Cross-Border Insolvency in Japan: Understanding the Recognition and Assistance Framework for Foreign Proceedings?

Japanese Attorney at Law - Bengoshi L.L.

• 15 min read

In an era of pervasive globalization, the financial collapse of a company often transcends national borders, impacting assets, creditors, and stakeholders across multiple jurisdictions. Addressing such international insolvencies effectively requires robust legal frameworks that facilitate cooperation between different legal systems. Japan took a significant step in this direction by enacting the Act on Recognition and Assistance for Foreign Insolvency Proceedings (外国倒産処理手続の承認援助に関する法律 - Gaikoku Tōsan Shori Tetsuzuki no Shōnin Enjo ni Kansuru Hōritsu, hereinafter "Recognition and Assistance Act" or RAA) in 2000, which came into effect in April 2001. This legislation, substantially based on the UNCITRAL Model Law on Cross-Border Insolvency, provides the primary mechanism through which Japanese courts can recognize and offer assistance to insolvency proceedings initiated in foreign countries. This article provides a detailed analysis of this framework.

The Shift from Territoriality to International Cooperation

Historically, Japan, like many countries, adhered to a principle of strict territoriality (属地主義 - zokuchi shugi) in insolvency matters. Under this doctrine, foreign insolvency proceedings generally had no legal effect within Japan, and conversely, Japanese insolvency proceedings were considered to have no effect on assets located abroad (as stipulated, for example, in Article 3 of the old Bankruptcy Act).

While this approach might have offered a degree of simplicity in an era of limited international commerce, it became increasingly problematic as business activities globalized. Strict territoriality could lead to inefficient piecemeal liquidations, unequal treatment of creditors located in different countries, difficulties in realizing the going-concern value of multinational enterprises, and opportunities for debtors to strategically shield assets by moving them across borders.

The international legal community recognized these challenges, culminating in the development of the UNCITRAL Model Law on Cross-Border Insolvency in 1997. This model law provided a template for domestic legislation to facilitate cross-border insolvency cooperation. Japan was among the early major economies to adopt a legislative framework based on these principles, signaling a decisive move away from insular territoriality towards a system of "modified universalism" that allows for recognition and assistance while preserving important domestic policy considerations. The enactment of the Recognition and Assistance Act in 2000, along with contemporaneous amendments to Japan's domestic insolvency statutes (Bankruptcy Act, Civil Rehabilitation Act, Corporate Reorganization Act) to incorporate specific cross-border provisions, fundamentally reshaped Japan's approach to international insolvency.

Core Principles of Japan's Recognition and Assistance Framework

The Recognition and Assistance Act is designed "to appropriately realize the effects of a foreign insolvency proceeding commenced with respect to a debtor engaged in international economic activities within Japan... thereby aiming to achieve an internationally consistent liquidation or economic rehabilitation of said debtor" (RAA, Art. 1). Several core principles underpin this framework:

  1. Recognition of Foreign Proceedings: The Act explicitly enables Japanese courts to formally "recognize" qualifying foreign insolvency proceedings. This recognition is the gateway to obtaining judicial assistance in Japan. This marks a clear departure from the previous doctrine of strict territoriality.
  2. Discretionary, Assistance-Based Model: Crucially, the recognition of a foreign proceeding by a Japanese court does not mean that the foreign insolvency law automatically applies in its entirety within Japan, nor does it automatically grant all the effects the foreign proceeding might have in its home jurisdiction. Instead, the Japanese system is "assistance-based" or "relief-oriented." Following recognition, the Japanese court has the discretion to grant specific forms of "assistance measures" (援助処分 - enjo shobun). These measures are tailored by the Japanese court to the specific needs of the foreign proceeding and the circumstances of the case in Japan, always subject to Japanese public policy. This approach allows the Japanese court to cooperate effectively with the foreign proceeding while maintaining control over actions taken within its own jurisdiction.
  3. "One Debtor, One Proceeding (with active effect) in Japan" Principle (一債務者一手続進行の原則 - ichi-saimusha ittetsuzuki shinkō no gensoku): While the Recognition and Assistance Act allows for the possibility of parallel proceedings (i.e., a domestic Japanese insolvency proceeding running concurrently with a recognized foreign insolvency proceeding concerning the same debtor), it generally seeks to avoid a situation where multiple foreign insolvency proceedings for the same debtor have co-existing, active, and potentially conflicting effects within Japan simultaneously. The Act provides rules for coordinating and, if necessary, prioritizing between a recognized foreign proceeding and a domestic Japanese proceeding, or between different types of recognized foreign proceedings (main versus non-main).

