Distributions to Creditors in Japanese Bankruptcy: Types and Procedures

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read

The culmination of a Japanese bankruptcy proceeding (破産手続 - hasan tetsuzuki), from a creditor's perspective, is the distribution (配当 - haitō) of the debtor's liquidated assets. After the bankruptcy trustee (破産管財人 - hasan kanzainin) has collected and sold the assets of the bankruptcy estate (破産財団 - hasan zaidan), paid all administrative expenses, and finalized the list of allowed creditor claims, the remaining funds are distributed according to a strict legal hierarchy. Japanese bankruptcy law provides for several types of distribution procedures, ranging from formal, comprehensive processes to more streamlined methods designed for efficiency.

Prerequisites for Distribution

Before any distribution to general bankruptcy creditors can occur, several crucial steps must typically be completed:

  1. Substantial Completion of Asset Liquidation: The trustee must have largely finished the process of converting the debtor's assets into cash.
  2. Full Payment of Administrative Claims (財団債権 - zaidan saiken): All administrative claims, which have the highest priority (e.g., trustee's fees, costs of preserving and selling assets, certain post-petition taxes), must be paid in full. If the estate cannot even cover these, no distribution to lower-ranking creditors is possible.
  3. Determination and Allowance of Bankruptcy Claims (破産債権 - hasan saiken): The claims of creditors must have been filed, investigated by the trustee, and either allowed or resolved through dispute mechanisms.

The Distribution Hierarchy: A Brief Recap

It's essential to remember the order of priority:

  1. Administrative Claims (zaidan saiken)
  2. Priority Bankruptcy Claims (yūsenteki hasan saiken - e.g., certain taxes, wages)
  3. General Unsecured Bankruptcy Claims (ippan hasan saiken)
  4. Subordinated Bankruptcy Claims (retsugoteki hasan saiken - e.g., post-petition interest)
  5. Contractually Subordinated Bankruptcy Claims (yakujō retsugo hasan saiken)

Distributions are made sequentially down this "waterfall."

Core Types of Distributions (配当の種類 - Haitō no Shurui) in Japanese Bankruptcy

The Japanese Bankruptcy Act (破産法 - Hasan Hō) outlines several formal methods for distributing estate proceeds:

1. Final Distribution (最後配当 - Saigo Haitō)

(Bankruptcy Act, Article 195 et seq.)

  • Nature: This is the standard, comprehensive procedure for distributing the entire remaining balance of the bankruptcy estate after all assets have been liquidated and all claims (including any disputed ones) have been definitively determined.
  • Key Steps:
    • Preparation of Distribution Schedule (配当表 - haitō-hyō): The trustee meticulously prepares a detailed distribution schedule. This document lists all creditors entitled to a distribution, the allowed amount of their claim, their priority status, and the calculated dividend amount for each.
    • Court Permission: The trustee must obtain permission from the bankruptcy court to make the final distribution.
    • Public Notice and Inspection: The distribution schedule is made available for inspection by interested parties. Public notice of the schedule and the distribution is typically given (though notice by other means can suffice instead of a public notice in the Official Gazette for certain aspects).
    • Objection Period: Creditors are given a period (e.g., two weeks from public notice or a set date) to file objections (異議 - igi) with the court if they disagree with the distribution schedule (e.g., their claim amount, priority, or the amount allocated to another creditor).
    • Resolution of Objections: The court resolves any objections.
    • Payment of Dividends: Once the schedule is finalized, the trustee makes the actual payments to creditors.
  • When Used: While the default legal procedure, the full saigo haitō is often lengthy. In practice, it's typically used for larger, more complex cases, or if creditors object to the use of simplified procedures.

2. Interim Distribution (中間配当 - Chūkan Haitō)

(Bankruptcy Act, Article 209 et seq.)

  • Nature: A distribution made before the final liquidation of all estate assets and the final determination of all claims.
  • Purpose: To provide creditors with some partial recovery earlier in what might be a protracted bankruptcy case, rather than making them wait until the very end.
  • Conditions: The trustee can make an interim distribution if:
    • The claim investigation process for general claims is largely complete.
    • Sufficient funds have been accumulated in the estate to make a meaningful interim payment after reserving for remaining administrative expenses and potential higher-priority claims.
    • The court grants permission.
  • Procedure: The process is similar to a final distribution, involving the preparation of an interim distribution schedule, court approval, notice to creditors, and an opportunity for objections, but it applies only to the funds being distributed at that interim stage. The trustee may also receive interim remuneration from the estate before making an interim distribution.
  • When Used: Typically considered in larger bankruptcies where the full liquidation process is expected to take a considerable amount of time (e.g., due to ongoing litigation or complex asset sales).

