Information Disclosure Obligations in Individual Guarantees for Business Debts in Japan: What Must the Principal Debtor Disclose to the Guarantor?

Japanese Attorney at Law - Bengoshi L.L.

• 7 min read

When an individual in Japan is asked to guarantee debts incurred by a principal debtor for business purposes, they often face a significant information imbalance. The principal debtor, typically a business entity or an entrepreneur, possesses detailed knowledge of their financial situation and the risks associated with the business, while the individual guarantor—who might be a family member, friend, or associate acting out of personal loyalty—may lack this insight. This asymmetry can lead to individuals undertaking substantial guarantee obligations without a full appreciation of the potential consequences.

To address this vulnerability, the Japanese Civil Code, through Article 465-10, imposes specific information disclosure obligations on the principal debtor when they commission an individual to act as a guarantor for business-related debts. Breach of these obligations can, under certain conditions, give the individual guarantor the right to cancel the guarantee agreement.

The core purpose of Article 465-10 is to protect prospective individual guarantors by ensuring they receive critical information from the principal debtor before committing to the guarantee. This aims to counteract the well-recognized vulnerabilities often associated with individual guarantees in a business context:

  • Guarantees Based on Personal Ties (情誼性, jōgisei): Individuals may feel compelled to guarantee due to personal relationships, even if it's not a financially prudent decision.
  • Uncertainty of Being Called Upon (未必性, mihitsusei): Guarantors might underestimate the likelihood of the principal debtor defaulting and the guarantee being invoked.
  • Rashness or Lack of Due Consideration (軽率性, keisotsusei): Individuals may not fully investigate or comprehend the risks involved.

By mandating the disclosure of key financial information, the law seeks to enable the prospective guarantor to make a more informed assessment of the principal debtor's creditworthiness and the actual risk they are undertaking.

Scope of Application of the Disclosure Obligation

The information disclosure duty under Article 465-10, Paragraph 1, applies under specific circumstances:

  • Who Owes the Duty? The principal debtor (主たる債務者, shu-taru saimusha) who is commissioning (委託する, itaku suru) the guarantee. The primary obligation to provide information rests on the party requesting the guarantee and benefiting from it.
  • To Whom is the Duty Owed? An individual (個人, kojin, i.e., a natural person) who is being asked to become a guarantor for the business debt. This provision does not apply if the prospective guarantor is a corporation or other legal entity.
  • What Types of Debts are Covered? The provision applies to guarantees for debts incurred by the principal debtor "for the purpose of their business" (事業のために負担する債務, jigyō no tame ni futan suru saimu). Notably, this is broader than the scope of Article 465-6 (which restricts certain loan-based business debt guarantees by individuals). Article 465-10 can apply to guarantees for various types of business obligations, not just loans or discounted bills.
  • Triggering Event: The duty arises when the principal debtor "commissions" the individual to provide the guarantee. This implies a direct request or entrustment from the principal debtor to the prospective guarantor.

Specific Information to Be Disclosed by the Principal Debtor

Article 465-10, Paragraph 1 mandates that the principal debtor, when commissioning an individual guarantee for their business debts, must provide information to the prospective guarantor concerning the following three key areas:

  1. The Principal Debtor's Financial Status (資産及び収入の状況, shisan oyobi shūnyū no jōkyō):
    This includes information about the principal debtor's assets (e.g., real estate, bank deposits, business inventory, receivables) and their income situation (e.g., business revenue, profits). This disclosure is intended to give the prospective guarantor a snapshot of the debtor's capacity to meet their obligations from their own resources.
  2. The Principal Debtor's Other Existing Debts (主たる債務以外に負っている債務の有無、その額及び履行状況, shu-taru saimu igai ni otte iru saimu no umu, sono gaku oyobi rikō jōkyō):
    The principal debtor must disclose whether they have any other debts apart from the specific debt for which the guarantee is being sought. If other debts exist, information regarding their amounts and the debtor's performance status (e.g., whether payments are current or if there are any defaults or arrears) must be provided. This reveals the principal debtor's overall leverage and potential competing claims from other creditors.
  3. Other Security Provided for the Principal Debt (主たる債務の担保として他に提供し、又は提供しようとするものがあるときは、その旨及びその内容, shu-taru saimu no tanpo toshite hoka ni teikyō shi, mata wa teikyō shiyō to suru mono ga aru toki wa, sono mune oyobi sono naiyō):
    If any other collateral has already been provided, or is intended to be provided, to secure the specific principal debt being guaranteed (whether by the principal debtor themselves or by another third party), the principal debtor must inform the prospective guarantor of this fact and provide details about the nature of such security. This allows the guarantor to understand the overall security structure for the debt and their potential position relative to other security providers or secured assets.

It's noteworthy that during the legislative drafting process, consideration was given to including "the specific content of the said business and its current profit situation" as part of the mandatory disclosure. However, this was ultimately excluded from the items directly triggering the cancellation right under Article 465-10. The rationale was that the specified disclosures focus on the information most directly relevant for assessing the likelihood of the guarantee being called upon and the principal debtor's general ability to pay. This does not mean, however, that misrepresentations about business specifics could not be grounds for other remedies (e.g., general fraud) if they meet the relevant criteria.

