Crafting and Confirming a Rehabilitation Plan in Japan's Civil Rehabilitation Proceedings?

Japan's Civil Rehabilitation (民事再生 - Minji Saisei) process provides a vital lifeline for financially distressed companies, allowing them to restructure under a Debtor-in-Possession (DIP) model. The cornerstone of this entire endeavor is the Rehabilitation Plan (再生計画 - saisei keikaku). This legally binding document, once approved by creditors and confirmed by the court, dictates the company's path forward, outlining how its debts will be treated and its business operations reorganized. This article offers a detailed guide to the intricate process of formulating, proposing, securing creditor approval for, and obtaining court confirmation of a Rehabilitation Plan in corporate Civil Rehabilitation cases.

The Centrality of the Rehabilitation Plan

The Rehabilitation Plan is more than just a document; it is the blueprint for the debtor company's emergence from financial distress and its journey towards renewed viability. It embodies the negotiated settlement between the debtor and its creditors, balancing the need for debt relief with the creditors' legitimate claims. The successful creation, approval, and ultimate court confirmation of this plan are the primary objectives of any Civil Rehabilitation proceeding. Its terms will govern the rights and obligations of all parties for years to come.

Formulation and Content of the Rehabilitation Plan (再生計画の条項 - Saisei Keikaku no Jōkō)

The Civil Rehabilitation Act (民事再生法 - Minji Saisei Hō) and its associated rules detail the necessary and permissible components of a Rehabilitation Plan.

A. Mandatory Provisions (Civil Rehabilitation Act, Art. 154(1))
A Rehabilitation Plan must include the following:

1. Modification of Rights of Rehabilitation Creditors (権利変更条項 - kenri henkō jōkō): This is the heart of the plan. It must specify any proposed changes to the rights of creditors holding pre-petition claims ("rehabilitation claims"). This typically involves:
   • General Standards for Modification (再生債権者の権利の変更の一般的基準 - saisei saikensha no kenri no henkō no ippan-teki kijun) (Art. 156): The plan must clearly articulate the general principles governing how rehabilitation claims will be altered. This could include the percentage of principal to be forgiven (debt haircut), the length of any extension for repayment terms (moratorium or rescheduling), and any adjustments to interest rates. These general standards are particularly important for claims that were acknowledged by the debtor but not formally filed and determined during the claims process, as they will still be subject to these overarching rules.
   • Specific Modifications for Each Determined Claim (Art. 157): The plan must then apply these general standards to each specific rehabilitation claim that has been duly filed and allowed (or acknowledged by the debtor and not successfully disputed). For instance, if the general standard is a 70% reduction in the principal of unsecured claims with the remaining 30% to be repaid over ten years, a JPY 10 million unsecured claim would be reduced to JPY 3 million, and the plan would specify the schedule for these JPY 300,000 annual (or more frequent) payments. Real-world data from Japan suggests that repayment rates for unsecured creditors in Civil Rehabilitation plans often range between 10% and 30% of the original claim amount.
2. Payment of Administrative Expenses (Kyōeki Saiken) and Claims with General Priority (Ippan Yūsen Saiken): The plan must contain provisions for the full payment of administrative expense claims (共益債権 - kyōeki saiken), which are costs incurred during the rehabilitation process itself (e.g., fees for supervisors, essential post-petition operational costs). It must also provide for the full payment of claims that have general priority under other laws (一般優先債権 - ippan yūsen saiken, e.g., certain labor claims, certain tax claims), as these are not subject to modification by the plan.
3. Disclosure of Post-Commencement Claims (Kaishi-go Saiken): If there are any known claims that arose after the commencement of the Civil Rehabilitation proceedings but do not qualify as administrative expenses, their nature and amount must be disclosed in the plan (Civil Rehabilitation Act, Art. 154(1)(iii)).
4. (If applicable) Treatment of Claims Not Subject to Voting/Modification: The plan must also address any claims that, by law, are not subject to voting or modification in the same way as general rehabilitation claims, such as certain types of statutory penalties (Civil Rehabilitation Act, Art. 157(2)).

