Information Duty to Individual Guarantors in Japan: What Must a Principal Debtor Disclose Before a Guarantee for Business Debt is Made?

Japanese Attorney at Law - Bengoshi L.L.

• 7 min read

When an individual in Japan is asked to guarantee a debt incurred by a business—whether that business is run by a family member, a friend, or is a company they are associated with—they are often taking on substantial financial risk with limited visibility into the true financial health of the principal debtor. To address this information asymmetry and enable more informed decision-making, the Japanese Civil Code, through Article 465-10 (introduced as part of the 2017 reforms, effective April 1, 2020), imposes specific information disclosure obligations on the principal debtor before such a personal guarantee is concluded. Failure by the principal debtor to comply can, under certain conditions, allow the guarantor to rescind the guarantee contract.

Purpose and Scope of the Information Disclosure Duty (Article 465-10)

The primary purpose of Article 465-10 is to protect individuals who are considering becoming guarantors for business-related debts. It aims to ensure they receive crucial financial information directly from the principal debtor before they make the commitment, allowing them to assess the risks involved more accurately.

Applicability of the Rule:
This information disclosure duty applies under the following conditions:

  1. The Guarantor is an Individual: The person being asked to provide the guarantee must be an individual (not a corporation).
  2. The Guarantor is NOT an "Excepted Business Insider": This duty applies to individuals who are not among those specifically exempted under Article 465-7 of the Civil Code. These exempted individuals (who are presumed to have sufficient access to information or understanding of the business risks due to their close involvement) include, for example:
    • Key management personnel actively engaged in the principal debtor's corporate business (e.g., directors).
    • Individuals holding a majority of the voting rights in the corporate principal debtor.
    • Partners or members of the principal debtor entity.
    • Spouses of individual principal debtors who are actively involved in the business or an indivisibly connected business.
    • Co-entrepreneurs with an individual principal debtor.
      If the prospective individual guarantor does not fall into these "insider" categories, the disclosure duty applies.
  3. The Principal Debtor (Individual or Corporation): The party whose debt is being guaranteed can be either an individual entrepreneur or a corporation.
  4. The Debt is "Incurred in Connection with Business": The principal obligation being guaranteed must have been incurred by the debtor "in connection with their business" (jigyo ni kanshite futan suru saimu 事業に関して負担する債務).
    • Important Distinction: Unlike the stricter rule requiring a notarized declaration of intent for personal guarantees of "loan, etc. debts" for business (Art. 465-6), this information disclosure duty under Article 465-10 applies to all types of business debts, not just loans or discounted bills. This could include guarantees for trade payables, lease obligations, or service contract liabilities, as long as they are business-related.

What Information Must the Principal Debtor Disclose? (Art. 465-10, Para. 1)

Before the individual concludes the guarantee contract, the principal debtor is obligated to provide them with information concerning the following three categories:

  1. Financial Status and Business Performance of the Principal Debtor:
    • Information regarding their assets and liabilities (e.g., a summary of their balance sheet or equivalent financial position).
    • Information regarding their income and expenses (e.g., a summary of their profit and loss or business revenue and expenditure).
    • The current status of their business operations.
      For corporate principal debtors, providing the latest audited or reliably prepared financial statements (balance sheet, income statement, etc.) would typically be a primary way to satisfy this requirement. For individual principal debtors, equivalent accurate and comprehensive information about their business's financial health must be disclosed.
  2. Existence and Details of Other Obligations:
    • Whether the principal debtor owes any other debts apart from the one being guaranteed.
    • If other debts exist, disclosure must include:
      • The amount of each such other debt.
      • The status of performance for those other debts (e.g., are payments current, or are there any defaults or arrears?).
  3. Existence and Details of Security Provided for Other Obligations:
    • Whether any of the principal debtor's assets are already pledged, mortgaged, or otherwise provided as security for any of their other existing debts.
    • If such security exists, details of the security provided (e.g., which assets are encumbered and for which debts).

The aim is to give the prospective guarantor a realistic picture of the principal debtor's overall financial condition, indebtedness, and encumbered assets, which directly impacts the risk the guarantor would be undertaking.

Timing and Manner of Disclosure

  • Timing: The disclosure must be made by the principal debtor to the prospective individual guarantor before the guarantee contract is concluded.
  • Manner: The Civil Code does not prescribe a specific mandatory form for this disclosure. However, for the disclosure to be effective and to serve its purpose (and for evidentiary reasons), it should be:
    • Clear and Understandable: Presented in a way the individual guarantor can comprehend.
    • Accurate and Truthful: Reflecting the true financial situation.
    • Sufficiently Detailed: Providing enough information for a reasonable assessment of risk.
      It is highly advisable for the principal debtor to provide this information in writing and to obtain an acknowledgment from the prospective guarantor that they have received and understood it.