The Process of Recognizing Foreign Insolvency Proceedings

A. Defining a "Foreign Insolvency Proceeding" (外国倒産処理手続 - Gaikoku Tōsan Shori Tetsuzuki)
For a foreign proceeding to be eligible for recognition under the RAA, it must meet the definition provided in Article 2(1)(i) of the Act. This definition requires the proceeding to be:

  • A collective judicial or administrative proceeding in a foreign state (including an interim proceeding).
  • Pursued pursuant to a law relating to insolvency.
  • One in which the assets and affairs of the debtor are subject to the control or supervision of a foreign court or other competent foreign state authority.
  • For the purpose of either reorganization or liquidation.
  • Equivalent in nature to one of Japan's main domestic insolvency proceedings: Bankruptcy (破産 - hasan), Civil Rehabilitation (民事再生 - minji saisei), Corporate Reorganization (会社更生 - kaisha kōsei), or Special Liquidation (特別清算 - tokubetsu seisan). The exact equivalence to a specific Japanese procedure is less important than its overall character as a collective insolvency proceeding aimed at debt resolution.

B. Distinguishing Between Foreign Main and Non-Main Proceedings
The RAA, following the UNCITRAL Model Law, distinguishes between two types of foreign proceedings:

  • Foreign Main Proceeding (外国主手続 - gaikoku shu-tetsuzuki) (RAA, Art. 2(1)(ii)): This is a foreign insolvency proceeding taking place in the state where the debtor has its "center of main interests" (COMI). There is a rebuttable presumption that the debtor's registered office (or habitual residence for an individual) is its COMI.
  • Foreign Non-Main Proceeding (外国従手続 - gaikoku jū-tetsuzuki) (RAA, Art. 2(1)(iii)): This is a foreign insolvency proceeding taking place in a state where the debtor has an "establishment" but not its COMI. An "establishment" is defined as any place of operations where the debtor carries out a non-transitory economic activity with human means and goods or services.
    This distinction is critical because the recognition of a foreign main proceeding can lead to certain automatic effects (such as a stay on actions against the debtor's assets in Japan, though specific relief still requires court orders), and generally carries more weight in coordination with other proceedings.

C. Jurisdictional Requirements for Recognition (RAA, Art. 17(1))
For a Japanese court to recognize a foreign proceeding, that proceeding must be pending in a country where the debtor has either its domicile, residence, principal office, or an office/place of business (which would typically correlate with COMI or an establishment). Proceedings based solely on the presence of assets in the foreign jurisdiction, without an operational presence (COMI or establishment), are generally not eligible for recognition under the RAA.

D. Grounds for Dismissing a Recognition Petition (RAA, Art. 21)
Even if a foreign proceeding meets the basic definitions, the Japanese court may dismiss a petition for its recognition on several grounds:

  • Failure by the petitioner to make the required advance deposit for procedural costs (Art. 21(i)).
  • If the foreign proceeding itself is purely territorial under its own law (i.e., it does not claim any extraterritorial effect) (Art. 21(ii)).
  • Public Policy (公の秩序 - ōyake no chitsujo) (Art. 21(iii)): This is a crucial safeguard. Recognition (or the granting of specific assistance measures) can be refused if doing so would be "manifestly contrary to the public policy of Japan." This exception is intended to be applied narrowly, typically in cases involving fundamental breaches of procedural fairness (e.g., lack of notice to affected parties) or substantive principles deeply embedded in Japanese law. Mere differences between foreign and Japanese insolvency law are not sufficient to invoke public policy.
  • If no assistance measures are actually needed or would be effective in Japan (Art. 21(iv)).
  • If the foreign representative has committed a serious breach of their duty to report to the Japanese court (Art. 21(v)).
  • If the petition for recognition has been filed not in good faith (Art. 21(vi)).

E. Requirement for Commencement of Foreign Proceeding (RAA, Art. 22(1))
Generally, for a Japanese court to issue a full recognition order, the foreign insolvency proceeding must have already been formally commenced in its home jurisdiction. However, the RAA pragmatically allows a petition for recognition to be filed in Japan before the foreign proceeding is formally opened (Art. 17(2)). This is very important because it enables the foreign representative (e.g., a provisional liquidator or administrator appointed in the early stages of a foreign case) to seek urgent interim relief from the Japanese court immediately upon filing the recognition petition in Japan, thereby protecting local assets or preventing detrimental actions while the foreign proceeding is still getting underway.