B. Principle of Equality Among Rehabilitation Creditors (債権者平等の原則 - Saikensha Byōdō no Gensoku)
A fundamental principle enshrined in Article 155(1) of the Civil Rehabilitation Act is that all rehabilitation creditors of the same class must be treated equally under the plan. In Civil Rehabilitation for corporations, there is generally no formal classification of unsecured creditors into different voting groups for the overall plan (unlike in Corporate Reorganization). Thus, this principle of equal treatment (e.g., same percentage of debt forgiveness, same repayment terms) applies broadly among the general body of rehabilitation creditors.
However, the Act permits certain exceptions to strict pro-rata equality, provided they are fair and reasonable (this is sometimes referred to as "substantive equality" - 実質的平等原則, jisshitsu-teki byōdō gensoku):

• Creditor Consent: A specific creditor can voluntarily agree to receive less favorable treatment than others in their class.
• Small Claims: The plan can provide for more favorable treatment of small-value claims (e.g., payment in full or on an accelerated schedule). This is often done for administrative convenience (to eliminate many small claims from ongoing plan administration) or to maintain goodwill with small but essential suppliers.
• Claims for Post-Petition Interest or Damages on Rehabilitation Claims (Civil Rehabilitation Act, Art. 84(2)): Although these amounts (accruing after the commencement of proceedings on pre-petition claims) are statutorily included as part of the rehabilitation claims, they do not typically carry voting rights (Art. 87(2)) and can be treated less favorably in the plan (e.g., lower repayment rate or longer terms) than the principal portion of the claims. This is because they are akin to what would be considered subordinated or deferred claims in a bankruptcy liquidation.
• Differentiation that Does Not Impair Fairness: This is a more general exception allowing for differentiated treatment if it is justifiable under the circumstances and does not unfairly prejudice any creditor. Examples could include providing slightly better terms to certain trade creditors whose continued cooperation is indispensable for the debtor's ongoing business, or, conversely, providing less favorable terms for claims held by insiders (like parent companies or former management) who may bear some responsibility for the company's financial distress. The concept of fairness here has been explored in case law (e.g., Fukuoka High Court, December 21, 1981, in a Corporate Reorganization context, and Tokyo High Court, July 23, 2004, concerning golf course membership rights in a Civil Rehabilitation).

C. Maximum Repayment Period
If the Rehabilitation Plan provides for installment payments to creditors (as opposed to a lump-sum payment), the repayment period is generally capped at ten years from the date the plan confirmation order becomes final and binding (Civil Rehabilitation Act, Art. 155(3)). This limitation was introduced to address problems under older insolvency laws where excessively long repayment plans (sometimes 15 or 20 years) were proposed, which were often overly burdensome for creditors and had a low probability of successful completion. An extension beyond ten years is permissible only if "special circumstances" (特別の事情 - tokubetsu no jijō) make it unavoidable. This exception is interpreted narrowly to maintain the focus on achieving a reasonably prompt rehabilitation. In contemporary practice, many successful Civil Rehabilitation plans, particularly those involving a financial sponsor or the sale of non-core assets, aim for much quicker, often even lump-sum, repayments to creditors.