3. Simplified Distribution (簡易配当 - Kan-i Haitō)

(Bankruptcy Act, Article 204 et seq.)

  • Nature: This is a streamlined and expedited distribution procedure designed to be quicker and less administratively burdensome than a full final distribution. It is the most commonly used method in Japanese bankruptcy practice, especially for small to medium-sized estates.
  • Rationale: To reduce costs and delays, allowing creditors to receive their dividends more quickly.
  • Sub-Types and Conditions:
    • (a) Small-Amount Simplified Distribution (少額型の簡易配当 - shōgaku-gata no kan-i haitō): This highly efficient method is available if the total amount of funds available for distribution to bankruptcy creditors (after paying administrative claims) is less than ten million Japanese Yen (Bankruptcy Act, Article 204, Paragraph 1, Item 1). A key feature is that the trustee does not need to formally ask creditors if they object to using the simplified procedure itself.
    • (b) Creditor Objection Confirmation Type (異議確認型の簡易配当 - igi kakunin-gata no kan-i haitō): If the distributable amount is ten million JPY or more, the trustee may still opt for a simplified distribution, but with an added step.
      • At Time of Distribution (配当時異議確認型 - haitō-ji igi kakunin-gata, Art. 204(1)(iii)): The trustee notifies creditors of the intention to make a simplified distribution and provides a period (usually one week after the notice is deemed received) for creditors to object to the use of the simplified procedure. If a certain threshold of creditors objects, the trustee must revert to the more formal final distribution process. This is the common approach for larger simplified distributions.
      • At Commencement (開始時異議確認型 - kaishi-ji igi kakunin-gata, Art. 204(1)(ii)): Less commonly, the court, at the beginning of the case, may give creditors a period to object to the general possibility of a future simplified distribution.
  • Key Steps in a Typical (Small-Amount) Simplified Distribution:
    1. Preparation of Distribution Schedule & Court Permission: The trustee prepares the haitō-hyō and obtains court permission for the simplified distribution (簡易配当許可申請書 - kan-i haitō kyoka shinseisho).
    2. Notice of Distribution (配当についての通知書 - haitō ni tsuite no tsūchisho): The trustee sends a notice to each creditor entitled to participate. This notice includes:
      • The total amount of allowed bankruptcy claims.
      • The total amount of funds available for distribution.
      • The specific creditor's allowed claim amount.
      • The creditor's anticipated dividend amount and the distribution rate (配当率 - haitō-ritsu).
      • The planned payment date.
    3. Deemed Arrival and Exclusion Period (除斥期間 - joseki kikan): The notice is deemed to have arrived after a short period (e.g., 3 days by mail in Osaka). An "exclusion period" of one week then commences from this deemed arrival date (Bankruptcy Act, Article 205, applying Article 198, Paragraph 1). During this period, any final issues regarding the determination of claims (e.g., contingent claims becoming fixed, or secured creditors proving their deficiency) must be resolved to be included in this distribution.
    4. Objection Period for Distribution Schedule Contents: After the exclusion period expires, creditors typically have another week to file objections specifically against the contents of the distribution schedule (e.g., calculation errors, incorrect priority for another creditor) (Bankruptcy Act, Article 205, applying Article 200, Paragraph 1).
    5. Payment: If no insurmountable objections are raised and upheld, the trustee proceeds to make the dividend payments to creditors, usually via bank transfer. The trustee reports the completion of the distribution to the court (簡易配当実施報告書 - kan-i haitō jisshi hōkokusho).

4. Consensual Distribution (同意配当 - Dōi Haitō)

(Bankruptcy Act, Article 208)

  • Nature: This is a distribution made based on a plan and schedule to which all participating bankruptcy creditors have given their consent.
  • Procedure: If unanimous consent is obtained, the trustee can apply to the court for permission to make a consensual distribution. This can be a very rapid method as it bypasses certain notice periods and objection rights inherent in other procedures.
  • When Used: Most suitable for cases with a very small number of creditors where obtaining everyone's agreement is feasible.