The Recognition Procedure in Japan

A. Exclusive Jurisdiction of the Tokyo District Court (RAA, Art. 4)
All petitions for the recognition of foreign insolvency proceedings must initially be filed with the Tokyo District Court. This centralization is intended to foster expertise and consistency in handling these specialized international cases. However, after a recognition order has been granted, the Tokyo District Court has the discretion to transfer the subsequent assistance proceedings to another District Court in Japan if that other court is deemed more appropriate (e.g., if the debtor's main assets or business operations in Japan are located within that other court's jurisdiction) (RAA, Art. 5).

B. The Petitioner: The Foreign Representative (RAA, Art. 17(1))
The petition for recognition must be filed by the "foreign representative" (外国管財人等 - gaikoku kanzainin tō) of the foreign insolvency proceeding. The RAA defines "foreign representative" broadly to include a person or body, including the debtor if applicable under the foreign law (as in some DIP reorganizations), who is authorized in the foreign proceeding to administer the reorganization or liquidation of the debtor's assets or affairs or to act as a representative of the foreign proceeding (RAA, Art. 2(1)(viii)).

C. Supporting Documentation and Ongoing Duties of the Foreign Representative
The foreign representative, when filing the petition, must submit various documents to the Japanese court, including certified copies of the decision commencing the foreign proceeding and appointing the foreign representative, and a statement identifying all foreign proceedings in respect of the debtor that are known to the foreign representative.
The foreign representative also has ongoing duties to the Japanese court. They must promptly inform the court of any substantial change in the status of the recognized foreign proceeding or in their own appointment (RAA, Art. 17(3)). Furthermore, to ensure smooth communication and compliance with Japanese procedural requirements, the court can order the foreign representative to appoint a lawyer practicing in Japan as their agent for the purposes of the Japanese proceedings (RAA, Art. 17(4)).

D. Interim Relief Available Before a Formal Recognition Order
As mentioned, one of the most practical and important features of the RAA is the ability for the Japanese court to grant urgent interim relief after a petition for recognition is filed but before the court has made a final decision on whether to formally recognize the foreign proceeding (RAA, Arts. 25(2), 26(2), 27(2), and 51 for provisional administration). This immediate protective capacity is vital in cross-border cases where assets can be quickly dissipated or actions taken that could prejudice the foreign proceeding.
Interim relief can include:

  • Staying execution proceedings against the debtor's assets located in Japan.
  • Entrusting the administration or realization of some or all of the debtor's assets in Japan to a provisional administrator (保全管理人 - hozen kanrinin) appointed by the Japanese court. This provisional administrator would manage the assets under the Japanese court's supervision pending the recognition decision.
  • Prohibiting the debtor or third parties from disposing of the debtor's assets in Japan.
  • Staying the enforcement of security interests against the debtor's assets in Japan.

E. The Recognition Order (承認の決定 - Shōnin no Kettei)
If the Tokyo District Court is satisfied that all the statutory requirements for recognition are met and that no grounds for dismissal exist, it will issue a formal order recognizing the foreign insolvency proceeding (RAA, Art. 22(1)). This is a judicial determination, not an automatic administrative act. The recognition order will specify whether the foreign proceeding is recognized as a "foreign main proceeding" or a "foreign non-main proceeding."
The recognition order must be publicly notified in Japan's Official Gazette (官報 - Kampō) (RAA, Art. 23(1)). While general individual notice to all potential creditors in Japan is not mandated at this stage (as recognition itself primarily enables the foreign representative to act), specific notice of the recognition must be given to Japanese governmental authorities responsible for taxes and other public charges, and to any labor unions representing the debtor's employees in Japan (RAA, Art. 23(3)). This is to ensure these key domestic stakeholders are aware of the foreign proceeding's recognition and can take appropriate steps to protect their interests.
An interested party can file an immediate appeal against the recognition order (RAA, Art. 24). However, such an appeal does not automatically suspend the effect of the recognition order; the recognition becomes operative immediately, allowing the foreign representative to seek assistance from the court (RAA, Art. 22(2)).

Assistance Measures Available After Recognition (援助処分 - Enjo Shobun)

Once a foreign insolvency proceeding is recognized, the Japanese court can grant various forms of "assistance measures" (enjo shobun) to aid the foreign representative and the foreign proceeding. The RAA provides a non-exhaustive list of potential relief, and the court has discretion to craft orders appropriate to the circumstances.