D. Provisions for Undetermined Claims and Secured Creditors' Deficiency Claims

• Undetermined Rehabilitation Claims (Civil Rehabilitation Act, Art. 159): If, at the time the plan is being formulated and voted upon, some rehabilitation claims are still subject to a court determination process (e.g., there is an ongoing dispute about the validity or amount of a claim), the plan must include "appropriate measures" (適確な措置 - tekikaku na sochi) for these claims. This typically involves a provision stating that if and when such a claim is finally allowed by the court, it will be paid at the same percentage and on the same terms as other similar allowed claims under the plan, possibly by setting aside a reserve fund.
• Deficiency Claims of Secured Creditors (Civil Rehabilitation Act, Art. 160(1)): A secured creditor is entitled to pursue their security interest outside the main Civil Rehabilitation process (as a "right of separate satisfaction" - 別除権, betsujo-ken). If the proceeds from the collateral are insufficient to cover the full amount of their secured debt, the remaining shortfall (the "deficiency claim") is treated as a general rehabilitation claim. If the exact amount of this deficiency is not yet known when the plan is prepared (e.g., because the collateral has not yet been liquidated), the plan must include appropriate measures for its eventual treatment once the deficiency is determined. For holders of ne-teitōken (a type of Japanese floating charge or blanket mortgage with a maximum secured amount), the plan can include provisions for interim payments related to the unsecured portion of their claim that exceeds the agreed maximum secured amount, even before the collateral is fully realized (Art. 160(2)).

E. Provisions for Plan Implementation and Corporate Restructuring Measures
The plan can also include various provisions relating to its own implementation and to more fundamental corporate restructuring:

• Role of a Creditors' Committee (if any) in Monitoring Plan Implementation (Civil Rehabilitation Act, Art. 154(2)): If a formal creditors' committee has been established and is expected to play a role in supervising the debtor's performance under the confirmed plan, and if the debtor's estate is to bear the costs associated with the committee's activities, these arrangements must be detailed in the plan.
• Guarantees or Security for Plan Performance (Civil Rehabilitation Act, Art. 158): If any third parties (e.g., a parent company, a financial sponsor) are providing guarantees or collateral to secure the debtor's obligations under the Rehabilitation Plan, the specifics of these arrangements must be set out in the plan.
• Corporate Restructuring Provisions (for stock companies - 株式会社, kabushiki kaisha):
  • Reduction of Stated Capital (減資 - Genshi) (Civil Rehabilitation Act, Art. 154(3), Art. 166): The plan can provide for a reduction of the debtor company's stated capital. To include such a provision, the debtor must obtain prior permission from the court, which will only be granted if the court finds that the company is in a state of de facto insolvency (its liabilities exceed its assets). This allows the plan to impose a measure of accountability on shareholders by reducing or eliminating their equity, without needing to go through the separate, often more cumbersome, shareholder meeting approval processes normally required under the Companies Act for a capital reduction.
  • Issuance of New Shares (募集株式の発行 - Boshū Kabushiki no Hakkō) (Civil Rehabilitation Act, Art. 154(4), Art. 166-2): For privately held companies (specifically, companies whose articles of incorporation require approval for share transfers), the Rehabilitation Plan can authorize the issuance of new shares or the disposal of treasury shares. This is a crucial tool for raising new capital from investors or sponsors, or for implementing debt-for-equity swaps where creditors convert their claims into equity in the reorganized company. Similar to capital reductions, including such a provision to bypass ordinary shareholder approval requires prior court permission, which is contingent on the company being insolvent and the new share issuance being deemed indispensable for the continuation of its business. This power is typically reserved for the debtor (DIP) to propose.

Proposal of the Rehabilitation Plan (再生計画案の提出 - Saisei Keikakuan no Teishutsu)

The process of formally submitting a plan to the court has specific rules:

• Who Can Propose a Plan:
  • The Debtor (DIP): The primary responsibility for preparing and submitting a Rehabilitation Plan lies with the debtor-in-possession. The DIP is obligated to file a plan with the court by a deadline set by the court, which is typically after the claim filing period has closed (Civil Rehabilitation Act, Art. 163(1)). In practice, this deadline is often around three months from the commencement of the proceedings.
  • Creditors with Filed Claims: Rehabilitation creditors who have duly filed their claims also have the right to submit their own competing Rehabilitation Plans to the court (Civil Rehabilitation Act, Art. 163(2)).
  • The Debtor (if a Trustee is Appointed): Even if a trustee has been appointed to manage the company (i.e., if a "management order" has displaced the DIP), the debtor itself (acting through its shareholders or former management) can still propose a plan.
• Timing and Extensions: The initial deadline for plan submission is usually set by the court to be within two months from the end of the general claim investigation period. However, the court can grant extensions if justified, though typically these extensions are limited (e.g., to a maximum of two) to ensure that the proceedings are not unduly delayed (Rules of Civil Rehabilitation, Art. 84(1), (3)).
• Modification of a Proposed Plan (Civil Rehabilitation Act, Art. 167): The party that submitted a plan (whether the DIP or a creditor) can, with the court's permission, modify the proposed plan at any time up until the court issues an order to put the plan to a vote by creditors.
• Early ("Pre-Packaged" or "Pre-Negotiated") Plan Submission (Civil Rehabilitation Act, Art. 164):
  • The Civil Rehabilitation Act allows for a plan to be submitted to the court much earlier in the process, even before the claim filing period has ended, or indeed, concurrently with the initial rehabilitation petition itself (Art. 164(1)).
  • This provision is designed to facilitate "pre-packaged" or "pre-negotiated" rehabilitations. In such scenarios, the debtor and its key creditors may have already reached substantial agreement on the terms of a restructuring plan before formally initiating the court proceedings. Filing this pre-negotiated plan at the outset can significantly accelerate the entire Civil Rehabilitation process.
  • A plan submitted this early cannot yet contain specific modifications for individual claims (as claims would not yet have been formally filed and determined), but it will set out the general principles and standards for how claims will be treated, with the specifics to be filled in later once claims are established (Art. 164(2)).

Creditor Voting on the Rehabilitation Plan (再生計画案の決議 - Saisei Keikakuan no Ketsugi)

Once one or more viable Rehabilitation Plans have been submitted, the next crucial stage is obtaining creditor approval.