5. Additional Distribution (追加配当 - Tsuika Haitō)

(Bankruptcy Act, Article 215)

  • Nature: This occurs if, after a final distribution (or a simplified distribution that was intended to be final) has been completed and the bankruptcy proceedings formally terminated, new assets belonging to the estate are discovered or recovered (e.g., from a successful late-stage avoidance action or an unexpected tax refund).
  • Procedure: The trustee (whose duties may be revived for this purpose) must, with court permission, make an additional distribution of these newly available funds. This distribution is generally made based on the previously established distribution schedule and creditor allowances.
  • If the amount is very small, it might be allocated to the trustee as additional remuneration or to cover minor outstanding costs.

Streamlined "Distributions" via Court-Approved Settlements or Permissions (運用上の工夫)

In practice, especially when it's clear that distributions will be limited to only high-priority creditors (like certain tax or labor claims) and no funds will reach general unsecured creditors, Japanese courts and trustees often utilize even more streamlined methods that are not formal "distributions" (haitō) under the above categories but achieve a similar economic result for those specific priority creditors:

  • For Priority Tax Claims: The trustee may, with court approval of a settlement (和解許可 - wakai kyoka, Bankruptcy Act, Article 78, Paragraph 2, Item 11), pay the allowed priority tax claims directly, bypassing the need to involve general creditors in a formal distribution process from which they would receive nothing.
  • For Priority Labor Claims: Similarly, the trustee may use:
    • Payment Permission (弁済許可 - bensai kyoka, Bankruptcy Act, Article 101, Paragraph 1): The court can permit the trustee to pay certain priority wage and retirement claims even before a general distribution, if it's necessary for the employees' livelihood and doesn't prejudice other higher or equal ranking claims.
    • Settlement Approval: As with taxes, a court-approved settlement can be used to pay priority labor claims.
      These "simplified allocations" (簡易分配 - kan-i bumpai) are practical court-supervised measures designed to efficiently channel funds to specific high-priority creditors without the administrative burden of a full distribution process that would offer no benefit to lower-ranking creditors. Cases resolved this way often conclude with an "early discontinuance" (iji haishi) rather than a formal "termination after distribution" (shūketsu).

Key Elements in Any Distribution Process

Regardless of the specific type of distribution, certain elements are common:

  • The Distribution Schedule (配当表 - Haitō-hyō): This is the trustee's master plan, detailing each creditor, their allowed claim, its priority, the applicable distribution rate (配当率 - haitō-ritsu), and the amount of their dividend. Meticulous calculation and verification are essential.
  • Handling of Contingent and Disputed Claims (未確定債権の取扱い - Mikakutei Saiken no Toriatsukai):
    • Claims subject to a suspensive condition (停止条件付債権 - teishi jōken-tsuki saiken, e.g., a claim that only arises if a future uncertain event occurs) are generally excluded from distribution if the condition has not been fulfilled by the end of the relevant exclusion period (Bankruptcy Act, Article 198, Paragraph 2).
    • For claims that are disputed (e.g., subject to ongoing claim assessment proceedings or litigation) when a distribution is being prepared, the trustee will typically set aside (供託 - kyōtaku) the potential dividend amount payable on that claim. These funds are deposited with a Legal Affairs Bureau pending the final resolution of the dispute (Bankruptcy Act, Article 202).
  • Participation of Secured Creditors (別除権者の配当参加 - Betsujo-kensha no Haitō Sanka):
    • Secured creditors (those with a "right of separation" - betsujo-ken) are primarily entitled to recovery from their specific collateral.
    • They can only participate in general bankruptcy distributions for their deficiency claim – the amount of their debt that remains unsatisfied after they have realized (or had valued) their collateral.
    • To be included, the secured creditor must prove the amount of this deficiency to the trustee by the end of the exclusion period for the distribution (Bankruptcy Act, Article 198, Paragraph 3). If they fail to do so, their deficiency claim may be excluded from that particular distribution.
    • Special rules apply to calculating the participating claim for holders of root-type mortgages (根抵当権 - neteitōken), often based on the agreed maximum secured amount (極度額 - kyokudogaku).

Conclusion

The distribution phase is the ultimate objective of a liquidation bankruptcy in Japan, aiming to return value to creditors based on their legal rights and priorities. The Japanese Bankruptcy Act provides a range of procedures, from the comprehensive final distribution to various simplified methods, allowing trustees and courts to tailor the process to the specifics of each case. While simplified distributions (kan-i haitō) are now the norm for efficiency, the underlying principles of adherence to statutory priorities, proper claim determination, and transparent reporting remain paramount. For creditors, understanding these different distribution mechanisms and the requirements for participation, such as for contingent claims or secured creditor deficiencies, is key to navigating the final stages of a Japanese bankruptcy proceeding.