Corporate Bankruptcy in Japan (Hasan): A Step-by-Step Guide for Creditors and Debtors?

Japanese Attorney at Law - Bengoshi L.L.

• 15 min read

When a company in Japan can no longer meet its financial obligations and restructuring is not a viable option, corporate bankruptcy (破産 - hasan) proceedings provide a legal framework for its orderly liquidation and the equitable distribution of its remaining assets to creditors. Unlike reorganization procedures aimed at reviving a business, corporate bankruptcy under the Japanese Bankruptcy Act (破産法 - Hasan-hō) fundamentally leads to the cessation of the company's operations and its eventual dissolution. For any entity doing business with or within Japan, understanding this process is crucial for navigating potential financial distress, whether as a debtor or a creditor. This article offers a guide to the key stages and aspects of corporate bankruptcy proceedings in Japan.

Understanding Corporate Bankruptcy (Hasan) in Japan

The primary objective of corporate bankruptcy in Japan is to achieve an orderly realization of the debtor company's assets and to distribute the proceeds fairly among its creditors according to established legal priorities. For a corporate entity, this process culminates in its dissolution, effectively ending its legal existence.

A defining characteristic of Japanese bankruptcy is that it is a trustee-administered proceeding. Upon the commencement of bankruptcy, the court appoints a bankruptcy trustee (破産管財人 - hasan kanzainin), typically an independent lawyer, who assumes control over the debtor company's assets and manages the entirety of the liquidation and distribution process. This contrasts with debtor-in-possession (DIP) models found in some reorganization procedures.

Commencement of Corporate Bankruptcy Proceedings (手続の開始 - Tetsuzuki no Kaishi)

The initiation of corporate bankruptcy involves several key considerations and steps:

A. Bankruptcy Capacity (破産能力 - Hasan Nōryoku)
Generally, any corporation or other legal entity possesses the capacity to be a debtor in bankruptcy proceedings under Japanese law. This straightforwardly includes privately-held stock companies (株式会社 - kabushiki kaisha) and other common corporate forms. The situation can be more nuanced for public corporations; while core governmental bodies (central and local governments) are not subject to bankruptcy, the capacity of other public or quasi-public entities often depends on their specific enabling statutes and interpretations thereof. Unincorporated associations and foundations that have designated representatives can also be subject to bankruptcy proceedings.

B. Who Can File a Petition? (申立権者 - Mōshitatekensha)
A bankruptcy petition can be filed by several parties:

  • Creditors: Any creditor holding a claim against the debtor company can petition for its bankruptcy. When doing so, the creditor must provide prima facie evidence (sōmei) supporting both their claim and the existence of grounds for bankruptcy (e.g., the debtor's inability to pay).
  • The Debtor Company Itself (Self-Petition - 自己破産, jiko hasan): A company, typically through a resolution by its board of directors, can voluntarily file for its own bankruptcy. In a self-petition, the debtor company is not required to provide prima facie evidence of the grounds for bankruptcy, as its willingness to enter the process is considered sufficient indication.
  • Directors, Liquidators, etc. (Quasi-Self-Petition - 準自己破産, jun jiko hasan): Individual directors, executive officers, or appointed liquidators (in the case of a company already in dissolution) can also file a petition for the company's bankruptcy. If the petition is not filed jointly by all directors (or equivalent governing body members), they, like creditors, must provide prima facie evidence of the bankruptcy grounds. This requirement aims to prevent the abusive use of bankruptcy petitions, for instance, as a leverage tool in internal corporate disputes or to oust existing management.

It's noteworthy that liquidators of a company already in voluntary dissolution have a statutory duty to petition for bankruptcy if they suspect the company is insolvent (i.e., its assets are insufficient to cover its liabilities, as stipulated in laws like Article 484(1) of the Companies Act). Historically, company directors also faced a similar obligation under pre-war commercial law, but this was later abolished. The policy shift reflects a preference for encouraging the voluntary and appropriate use of insolvency procedures rather than compelling filings through the threat of penalties, recognizing that facilitative measures are often more effective than coercive ones in achieving timely and orderly resolutions.