• Court Decision to Put Plan to a Vote (付議決定 - Fugi Kettei) (Civil Rehabilitation Act, Art. 169(1)):
  • The court reviews any submitted plan(s). If a plan is deemed procedurally sound and does not clearly contain grounds that would lead to its non-confirmation by the court later (see below), the court will issue an order to put the plan to a vote by the rehabilitation creditors.
  • This decision is typically made after the general claim investigation period has concluded (so that the body of claims is largely known) and after the debtor has formally reported to the court on its asset status (so creditors have adequate information).
• Methods of Voting (Civil Rehabilitation Act, Art. 169(2)):
  • Voting at a Creditors' Meeting (債権者集会における決議 - saikensha shūkai ni okeru ketsugi): The court convenes a formal meeting of creditors where the plan is discussed and voted upon. Creditors attending the meeting (or their proxies) cast their votes.
  • Voting by Written (or Electronic) Ballot (書面等投票による決議 - shomen-tō tōhyō ni yoru ketsugi): The court can decide that voting will be conducted by written or approved electronic ballots submitted by creditors within a specified period, without requiring a physical meeting. This method is often used for efficiency, especially if there are a large number of creditors or if they are geographically dispersed.
  • Combined Method: It is also common for the court to employ a combination, allowing creditors to vote by written/electronic ballot in advance of a creditors' meeting, with final votes also taken at the meeting itself.
• Voting Rights (議決権 - Giketsuken):
  • Generally, only those rehabilitation creditors who have duly filed proofs of their claims (or whose claims are "deemed filed" if the debtor properly acknowledged them in its initial schedules in certain types of individual rehabilitation, though for corporate DIP cases, active filing is the norm for voting) are entitled to vote on the plan (Civil Rehabilitation Act, Art. 94(1)). Claims for post-commencement interest or damages on pre-petition claims, though part of the rehabilitation claims, do not carry voting rights (Art. 87(2)).
  • The amount of a creditor's voting right is based on the determined or allowed amount of their rehabilitation claim (Civil Rehabilitation Act, Art. 170(2)(i)). If a claim is still disputed at the time of voting, the court has the authority to make a provisional determination of its value for voting purposes (Art. 170(1) and Art. 171(1)(ii) for written voting).
• Requirements for Plan Approval by Creditors (可決要件 - Kaketsu Yōken) (Civil Rehabilitation Act, Art. 172-3(1)):
  • For a Rehabilitation Plan to be considered "approved" (or "passed") by the creditors, it must satisfy a dual majority threshold:
    1. Majority in Number: More than half of the rehabilitation creditors who actually exercise their voting rights (either at the meeting or by ballot) must vote in favor of the plan.
    2. Majority in Value (Amount): Those creditors voting in favor must collectively represent more than half of the total aggregate amount of voting rights of all rehabilitation creditors entitled to vote on the plan.
  • These approval requirements are notably more lenient than those under the old Composition Act (which, for example, required the consent of creditors holding three-fourths of the total debt amount). This was a deliberate reform to make plan approval more achievable, particularly for SMEs. The "majority in number" requirement ensures that a plan cannot be forced through solely by a few very large creditors if a broad swathe of smaller creditors opposes it; this can be important for SMEs whose survival may depend on the continued support of numerous trade creditors.
  • The Supreme Court has indicated that any artificial manipulation of the voting numbers, such as by a debtor improperly splitting a single large friendly claim into multiple smaller claims just to satisfy the "majority in number" test, can be considered an improper method of obtaining approval and thus grounds for the court to later refuse to confirm the plan (Supreme Court, March 13, 2008).
• Adjournment and Continued Voting (Civil Rehabilitation Act, Art. 172-5):
  • If a plan does not achieve the required dual majorities at the first voting session, the process does not necessarily end there. The creditors' meeting can be adjourned and the voting continued to a later date if either one of the two majority thresholds (number or value) was met, OR if a simple majority in number of those creditors present and voting, who also represent more than half the value of claims present and voting, agree to an adjournment. This provides an opportunity for further negotiations or modifications to the plan to try to garner sufficient support.
  • However, this continuation cannot go on indefinitely. If a plan is not successfully approved by the creditors within, in principle, two months from the date of the first voting meeting, it is deemed to have been rejected.

Court Confirmation of the Rehabilitation Plan (再生計画の認可 - Saisei Keikaku no Ninka)

Even if a Rehabilitation Plan is approved by the requisite majorities of creditors, it is not yet effective. It must then be submitted to the court for formal confirmation (認可 - ninka).

