Handling Overseas Assets in a Japanese Bankruptcy Proceeding

Japanese Attorney at Law - Bengoshi L.L.

• 7 min read

In an increasingly interconnected global economy, it is common for Japanese companies and individuals facing bankruptcy (破産手続 - hasan tetsuzuki) to possess assets located in foreign jurisdictions. These overseas assets can range from real estate and bank accounts to shares in foreign subsidiaries or receivables from international customers. For the Japanese bankruptcy trustee (破産管財人 - hasan kanzainin), identifying, securing, and realizing these foreign assets presents a unique and often complex set of challenges and opportunities.

The Principle of Universality in Japanese Bankruptcy Law

The Japanese Bankruptcy Act (破産法 - Hasan Hō) operates, in principle, on the concept of universality (属人主義 - zokujin shugi, or universality principle). This means that the bankruptcy estate (破産財団 - hasan zaidan), which comes under the administration of the trustee, is intended to encompass all of the debtor's property, wherever it is located in the world, at the time of the bankruptcy commencement order (Bankruptcy Act, Article 34, Paragraph 1). The goal is a single, unified administration of the debtor's worldwide assets for the equitable benefit of all creditors.

However, this principle of universality often clashes with the practical realities of territoriality (zokuchi shugi - 属地主義) in international law. The ability of a Japanese trustee to actually assert control over and recover assets located in a foreign country depends heavily on the laws of that foreign jurisdiction, its willingness to recognize the Japanese bankruptcy proceedings, and the level of international cooperation available.

The Bankruptcy Trustee's Duty and Initial Steps Regarding Foreign Assets

Despite the potential difficulties, a Japanese bankruptcy trustee has a fiduciary duty to make reasonable efforts to:

  1. Investigate and Identify Overseas Assets: The trustee must diligently investigate whether the bankrupt debtor holds any assets abroad. This involves scrutinizing the debtor's books and records, financial statements, and correspondence, as well as interviewing the debtor, its management (for corporations), and other relevant parties. Information from creditors can also be crucial in uncovering foreign assets.
  2. Assess Value and Recoverability: Once potential foreign assets are identified, the trustee must attempt to assess their value and the likelihood and feasibility of recovery.
  3. Cost-Benefit Analysis: A critical early step is a thorough cost-benefit analysis. Pursuing foreign assets can be expensive (involving foreign legal fees, translation costs, travel, etc.) and time-consuming. The trustee must weigh the potential net recovery for the estate against these anticipated costs and the inherent uncertainties of cross-border legal action. This analysis will dictate whether active pursuit is in the best interests of the creditors.

Methods for Realizing Overseas Assets

If the cost-benefit analysis is favorable, the trustee may employ several strategies to realize value from foreign assets:

1. Seeking Voluntary Cooperation from the Debtor

This is often the simplest and least expensive approach. If the debtor (or, in the case of a corporation, its former directors or representatives who have knowledge and control) is cooperative, they may be willing to assist the trustee by:

  • Voluntarily repatriating liquid assets (e.g., transferring funds from foreign bank accounts to the trustee's account in Japan).
  • Assisting in the sale of foreign assets and remitting the proceeds.
  • Providing necessary documentation and information regarding the foreign assets.

2. Engaging Local Counsel in the Foreign Jurisdiction

For almost any action involving foreign assets, retaining qualified legal counsel in the jurisdiction where the assets are located is essential. Local lawyers can:

  • Advise on the applicable local laws regarding property rights, creditor claims, and insolvency procedures.
  • Represent the trustee in foreign courts.
  • Assist with the practicalities of securing, valuing, and selling assets in compliance with local regulations.
    The selection of experienced and reputable foreign counsel is a critical decision for the trustee.

3. Seeking Recognition of Japanese Bankruptcy Proceedings Abroad

The ability to have the Japanese bankruptcy proceeding formally recognized by foreign courts can greatly enhance the trustee's powers in that jurisdiction.

  • UNCITRAL Model Law on Cross-Border Insolvency: Many countries have adopted legislation based on the UNCITRAL Model Law. If the country where the assets are located has enacted such a law, the Japanese trustee can apply to the foreign court for:
    • Recognition of the Japanese proceeding: Typically as a "foreign main proceeding" (if Japan is the debtor's center of main interests - COMI) or a "foreign non-main proceeding."
    • Ancillary Relief: Upon recognition, the trustee may be granted various forms of relief, such as:
      • A stay or moratorium on actions by local creditors against the debtor's assets in that jurisdiction.
      • Orders for the turnover of local assets to the Japanese trustee.
      • The power to examine witnesses or obtain evidence locally.
      • The ability to participate in local insolvency proceedings concerning the debtor.
        Japan itself has adopted the UNCITRAL Model Law through its "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, Act No. 129 of 2000), which facilitates cooperation with foreign insolvency representatives seeking assistance in Japan. This demonstrates Japan's commitment to international insolvency cooperation.
  • Principles of Comity and Bilateral Treaties: In jurisdictions that have not adopted the Model Law, recognition of the Japanese proceedings may depend on general principles of international comity (the mutual respect and recognition of judicial decisions between nations) or, less commonly, specific bilateral treaties that address bankruptcy matters.