C. Grounds for Commencing Bankruptcy (破産手続開始原因 - Hasan Tetsuzuki Kaishi Gen'in)
For a court to issue a bankruptcy commencement order, specific legal grounds must be established:

  • Inability to Pay Debts (支払不能 - Shiharai Funō): This is the most common ground. "Inability to pay" is defined in Article 2(11) of the Bankruptcy Act as a situation where the debtor, due to a lack of financial capacity (payment ability), is generally and continuously unable to meet its payment obligations as they fall due. This is not about a mere temporary shortage of funds or inability to pay a single debt, but rather a more systemic and ongoing incapacity. The assessment considers the debtor's overall financial condition, including its assets, liabilities, income, operational cash flow, and even its creditworthiness or ability to raise funds.
  • Suspension of Payments (支払停止 - Shiharai Teishi): A debtor's act of suspending payments creates a legal presumption of its inability to pay (Bankruptcy Act, Art. 15(2)). A "suspension of payments" is an objective manifestation by the debtor of its general and continuous inability to meet its obligations. This can take various forms, such as absconding, explicitly declaring an inability to pay at a creditors' meeting, or, very commonly in Japanese business practice, the dishonor of bills of exchange or promissory notes on two occasions within a six-month period, leading to a formal suspension of transactions by the bill clearinghouse. While this presumption is strong, it is rebuttable if the debtor can prove it is, in fact, still able to pay its debts.
  • Excess of Liabilities over Assets (債務超過 - Saimu Chōka): For corporate debtors (but not generally for individual debtors in bankruptcy, though it is a ground for their civil rehabilitation), an "excess of liabilities" is an independent ground for bankruptcy (Bankruptcy Act, Art. 16). This means that if the total value of the company's liabilities exceeds the total value of its assets (balance sheet insolvency), bankruptcy proceedings can be initiated. The valuation of assets in this context is crucial. Using strict liquidation values could render many companies technically insolvent, even if they have positive cash flow. While going-concern valuations are more pertinent in reorganization contexts, for bankruptcy, the objective assessment of the balance sheet indicating an inability to ever satisfy all debts becomes a key trigger.

D. Court Fees and Advance Deposits (予納金 - Yonōkin)
Initiating a bankruptcy case involves costs. The petitioner must pay a standard court filing fee (for instance, a creditor's petition for bankruptcy typically costs JPY 20,000). More significantly, the petitioner is usually required to make an advance deposit (予納金 - yonōkin) to cover the anticipated administrative expenses of the proceedings (Bankruptcy Act, Art. 22). This deposit is crucial because many bankrupt estates have insufficient liquid assets at the outset to fund the process. The amount of the deposit is determined by the court and varies based on factors such as the scale of the debtor's liabilities and assets, the complexity of the case, and the anticipated workload for the trustee. These funds primarily cover the bankruptcy trustee's remuneration and other essential administrative costs like public notices and postage. Courts often have standardized schedules for deposit amounts based on tiers of total liabilities. While there is a provision for procedural expenses to be provisionally paid from the national treasury in cases of petitioner indigence, particularly for self-petitions by individuals, this is rarely applied in corporate bankruptcy cases.

E. Interim Protective Measures (破産手続開始決定前の保全措置 - Hasan Tetsuzuki Kaishi Kettei Mae no Hozen Sochi)
Between the filing of a bankruptcy petition and the court's decision to issue a commencement order, there is a critical interim period. To prevent the debtor from dissipating assets or certain creditors from gaining unfair advantages, the court has the authority to implement various interim protective measures (保全措置 - hozen sochi) (Bankruptcy Act, Art. 24 et seq.). These measures are vital for preserving the value of the potential bankruptcy estate:

  • Orders Prohibiting Debtor Actions: The court can issue orders prohibiting the debtor company from making payments on existing debts or from disposing of its assets (Bankruptcy Act, Art. 28).
  • Stay of Creditor Actions: Individual creditors' attempts to enforce their claims through lawsuits or execution proceedings can be stayed by court order (Bankruptcy Act, Art. 24). In situations where a widespread rush by creditors is anticipated, the court can issue a "comprehensive prohibition order" (包括的禁止命令 - hōkatsuteki kinshi meirei) that broadly forbids all creditors from taking such actions (Bankruptcy Act, Art. 25).
  • Appointment of a Provisional Administrator (保全管理人 - Hozen Kanrinin): In more complex cases, or where there's a high risk of asset dissipation, the court can appoint a provisional administrator to take control and manage the debtor's assets and business pending the commencement order (Bankruptcy Act, Art. 91 et seq.). This appointee functions similarly to a trustee but on an interim basis.

These interim measures, while perhaps more frequently associated with reorganization proceedings where maintaining the debtor as a going concern is paramount, are equally available and important in bankruptcy to ensure that a meaningful estate is available for the trustee to administer.