A. Stays of Actions and Enforcement against the Debtor's Assets in Japan:

  • Stay of Individual Creditor Actions (RAA, Art. 25(1)): The court can order a stay of lawsuits, execution proceedings (e.g., attachments, seizures), and provisional remedies (e.g., preliminary injunctions) initiated by individual creditors against the debtor or its assets located in Japan. The court can also order the cancellation of existing executions if deemed particularly necessary to achieve the objectives of the recognition and assistance (Art. 25(5)).
  • Comprehensive Prohibition Order (RAA, Art. 28(1)): Similar to the interim relief measure, the court can issue a broad order prohibiting all creditors (or specific classes of creditors) from commencing or continuing such actions against the debtor's assets in Japan. This provides more extensive protection than individual stay orders.

B. Orders Concerning the Debtor's Property and Business in Japan:

  • Prohibition on Disposal of Assets or Payment of Debts (RAA, Art. 26(1)): The court can issue orders restricting the debtor from disposing of its assets located in Japan or from making payments on pre-existing debts using those assets.
  • Stay of Security Interest Enforcement (RAA, Art. 27(1)): The court can order a temporary stay on the enforcement of security interests (e.g., mortgages, pledges) against the debtor's property in Japan. However, the conditions for granting such a stay against secured creditors are generally stricter than for stays against unsecured creditors. The court must be satisfied that the stay is in the general interest of creditors and will not cause undue prejudice to the secured creditor, whose opinion must normally be heard. The stay is also typically granted for a "reasonable period" to allow for other arrangements to be made.

C. Entrusting Administration of Japanese Assets to a Japanese Recognition Trustee (管理命令 - Kanri Meirei) (RAA, Art. 32):
A significant form of assistance is the court's power to issue a "management order" (kanri meirei). This order appoints an "recognition trustee" (承認管財人 - shōnin kanzainin) in Japan to administer the debtor's assets and business affairs located within Japan.

  • Who can be appointed as Recognition Trustee?
    • The foreign representative themselves can be appointed by the Japanese court to act as the recognition trustee in Japan. This is often a practical solution if the foreign representative is capable of acting in Japan (usually with the assistance of Japanese legal counsel) and the foreign proceeding is one that commands confidence. This approach was taken, for example, in the first case where a foreign proceeding (from Hong Kong) was recognized in Japan.
    • Alternatively, the Japanese court can appoint a Japanese lawyer or another qualified professional to act as the recognition trustee. This might be preferred if the foreign proceeding is a debtor-in-possession type case where there isn't a separate foreign trustee, or if there are concerns about the foreign representative's ability to manage Japanese assets effectively or impartially, or if specific local expertise is required.
  • Powers of the Recognition Trustee: If a management order is issued, the appointed recognition trustee generally assumes powers over the debtor's Japanese assets and business affairs that are similar to those of a trustee in a domestic Japanese insolvency proceeding (such as the power to manage and dispose of assets, subject to court approval for certain significant acts) (RAA, Art. 34). They are also subject to the supervision of the Japanese court and owe fiduciary duties (RAA, Arts. 38, 45).

D. Court Control over Disposal or Repatriation of Assets Located in Japan (RAA, Art. 31):
If the Japanese court has granted significant assistance measures (such as stays on creditor actions or a management order entrusting assets to a recognition trustee), it can also order that any subsequent disposal of the debtor's assets located in Japan, or any transfer of such assets or their proceeds out of Japan, requires the prior permission of the Japanese court.

  • This power is designed to protect the interests of creditors, particularly those located in Japan. The court will grant such permission only if it is satisfied that the proposed disposal or transfer will not unduly harm the interests of domestic creditors (Art. 31(2)).
  • An unauthorized disposal or repatriation of assets in violation of such a court order can lead to the transaction being invalidated (if the counterparty was not in good faith) and can also be grounds for the revocation of the recognition of the foreign proceeding. Furthermore, the debtor or the foreign representative responsible for such an unauthorized act can face criminal penalties under Japanese law (RAA, Art. 31(3), Art. 69).

E. Other Forms of Assistance:
The list of assistance measures in the RAA is not exhaustive. The court has the flexibility to grant "any other appropriate relief" that is necessary to facilitate cooperation with the foreign insolvency proceeding and achieve the objectives of the Act.

Coordination with Domestic Japanese Insolvency Proceedings

The RAA provides a detailed framework for managing situations where a debtor becomes subject to both a recognized foreign insolvency proceeding and a domestic Japanese insolvency proceeding (such as bankruptcy, civil rehabilitation, or corporate reorganization) concerning the same debtor.