4. Initiating Ancillary or Secondary Insolvency Proceedings Abroad

In some situations, particularly if comprehensive administration of local assets is required or if recognition of the Japanese proceeding is problematic, it might be necessary or more effective for the Japanese trustee (or a representative appointed on their behalf) to initiate a local, ancillary, or secondary insolvency proceeding in the foreign country where the assets are situated. This allows the assets to be administered under local insolvency law, ideally in coordination with the main Japanese proceeding.

The trustee may also undertake direct legal action in foreign courts to recover specific assets or enforce claims, such as:

  • Suing a foreign party that owes a debt to the bankrupt Japanese company.
  • Initiating legal proceedings to recover property that was fraudulently transferred abroad by the debtor.

6. Selling the Claim or Information Regarding the Foreign Asset

If direct recovery of a foreign asset is deemed too complex, costly, or uncertain, the trustee may explore alternative strategies to derive some value for the estate:

  • Selling the Claim: The trustee might sell the estate's claim to the foreign asset (e.g., a receivable from a foreign debtor, or rights to a piece of property) to a third party, such as a specialized debt recovery firm or a major creditor who has a presence or interest in that foreign jurisdiction.
  • Selling Information: If the trustee possesses valuable information about a concealed or hard-to-reach foreign asset, they might sell this information to parties better equipped to pursue it.
    While this may result in less than the full value of the asset, it can provide a certain and immediate recovery for the estate, avoiding the risks and costs of protracted cross-border litigation.

Common Challenges in Dealing with Overseas Assets

Trustees face numerous hurdles when attempting to administer foreign assets:

  • Jurisdictional Issues and Conflict of Laws: Different countries have different legal systems, property laws, and rules regarding the priority of claims, which can conflict with Japanese law.
  • Recognition of Trustee's Authority: Foreign courts may not automatically recognize the Japanese trustee's legal standing or their powers to act.
  • Information Gathering: Obtaining accurate and comprehensive information about assets located abroad, or about foreign debtors, can be exceptionally difficult.
  • Substantial Costs: Legal fees for foreign counsel, court costs, translation services, travel expenses, and asset valuation costs can quickly accumulate and may outweigh the potential recovery from smaller assets.
  • Time Delays: Cross-border legal processes are notoriously slow and can significantly prolong the administration of the bankruptcy estate.
  • Language and Cultural Barriers: Effective communication and negotiation can be hampered by differences in language and business culture.
  • Enforcement of Judgments: Even if a Japanese court issues an order related to foreign assets, enforcing that order in a foreign jurisdiction can be a separate and complex legal challenge.
  • Local Creditor Actions: Creditors located in the foreign jurisdiction might attempt to seize local assets for their own benefit, potentially disrupting the trustee's efforts to ensure a universal and equitable administration.

Specific Types of Overseas Assets and Considerations

The nature of the asset itself influences the recovery strategy:

  • Real Estate: Sale and transfer must comply strictly with the local property laws of the jurisdiction where it is located. This almost always requires local legal assistance.
  • Bank Accounts: Accessing or freezing foreign bank accounts may necessitate court orders in the local jurisdiction. Foreign banks may also assert their own set-off rights against balances held.
  • Shares in Foreign Subsidiaries: The trustee may try to sell the shares in the foreign subsidiary. If the subsidiary itself is viable, this might attract buyers. If the subsidiary is also insolvent, the trustee may need to coordinate with any local insolvency proceedings for that subsidiary, which can become highly complex.
  • Receivables from Foreign Debtors: Collection efforts might involve direct negotiation, engaging international debt collection agencies, or initiating litigation in the foreign debtor's home jurisdiction.

Abandonment of Overseas Assets from the Bankruptcy Estate (財団からの放棄 - Zaidan kara no Hōki)

Given the challenges and costs, there are situations where pursuing a foreign asset is simply not economically viable for the bankruptcy estate. If, after a thorough investigation and cost-benefit analysis, the trustee concludes that the likely net recovery from a foreign asset (after deducting all anticipated costs) is negligible or even negative, they can seek permission from the Japanese bankruptcy court to abandon the asset from the bankruptcy estate (Bankruptcy Act, Article 78, Paragraph 2, Item 12).

Abandonment means the bankruptcy estate formally relinquishes all claims and interest in that specific foreign asset. This allows the trustee to focus resources on more readily recoverable domestic assets.

The Importance of a Practical and Strategic Approach

The successful administration of overseas assets in a Japanese bankruptcy requires a highly practical, strategic, and often cautious approach by the trustee. Each situation must be assessed on its own merits, balancing the theoretical scope of the Japanese bankruptcy estate with the tangible realities of cross-border enforcement. Trustees must be resourceful, well-advised by international legal experts, and always mindful of their primary duty to act in the best financial interests of the collective body of creditors.

Conclusion

Handling overseas assets represents one of the most sophisticated and challenging aspects of modern Japanese bankruptcy administration. While Japanese bankruptcy law embraces the principle of universality, the practical realization of foreign assets hinges on a complex interplay of international cooperation, the specific laws of foreign jurisdictions, and the trustee's diligent and strategic efforts. The increasing adoption of frameworks like the UNCITRAL Model Law on Cross-Border Insolvency by many countries, including Japan, has improved the prospects for international cooperation. Nevertheless, recovering foreign assets remains a demanding task that often requires specialized expertise, significant resources, and a pragmatic assessment of what is realistically achievable for the benefit of the estate.