F. Court Examination and Grounds for Dismissing the Petition (申立棄却事由 - Mōshitate Kikkyaku Jiyū)
After a petition is filed, the court will examine whether the legal requirements, particularly the grounds for bankruptcy, are met. If they are, a commencement order will generally follow. However, the court may dismiss the petition under certain circumstances (申立棄却事由 - mōshitate kikkyaku jiyū) (Bankruptcy Act, Art. 30(1)):

  • Failure to Pay Advance Deposit: If the petitioner fails to pay the required advance deposit for procedural costs, the petition will be dismissed (kyakka).
  • Improper Purpose or Lack of Good Faith: The court can dismiss a petition if it finds it was filed for an improper purpose (e.g., solely to pressure a debtor for debt collection unrelated to genuine insolvency, or as a malicious tactic in a corporate control battle) or otherwise not in good faith.
  • Preference for Other Pending Insolvency Proceedings: If other insolvency proceedings—such as Civil Rehabilitation, Corporate Reorganization, or Special Liquidation—are already pending against the debtor, and the court determines that allowing those proceedings to continue would better serve the general interests of creditors, it may dismiss the bankruptcy petition. Reorganization-type proceedings generally take precedence over liquidation-type proceedings if there is a viable prospect of restructuring that benefits creditors more than immediate liquidation would.

The Bankruptcy Commencement Order (破産手続開始決定 - Hasan Tetsuzuki Kaishi Kettei)

If the court is satisfied that all legal requirements are met and no grounds for dismissal exist, it will issue a formal bankruptcy commencement order (破産手続開始決定 - hasan tetsuzuki kaishi kettei). This order is a pivotal moment in the process.

Key Elements of the Order and Simultaneous Actions:
The commencement order must clearly state the date and exact time of its issuance, as this fixes the critical moment for determining the scope of the bankruptcy estate and the treatment of claims. Concurrent with issuing the order, the court will typically take several important actions (these are sometimes referred to as 同時処分 - dōji shobun, or simultaneous dispositions):

  1. Appointment of a Bankruptcy Trustee (破産管財人の選任 - hasan kanzainin no sennin): The court appoints one or more bankruptcy trustees to administer the estate.
  2. Setting Deadlines for Proofs of Claim (債権届出期間の定め - saiken todokede kikan no sadame): A period is fixed within which creditors must formally file their claims with the court.
  3. Scheduling the First Creditors' Meeting (財産状況報告集会の期日の定め - zaisan jōkyō hōkoku shūkai no kijitsu no sadame): This meeting is for the trustee to report to creditors on the initial status of the debtor's assets and liabilities.
  4. Setting Periods/Dates for Claim Investigation (債権調査期間又は期日の定め - saiken chōsa kikan mata wa kijitsu no sadame): Timeframes are established for the trustee and other creditors to examine and potentially object to the filed claims.

Public Notice and Notifications (公告及び通知 - Kōkoku oyobi Tsūchi):
The issuance of the commencement order, along with the name of the trustee and the key dates set by the court, is publicly announced (公告 - kōkoku), typically in the Official Gazette (官報 - Kampō). Additionally, individual notifications are sent to the debtor, all known creditors, the appointed trustee, parties who owe debts to the bankrupt company or hold its property, and relevant labor unions. In cases involving a very large number of known creditors (e.g., 1,000 or more), the court has the discretion to dispense with individual notifications to all such creditors and rely on public notice, provided this decision itself is notified to a core group and publicly announced.

Appeals (即時抗告 - Sokuji Kōkoku):
Interested parties, such as the debtor company or its creditors, have the right to file an immediate appeal (即時抗告 - sokuji kōkoku) with a higher court against the bankruptcy commencement order or an order dismissing the bankruptcy petition.

Simultaneous Termination (同時破産廃止 - Dōji Hasan Haishi) – The "No-Asset" Scenario:
A significant procedural variation can occur at the moment of commencement. If it is evident to the court that the debtor company's assets are so minimal that they are insufficient to cover even the basic administrative expenses of conducting the bankruptcy proceeding (including the trustee's fees), the court may issue an order that simultaneously commences and terminates the bankruptcy proceedings (Bankruptcy Act, Art. 216). This is known as dōji haishi. In such a "no-asset" or "insufficient-asset" scenario, a bankruptcy trustee is not appointed, and the standard procedures for asset administration, claim investigation, and distribution are bypassed because there is nothing to administer or distribute. While very common in consumer bankruptcies, dōji haishi can also apply to corporate cases where the company is truly an empty shell.