  • General Principle: Primacy of Domestic Proceedings: As a general rule, if a domestic Japanese insolvency proceeding is properly initiated against the same debtor, that domestic proceeding will take precedence. A petition for recognition of a foreign proceeding may be dismissed if a domestic proceeding is already actively pending (RAA, Art. 57(1)). If a domestic proceeding is commenced after a foreign proceeding has already been recognized in Japan, the recognition and assistance proceeding will typically be stayed to allow the domestic proceeding to take priority (RAA, Art. 59(1)).
  • Important Exception for Recognized Foreign Main Proceedings (International Comity): In a significant demonstration of international comity that goes beyond the basic requirements of the UNCITRAL Model Law, Japanese law allows an exception to the primacy of domestic proceedings. If the recognized foreign proceeding is a "foreign main proceeding" (i.e., one taking place in the country of the debtor's COMI), the Japanese court has the discretion to allow that recognized foreign main proceeding (and the assistance measures granted under it) to take precedence over a concurrent domestic Japanese proceeding (RAA, Arts. 57(1) proviso, 59(1) proviso). This extraordinary step can be taken if the court determines that:
    1. The recognized foreign proceeding is indeed a main proceeding.
    2. Giving it precedence will not unduly prejudice the legitimate interests of creditors located in Japan.
    3. Allowing the foreign main proceeding to take the lead is in the general interests of all creditors of the debtor, considered globally (e.g., because it facilitates a more efficient global restructuring or a higher recovery from worldwide assets).
      If these conditions are met, the Japanese court can choose to recognize the foreign main proceeding and then stay or even dismiss the parallel domestic Japanese proceeding (RAA, Arts. 57(2), 59(1)).
  • Coordination Between Multiple Recognized Foreign Proceedings (RAA, Art. 62): If multiple foreign insolvency proceedings concerning the same debtor are recognized in Japan, a clear hierarchy applies: a recognized foreign main proceeding will generally take precedence over any recognized foreign non-main proceeding. If multiple non-main proceedings are recognized (e.g., from different countries where the debtor has establishments), the Japanese court will determine which one should proceed or how they should be coordinated, based on what is in the best general interests of creditors.

Termination (Revocation) of Recognition

The recognition of a foreign insolvency proceeding by a Japanese court is not necessarily permanent and can be terminated (revoked or cancelled - 取消し, torikeshi) under specific circumstances (RAA, Art. 56).

Grounds for Revocation:

  • If it is discovered that the original grounds for granting recognition were absent, or if those grounds subsequently cease to exist.
  • If the foreign insolvency proceeding itself is terminated in its home country (whether due to successful completion, conversion to another type of proceeding, or failure).
  • If the foreign representative or the debtor engages in serious misconduct in Japan, such as making unauthorized disposals or transfers abroad of assets located in Japan in violation of a court order, or commits a serious breach of their reporting duties to the Japanese court.

The consequences of revocation, particularly on any domestic Japanese proceedings that may have been stayed due to the recognition, will depend on the reason for the revocation. If the foreign proceeding was successfully concluded and thus the Japanese recognition is revoked, any stayed domestic proceedings may also terminate or lose their effect (RAA, Art. 61(1), Art. 64). However, if the foreign proceeding failed or if recognition was revoked due to misconduct, any stayed domestic proceedings might be reactivated and allowed to continue.

Conclusion

Japan's Act on Recognition and Assistance for Foreign Insolvency Proceedings provides a comprehensive and modern legal framework, aligned with international best practices based on the UNCITRAL Model Law, for dealing with the complexities of cross-border insolvencies. It enables Japanese courts to formally recognize foreign insolvency proceedings and to grant a wide array of discretionary assistance measures to foreign representatives. This facilitates the orderly administration of a debtor's assets and affairs across jurisdictions, protects local assets from piecemeal seizure by individual creditors, and promotes fairer and more efficient outcomes for all stakeholders in an increasingly interconnected global economy. While the system includes safeguards for domestic interests and public policy, and provides rules for coordinating with domestic Japanese insolvency proceedings (generally prioritizing them but with notable exceptions for foreign main proceedings), its overall thrust is towards enhanced international cooperation. For businesses and legal professionals involved in international insolvencies that have a nexus with Japan—whether as debtors, creditors, or insolvency practitioners—a thorough understanding of this Recognition and Assistance Act is essential for navigating the legal landscape and effectively protecting their rights and interests.