Consequences of Non-Disclosure or Misrepresentation by the Principal Debtor (Art. 465-10, Para. 2)

If the principal debtor fails to fulfill this information disclosure duty, the individual guarantor may, under specific conditions, have the right to rescind (torikesu 取り消す) the guarantee contract. Rescission renders the guarantee void from the beginning.

For the guarantor to successfully rescind, all the following conditions must be met:

  1. The Principal Debtor's Failure:
    • The principal debtor failed to provide the required information concerning any of the three categories (financial status/performance, other debts, other security); OR
    • The principal debtor provided false information concerning any of these matters.
  2. The Guarantor's Resulting Mistaken Belief:
    • As a direct result of the principal debtor's non-disclosure or misrepresentation, the individual guarantor was mistaken about material facts relevant to their decision.
    • Examples: The guarantor believed the principal debtor was financially sound when, in reality, they were heavily indebted or insolvent; the guarantor believed the debtor had no other significant secured debts when, in fact, most key assets were already encumbered.
  3. Causation for Providing the Guarantee:
    • The guarantor must demonstrate that they would not have entered into the guarantee contract, or would have agreed only to a guarantee with a more limited scope (e.g., a lower maximum amount or a shorter duration), had they known the true facts.
  4. The Creditor's Knowledge or Constructive Knowledge:
    • This is a critical element concerning the party who benefits from the guarantee (the creditor, e.g., the lender or supplier). The guarantor can rescind only if the creditor, at the time the guarantee contract was concluded, knew or could have known (shiri, mata wa shiru koto ga dekita toki 知り、又は知ることができたとき) that the principal debtor had failed to provide the information or had provided false information.
    • "Knew": Actual knowledge by the creditor of the debtor's disclosure failure.
    • "Could have known": This implies a standard of objective foreseeability or negligence on the creditor's part. If the circumstances were such that a reasonable creditor should have suspected or been aware of the principal debtor's non-compliance with the disclosure duty, this condition might be met. For example, if the creditor had access to conflicting information or if the debtor's misrepresentations were glaringly obvious to a diligent creditor.
    • This requirement protects creditors who were genuinely unaware of and not reasonably expected to know about the principal debtor's wrongful act of non-disclosure or misrepresentation towards the guarantor.

Burden of Proof and Time Limit for Rescission:

  • The individual guarantor seeking to rescind the guarantee contract bears the burden of proving all the above-mentioned conditions, including the creditor's knowledge or constructive knowledge.
  • The right to rescind a voidable act (which includes a guarantee contract rescindable under Art. 465-10) must generally be exercised within one year from the time the guarantor became aware of the grounds for rescission (i.e., discovered the non-disclosure/misrepresentation and the creditor's knowledge thereof), or within five years from the time the guarantee contract was concluded, whichever is earlier (as per the general rules for rescission of voidable acts, Article 126 of the Civil Code).

Implications for Creditors

While the primary duty of disclosure under Article 465-10 rests on the principal debtor, creditors who rely on personal guarantees for business debts need to be highly mindful of this provision. If the principal debtor fails in their disclosure duty, and the creditor knew or could have known of this failure, the creditor's ability to enforce an otherwise valid personal guarantee can be completely nullified by the guarantor's rescission.
To mitigate this risk, creditors might consider:

  • Implementing procedures to encourage or even verify (where feasible) that the principal debtor has made proper disclosure to the prospective individual guarantor.
  • Obtaining written representations from both the principal debtor (confirming they have made full and accurate disclosure) and the prospective guarantor (confirming they have received and understood the information, and are entering the guarantee based on that understanding).
  • Being alert to any "red flags" that might suggest the principal debtor is not being truthful with the guarantor.

Distinction from Creditor's Post-Contract Information Duties

It is important to note that Article 465-10 specifically addresses the principal debtor's pre-contract information disclosure duty to the prospective individual guarantor. This is distinct from separate obligations imposed on the creditor under Articles 458-2 and 458-3 of the Civil Code. These latter articles require the creditor to provide certain information to the guarantor after the guarantee contract is already in place (e.g., information about the status of the principal debt upon the guarantor's request, or notification to the guarantor if the principal debtor defaults on payments for a certain period).

Conclusion

The information disclosure duty imposed on principal debtors by Article 465-10 of the Japanese Civil Code represents a significant step towards protecting individuals who are asked to guarantee business-related debts. By mandating the provision of critical financial information before the guarantee is given, the law aims to ensure that such individuals can make a genuinely informed and voluntary decision, fully aware of the principal debtor's financial situation and the attendant risks. For principal debtors, compliance is a legal obligation. For creditors relying on such personal guarantees (from non-insider individuals), understanding this rule and the potential for rescission if the debtor fails in their duty (and the creditor knew or could have known) is crucial for assessing the true strength and enforceability of their security.