Effects of the Bankruptcy Commencement Order (破産手続開始の効果 - Hasan Tetsuzuki Kaishi no Kōka)

The issuance of a bankruptcy commencement order has profound legal consequences for the debtor company, its creditors, and ongoing legal matters:

A. On the Debtor Company:

  • Loss of Management and Disposal Rights over Estate Assets: The most immediate effect is that the debtor company loses all power to manage and dispose of any assets that form part of the "bankruptcy estate" (破産財団 - hasan zaidan). This authority vests exclusively in the court-appointed bankruptcy trustee (Bankruptcy Act, Art. 78(1)). The bankruptcy estate generally comprises all property belonging to the debtor at the time of the commencement order, wherever located.
  • Dissolution of the Corporation: As a matter of corporate law, the bankruptcy commencement order acts as a cause for the dissolution of the company (e.g., Companies Act, Art. 471(v)). This is often described poetically as the company receiving its "death sentence".
  • Continuation of Corporate Personality for Liquidation Purposes: Despite being dissolved, the legal personality of the bankrupt corporation is deemed to continue for the specific purposes of the bankruptcy liquidation process (Bankruptcy Act, Art. 35). The assets of the bankruptcy estate legally still belong to the (now bankrupt) corporation, but they are under the exclusive control and administration of the trustee. This legal fiction allows the trustee to act in the name of the company for liquidation activities. The corporate personality is fully extinguished only upon the formal conclusion or termination of the bankruptcy proceedings and the closure of its registration in the commercial registry.
  • Status of Directors and Officers: Directors and officers lose their authority over the company's business operations and assets that are part of the bankruptcy estate. However, their formal positions may continue, and they retain certain obligations, such as the duty to cooperate with the bankruptcy trustee, provide information and explanations about the company's affairs, and attend creditors' meetings if required. Their underlying mandate or service agreements with the company do not necessarily terminate automatically for all purposes solely due to the bankruptcy commencement, particularly concerning these cooperation duties (as suggested by a Supreme Court decision of April 17, 2009, relating to the continuation of directors' duties in a non-property context).

B. On Pending Legal Proceedings:

  • Suspension (or "Interruption") of Lawsuits: Most lawsuits concerning the property within the bankruptcy estate to which the debtor company is a party are automatically suspended (中断 - chūdan) by the bankruptcy commencement order (Bankruptcy Act, Art. 44(1)).
    • If a lawsuit involves a non-monetary claim concerning estate property (e.g., a dispute over title to an asset claimed by the estate, or a claim by the estate to recover property), the bankruptcy trustee generally has the option to take over the litigation on behalf of the estate.
    • If a lawsuit was initiated by a creditor against the debtor company to establish or collect a debt that would qualify as a "bankruptcy claim" (a pre-petition unsecured claim), the lawsuit is suspended. The creditor must then file a proof of claim in the bankruptcy proceedings to have their claim adjudicated and to participate in any distribution.
  • Suspension of Creditor Representative Actions: Certain types of lawsuits initiated by individual creditors on behalf of the general creditor body before the bankruptcy are also suspended. This includes:
    • Creditor derivative actions (債権者代位訴訟 - saikensha daii soshō), where a creditor sues a third party on behalf of the debtor to recover assets for the debtor's estate (Bankruptcy Act, Art. 45(1)).
    • Fraudulent conveyance actions (詐害行為取消訴訟 - sagai kōi torikeshi soshō), where a creditor seeks to nullify a pre-petition transfer of assets by the debtor that was detrimental to creditors (Bankruptcy Act, Art. 45(1)).
      The bankruptcy trustee will typically evaluate these suspended actions and has the authority to take them over, particularly fraudulent conveyance claims, which are often subsumed into the trustee's broader statutory avoidance powers (否認権 - hinin-ken).

C. On Creditors' Rights and Actions:

  • Prohibition of Individual Enforcement: A fundamental effect is the general prohibition on creditors initiating or continuing any individual enforcement actions (such as attachments, seizures, or foreclosures) against assets belonging to the bankruptcy estate. All such efforts are channeled into the collective bankruptcy process to ensure equitable treatment.
  • Requirement to File Proofs of Claim: To receive any distribution from the bankruptcy estate, creditors (both secured, for their deficiency claims, and unsecured) must file a formal proof of claim (債権届出 - saiken todokede) with the court within the deadline set in the commencement order. Failure to do so correctly and timely can result in the claim not being allowed or being subordinated.