• Court Review and Grounds for Non-Confirmation (Civil Rehabilitation Act, Art. 174):
  • The court will review the creditor-approved plan. It must confirm the plan unless one or more specific statutory grounds for non-confirmation exist (Art. 174(1)). The court does not have broad discretion to refuse confirmation if all legal requirements are met and no non-confirmation grounds are present.
  • The primary grounds for non-confirmation (不認可事由 - fu-ninka jiyū) are set out in Article 174(2) and include:
    1. Material Violation of Law: If the Civil Rehabilitation proceedings themselves or the content of the Rehabilitation Plan materially violate the provisions of the Civil Rehabilitation Act or other applicable laws.
    2. Lack of Feasibility: If the court determines that the Rehabilitation Plan is not feasible, meaning there is no reasonable prospect that it can be successfully carried out by the debtor.
    3. Improper Method of Obtaining Creditor Approval: If the resolution by creditors approving the plan was obtained by fraudulent means, bribery, or other improper methods (such as the manipulative claim-splitting mentioned by the Supreme Court, March 13, 2008).
    4. Plan Not in the General Interest of Rehabilitation Creditors (Liquidation Value Guarantee): This is the crucial "best interest of creditors" test, also known as the liquidation value guarantee (清算価値保障原則 - seisan kachi hoshō gensoku). The plan must provide rehabilitation creditors with a value that is at least equivalent to what they would likely receive if the debtor company were to be liquidated under bankruptcy proceedings instead of being rehabilitated. If the plan offers less, it cannot be confirmed, even if approved by the creditors. (A Tokyo High Court decision of July 25, 2003, provides an example where a plan was found to violate this principle).
• Hearing Opinions and Appeals: Before making its confirmation decision, the court may hear the opinions of the debtor, the Supervisor (if any), filed rehabilitation creditors, and the debtor's labor union (if any) (Civil Rehabilitation Act, Art. 174(3)). The court's order confirming or refusing to confirm the plan can be appealed to a higher court by interested parties (Art. 175).
• Effect of a Confirmed Plan:
  • The Rehabilitation Plan becomes legally effective when the court's confirmation order becomes final and binding (i.e., no longer subject to appeal) (Civil Rehabilitation Act, Art. 176).
  • Modification of Creditors' Rights (Art. 179): The rights of all rehabilitation creditors are modified in accordance with the terms stipulated in the confirmed plan. This includes modifications to principal amounts, interest rates, repayment schedules, etc. These modifications are then formally recorded in the court's schedule of rehabilitation claims (再生債権者表 - saisei saikensha-hyō) (Art. 180(1)).
  • Discharge of Remaining Debt (Art. 178): The debtor is discharged from all its pre-petition rehabilitation debts except to the extent provided for in the Rehabilitation Plan. This discharge generally includes claims that were not filed by creditors, unless specific exceptions apply (e.g., if the debtor knew of a claim but culpably failed to list it in its schedules, or if the creditor had no fault in not filing their claim) (Art. 181(1)). This comprehensive discharge is crucial for giving the debtor a fresh financial start.
  • Binding Effect (Art. 180(2)): The confirmed Rehabilitation Plan and the entries in the schedule of rehabilitation claims have the legal effect of a final and binding judgment among the debtor, all rehabilitation creditors, and any persons who furnished security for the plan. This allows creditors to enforce the terms of the plan if the debtor defaults on its plan obligations.
  • No Effect on Guarantors or Co-obligors (Art. 177(2)): Importantly, the modification of the debtor's obligations under the plan, and the discharge of the debtor, do not affect the rights of rehabilitation creditors against any third parties who guaranteed the debtor's obligations or provided security for them (e.g., personal guarantors of corporate debt, or entities that pledged their own assets for the debtor's debt). Creditors remain free to pursue these third parties for the original, unmodified debt, unless those third parties are themselves part of a separate restructuring. This principle was affirmed by the Supreme Court in a Corporate Reorganization context (Supreme Court, June 10, 1970).
  • Implementation of Corporate Restructuring Measures: If the plan includes provisions for corporate actions like a reduction of capital or the issuance of new shares (for closely held companies, under the special rules mentioned earlier), these actions can be implemented based on the authority of the confirmed plan itself, without needing to follow the separate procedural requirements (like specific shareholder meeting approvals) that would ordinarily be mandated by the Companies Act (Civil Rehabilitation Act, Arts. 183, 183-2).
  • Termination of Stays: Upon the plan confirmation order becoming final, court-ordered stays on enforcement actions or other legal proceedings against the debtor are generally lifted or lose their effect, subject to the terms of the plan itself (Civil Rehabilitation Act, Art. 184).

Conclusion

The Rehabilitation Plan stands as the definitive roadmap charting a company's journey out of financial distress in Japan's Civil Rehabilitation proceedings. Its meticulous formulation, involving a careful assessment of the debtor's situation and prospects, is followed by a critical phase of creditor deliberation and voting, where the fate of the proposed restructuring is decided. Finally, court confirmation, contingent upon the plan meeting stringent legal standards of fairness, feasibility, and compliance with the "best interest of creditors" test, imbues the plan with legal force. This comprehensive process, while demanding, is designed to provide a structured and equitable pathway for Japanese companies to reorganize their affairs, modify their debt burdens, and strive for a sustainable return to operational and financial health under the continued stewardship of their existing management.