Guarantor's Right to Cancel: Consequences of Non-Disclosure or Misrepresentation

Failure by the principal debtor to comply with these disclosure obligations can have severe consequences for the validity of the guarantee agreement. Article 465-10, Paragraph 2 grants the individual guarantor a right to cancel (取り消すことができる, torikesu koto ga dekiru) the guarantee agreement under specific conditions:

  1. Breach of Duty by Principal Debtor: The principal debtor either:
    • Failed to provide information on one or more of the mandatory disclosure items listed above, OR
    • Provided false information concerning those items.
  2. Guarantor's Mistake (誤認, Gonin): As a direct result of this non-disclosure or false information, the individual guarantor was mistaken about the true state of affairs concerning those mandatory disclosure items.
  3. Causation: This mistake caused the guarantor to make the offer or give their acceptance for the guarantee agreement. Essentially, had the guarantor known the correct and complete information, they would either not have entered into the guarantee agreement at all, or would have done so only on different terms. This requires proof of a "double causal link": the debtor's failure led to the guarantor's mistake, and that mistake led to the conclusion of the guarantee.
  4. Creditor's Knowledge or Constructive Knowledge: This is a crucial limiting condition. The guarantor can only exercise this right of cancellation if, at the time the guarantee agreement was concluded, the creditor knew or could have known (知り又は知ることができたとき, shiri mata wa shiru koto ga dekita toki) that the principal debtor had failed to provide the required information or had supplied false information.

The structure requiring the creditor's awareness (actual or constructive) of the principal debtor's disclosure breach is analogous to the general rule for rescission due to fraud committed by a third party (as seen in Article 96, Paragraph 2 of the Civil Code). It aims to protect a creditor who is genuinely unaware of, and not negligent in failing to recognize, the principal debtor's misconduct in the commissioning of the guarantee. The burden of proving all these conditions, including the creditor's knowledge or constructive knowledge, rests on the guarantor who seeks to cancel the agreement.

A creditor's assertion that they received a representation or warranty from the principal debtor stating that all necessary information was duly provided to the guarantor does not, by itself, automatically absolve the creditor from being deemed to have "known or been able to know" of a disclosure failure if other circumstances should have alerted them.

The special right of cancellation under Article 465-10 does not preclude an individual guarantor from seeking to avoid the guarantee agreement based on other established legal grounds, if applicable. These could include:

  • Mistake (錯誤, sakugo) under Article 95 of the Civil Code, if the guarantor's mistake relates to a fundamental basis of the transaction and meets the statutory requirements.
  • Fraud or Duress (詐欺・強迫, sagi / kyōhaku) by the creditor or by the principal debtor (if the creditor was aware of the principal debtor's fraud/duress, as per Article 96).
  • Consumer Contract Act: If the guarantee agreement can be characterized as a consumer contract and the guarantor as a consumer (which might be less common for guarantees of business debts but not impossible depending on the guarantor's specific circumstances), then provisions of the Consumer Contract Act regarding misrepresentation or failure to disclose material facts by the business operator (the creditor) could also provide grounds for cancellation.

Furthermore, Article 465-10 does not limit any potential claims for damages that a guarantor (whether individual or corporate) might have against the principal debtor for breach of duties of care or good faith during the negotiation and commissioning of the guarantee.

Practical Implications

These disclosure obligations and the associated cancellation right carry significant practical implications:

  • For Principal Debtors Commissioning Individual Guarantees: They must be diligent and truthful in providing the statutorily required financial information to prospective individual guarantors for their business debts. Failure to do so not only exposes them to potential liability to the guarantor but can also render the guarantee (which they are relying on) cancellable if the creditor knew or should have known of the lapse.
  • For Individual Guarantors: Article 465-10 provides a crucial avenue for relief if they were induced to guarantee a business debt based on incomplete or false information from the principal debtor. However, the need to prove the creditor's knowledge or constructive knowledge of the disclosure failure can be a significant evidentiary challenge. It underscores the importance for guarantors to actively seek and verify information, and to document their understanding and the basis of their decision.
  • For Creditors Accepting Individual Guarantees for Business Debts: Although the primary disclosure obligation lies with the principal debtor, creditors cannot be entirely passive. If circumstances suggest that a prospective individual guarantor is not being properly informed by the principal debtor, the creditor runs the risk of the guarantee being cancelled. This might encourage creditors to:
    • Inquire about the information provided by the debtor to the guarantor.
    • Consider implementing procedures to ensure or verify that essential information has been communicated, perhaps even providing key financial summaries directly to the guarantor (with the principal debtor's consent) to mitigate their own risk of the guarantee being invalidated.

Conclusion

Article 465-10 of the Japanese Civil Code represents a targeted effort to protect individuals who are asked to guarantee business debts by ensuring they receive essential financial information from the principal debtor before making such a commitment. By imposing a clear disclosure duty on the commissioning principal debtor and providing a right of cancellation to the guarantor if this duty is breached (and if the creditor was, or should have been, aware of the breach), the law aims to foster more informed and equitable guarantee arrangements. This provision is a key element in Japan's broader legal reforms designed to mitigate the harsh consequences that can befall individual guarantors in the context of business financing, promoting fairness and responsible lending and guaranteeing practices.