: The trustee, after attempting to collect and realize assets, will report to the bankruptcy court if they conclude that the estate is insufficient to cover procedural costs and make distributions. This report will include a final statement of assets and liabilities.
2. Creditors' Meeting for Hearing Opinions (意見聴取集会 - iken chōshu shūkai): Before deciding on discontinuance, the court must, in principle, convene a creditors' meeting to hear the opinions of the creditors regarding the proposed iji haishi (Bankruptcy Act, Article 217, Paragraph 1). The trustee will also present their findings and reasoning at this meeting.
3. Court's Order of Discontinuance (廃止決定 - haishi kettei): If, after considering the trustee's report and the creditors' opinions, the court finds that the grounds for discontinuance are met, it will issue an Order of Discontinuance.
4. Public Notice: This decision is then publicly announced, typically in the Official Gazette (官報 - kanpō).

C. Consequences of Discontinuance

• Closure of Proceedings: The bankruptcy proceedings are formally closed.
• No Distributions to Bankruptcy Creditors: The defining feature of iji haishi is that no distributions are made from the estate to general or priority bankruptcy creditors because the assets were insufficient to even cover the administrative costs.
• Impact on Individual Debtors: For an individual debtor, the discontinuance of the bankruptcy proceedings due to insufficient assets does not prevent them from seeking or obtaining a discharge of their debts (免責 - menseki). The discharge application process, which aims to give the debtor a fresh financial start, proceeds as a separate, albeit related, matter.
• Impact on Corporate Debtors: For a corporate debtor, iji haishi effectively leads to the dissolution of the legal entity. Since there are no assets to distribute, the company ceases to exist for practical purposes.
• Claim Investigation (Saiken Chōsa): In cases clearly heading towards iji haishi, a full and formal claim investigation and allowance process for general bankruptcy claims is often truncated or not fully conducted by the trustee, as there will be no assets against which these claims could receive a dividend.

II. Termination of Bankruptcy Proceedings (破産手続終結 - Hasan Tetsuzuki Shūketsu)

"Termination of bankruptcy proceedings," or hasan tetsuzuki shūketsu, as defined in Article 220 of the Bankruptcy Act, is the method of concluding a case when the administration of the estate has been completed and distributions have been made to creditors.

A. Grounds for Termination

This occurs after the bankruptcy trustee has carried out a final distribution (最後配当 - saigo haitō) or a simplified distribution (簡易配当 - kan-i haitō) to creditors. It signifies that the trustee has liquidated all available assets, paid all administrative claims, and distributed the remaining proceeds to bankruptcy creditors according to their legal priorities.

B. The Termination Procedure

1. Trustee's Final Account (任務終了の計算報告 - ninmu shūryō no keisan hōkoku): After completing all distributions, the trustee prepares and submits a final account of their administration to the bankruptcy court. This report details all receipts, expenditures, and the distributions made.
2. Final Creditors' Meeting (任務終了計算報告集会 - ninmu shūryō keisan hōkoku shūkai): The court convenes a final creditors' meeting where the trustee presents this final report (Bankruptcy Act, Article 88, Paragraph 3).
3. Creditor Objections: Creditors have the opportunity at this meeting to raise any objections to the trustee's final accounts.
4. Court Approval and Order of Termination: If no valid objections are raised, or once any objections are resolved, the court approves the trustee's final accounts. Following this, the court issues an Order of Termination of Bankruptcy Proceedings (破産手続終結決定 - hasan tetsuzuki shūketsu kettei) (Bankruptcy Act, Article 220, Paragraph 1).
5. Public Notice: This termination order is publicly announced.

C. Consequences of Termination

• Formal Conclusion of Proceedings: The bankruptcy case is officially closed.
• Trustee's Duties Completed: The trustee's primary responsibilities are concluded, and they are generally discharged from their duties (though they may have minor residual tasks or could be re-involved if, for example, significant new assets are discovered later).
• Impact on Individual Debtors: For individuals, the granting of a discharge (if applied for and approved) often coincides with or follows the termination of proceedings, allowing them a fresh start.
• Impact on Corporate Debtors: The corporation is dissolved. The termination order leads to the eventual closure of its commercial registration (破産登記の抹消 - hasan tōki no masshō), and the legal entity ceases to exist.

III. Consensual Discontinuance (同意廃止 - Dōi Haishi)

A less common method for concluding bankruptcy proceedings is "consensual discontinuance" (dōi haishi) under Article 218 of the Bankruptcy Act. This can occur if all bankruptcy creditors who have filed proofs of claim and whose claims have been allowed (or are undisputed) consent to the discontinuance of the proceedings. This also requires court approval and is typically only feasible in cases with a very small and cooperative creditor body.

IV. Key Differences and Implications Summarized

V. Post-Conclusion Matters

Even after an order of discontinuance or termination, some issues may persist or arise:

• Trustee's Continuing (Limited) Role: While primary duties end, a trustee might be involved if significant, previously unknown assets are discovered (see Article 215 regarding additional distributions after termination). The trustee is also responsible for the proper handling and storage of the debtor's books and records for a statutory period.
• Pending Litigation: The effect on ongoing lawsuits varies:
  • Discontinuance (Iji Haishi): For an individual debtor, lawsuits related to bankruptcy claims that were interrupted and involved the trustee may be resumed by the debtor. For a corporation, its dissolution typically leads to the abatement of most lawsuits unless there's a specific reason for a successor (like a specially appointed liquidator for limited purposes) to continue.
  • Termination (Shūketsu): Most litigation directly involving the estate would have been resolved. However, if funds were set aside (供託 - kyōtaku) for a disputed claim pending litigation, legal proceedings involving the trustee to determine entitlement to those set-aside funds might continue even after the general termination of the main bankruptcy case (Bankruptcy Act, Article 133, Paragraph 3). Avoidance actions (hinin soshō) should ideally be concluded before termination, as their continuation post-termination can be problematic.
• Corporate Dissolution and Deregistration: For corporations, both iji haishi and shūketsu ultimately lead to the entity being struck from the commercial register, marking its final legal demise.

Conclusion

The conclusion of Japanese bankruptcy proceedings for cases involving a trustee takes one of two primary forms: Discontinuance (iji haishi) when assets are insufficient for distributions, or Termination (hasan tetsuzuki shūketsu) after distributions have been made. While both signify the end of the court-supervised administration by the trustee, the path taken and the implications for creditors—particularly regarding the possibility of recovering any portion of their claims—are vastly different. Understanding these distinctions helps creditors set realistic expectations and comprehend the final stages of a Japanese bankruptcy case.