Key Parties and Their Roles (手続の機関 - Tetsuzuki no Kikan)

Several key actors are involved in administering and overseeing a corporate bankruptcy proceeding:

A. The Bankruptcy Court (破産裁判所 - Hasan Saibansho)
The District Courts (地方裁判所 - chihō saibansho) have exclusive original jurisdiction over bankruptcy cases. The specific District Court that will handle a case (venue) is generally determined by the location of the debtor company's principal place of business (Bankruptcy Act, Art. 5(1)). There are also special venue rules that allow for cases involving affiliated companies or very large enterprises to be filed in major commercial centers like Tokyo or Osaka, even if the principal office is elsewhere, to leverage the expertise of specialized insolvency divisions in those courts. The Bankruptcy Court presides over the entire proceeding. It issues all key orders (commencement, appointment of trustee, confirmation of distributions, final closure), supervises the activities of the bankruptcy trustee, resolves disputes that arise (such as objections to claims), and ensures the process adheres to the law. Court clerks (裁判所書記官 - saibansho shokikan) also perform significant administrative functions and, under recent legal reforms, have been granted authority over certain procedural matters to enhance efficiency.

B. The Bankruptcy Trustee (破産管財人 - Hasan Kanzainin)
The bankruptcy trustee is the central figure in the administration of the bankrupt estate. Appointed by the court at the time of the commencement order, the trustee is almost invariably an independent lawyer with experience in insolvency matters. Key responsibilities include:

  • Taking immediate possession and control of all assets belonging to the bankruptcy estate.
  • Conducting a thorough investigation into the debtor's financial affairs, including the reasons for its failure.
  • Identifying, collecting, and liquidating all estate assets in a manner that maximizes recovery.
  • Evaluating proofs of claim filed by creditors and objecting to those deemed improper or overstated.
  • Exercising statutory avoidance powers to recover assets improperly transferred by the debtor prior to bankruptcy.
  • Making distributions from the liquidated proceeds to creditors in accordance with statutory priorities.
  • Reporting regularly to the court and creditors on the progress of the administration.
    The trustee operates under a strict duty of care of a good manager (善管注意義務 - zenkan chūi gimu) and is personally liable for any damages caused to the estate or creditors by a breach of this duty (Bankruptcy Act, Art. 85). For significant actions, such as the sale of real estate or a business unit, or the pursuit of major litigation, the trustee must obtain prior court approval (Bankruptcy Act, Art. 78(2)).

C. Creditors' Meetings (債権者集会 - Saikensha Shūkai)
The Bankruptcy Act provides for creditors' meetings, which serve as a forum for the trustee to report to creditors and for creditors (at least in theory) to express their views on certain aspects of the estate's administration. The most significant meetings are typically the initial one for reporting on the debtor's financial status (財産状況報告集会 - zaisan jōkyō hōkoku shūkai) and a final meeting for the trustee to report on their accounts before the case is closed. However, active participation by creditors in these meetings is often limited in practice, especially in routine liquidations. Recognizing this, the law now allows for the initial reporting meeting to be dispensed with by the court in certain circumstances, and the final accounting report from the trustee can also be made in writing to the court, with creditors having an opportunity to inspect it, rather than requiring a physical meeting. The direct decision-making powers of creditors' meetings have been curtailed over time, with greater emphasis placed on court supervision and the trustee's professional judgment.

D. Creditors' Committee (債権者委員会 - Saikensha Iinkai)
A more recent addition to Japanese bankruptcy law is the possibility of forming an official Creditors' Committee. This allows a group of creditors, if certain statutory conditions are met (such as representing a significant portion of the debt and being approved by the court), to formally organize and represent the collective interests of the unsecured creditor body. Such a committee has the right to be consulted by the trustee and to offer opinions to the court and the trustee on various matters concerning the administration of the bankruptcy estate. However, its role is primarily advisory and investigative, and it does not possess the extensive powers or funding mechanisms often seen with official creditors' committees in U.S. Chapter 11 reorganizations. Its formation is not mandatory and tends to be more common in larger or more complex cases where active creditor involvement is deemed beneficial.

Conclusion

The corporate bankruptcy (hasan) process in Japan provides a structured, court-supervised, and trustee-driven mechanism for the final liquidation of an insolvent company. It aims to maximize asset recovery for the benefit of all creditors while ensuring an equitable distribution according to legal priorities. For businesses interacting with the Japanese market, a clear understanding of how these proceedings are initiated, the profound effects of a commencement order, and the distinct roles played by the court, the bankruptcy trustee, and creditors is essential for navigating the complexities of a counterparty's insolvency or, in unfortunate circumstances, a company's own financial demise. While focused on liquidation, the process incorporates principles designed to achieve fairness and order in bringing a company's financial affairs to a close.