My Company's Japanese Subsidiary and its Representative are Insolvent: How Does "Shogaku Kanzai" (Small-Scale Trusteeship) Work for Corporate and Director Bankruptcy in Japan?

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read

When a small to medium-sized enterprise (SME) in Japan, such as a local subsidiary of a foreign company, faces insurmountable financial distress, and its representative director is personally entangled through guarantees, a common path to resolution is a concurrent bankruptcy filing for both the company and the director. In many such instances, the Japanese courts may utilize a procedure known as Shōgaku Kanzai (少額管財), or "Small-Scale Trusteeship." This is a form of court-supervised bankruptcy designed to be more streamlined and cost-effective than full-scale trusteeship, making it suitable for entities with limited assets and less complex affairs. This article explores how Shōgaku Kanzai functions in these interconnected corporate and director bankruptcies.

Understanding Concurrent Corporate and Director Bankruptcy

In Japan, it is very common for representative directors of SMEs to have provided personal guarantees for their company's debts, especially loans from financial institutions. Consequently, when the company becomes insolvent, the director's personal finances are often inextricably linked and equally compromised. Filing for bankruptcy for both the company and the director simultaneously is often the most practical approach.

  • For the Company: The goal of corporate bankruptcy (法人破産 - hōjin hasan) is the orderly liquidation of its assets, distribution of any proceeds to creditors according to legal priorities, and ultimately, the dissolution of the corporate entity.
  • For the Representative Director: The goal of personal bankruptcy (自己破産 - jiko hasan) is to address their personal liabilities (including those arising from guarantees) and, crucially, to obtain a discharge of debts (免責 - menseki), allowing for a financial fresh start.

Shōgaku Kanzai provides a framework for managing these often-intertwined insolvencies efficiently.

What is Shōgaku Kanzai (Small-Scale Trusteeship)?

Shōgaku Kanzai is not a distinct type of bankruptcy proceeding in itself but rather an operational framework or practice adopted by certain courts, notably the Tokyo District Court and other major urban courts, for managing trusteeship cases (kanzai jiken - 管財事件) that are relatively small in scale and complexity.

Purpose and Distinction:
Standard corporate bankruptcy proceedings can be lengthy and expensive, involving a court-appointed bankruptcy trustee (hasan kanzai'nin - 破産管財人) who undertakes extensive investigations and asset administration. Shōgaku Kanzai aims to:

  • Reduce the financial burden on the debtor (or the estate) by lowering the advance court deposit (hiki-tsugi yonōkin - 引継予納金 or simply yonōkin - 予納金) required for the trustee's remuneration and expenses. For instance, while full trusteeship costs can be substantial, shōgaku kanzai deposits for very small personal cases might start from around ¥200,000 in Tokyo, though corporate cases would likely be higher depending on anticipated work.
  • Expedite the bankruptcy process by simplifying certain procedures, allowing the trustee to work more efficiently.

Criteria for Application:
While there are no rigid nationwide statutory criteria, courts typically consider factors such as:

  • The anticipated value of the debtor's assets.
  • The number of creditors and the complexity of claims.
  • The absence of significant legal disputes or extensive investigations (e.g., large-scale avoidance actions for preferential payments or fraudulent transfers).
  • The expected workload for the trustee.

If a case involves substantial assets, numerous creditors, complex international transactions, or serious allegations of managerial misconduct requiring deep investigation, it would likely proceed as a full-scale trusteeship. Dōji haishi (simultaneous abolition), common in no-asset personal bankruptcies, is generally not applicable to corporations.

The Pre-Filing Phase: Lawyer's Role in Preparation

Before petitions are filed, the lawyer representing the insolvent company and its director undertakes extensive preparatory work. This phase is critical for a smooth transition into Shōgaku Kanzai.

1. Comprehensive Financial Investigation:

  • Company's Finances: The lawyer meticulously reviews the company’s financial statements (balance sheets, profit and loss statements, tax returns), bank records, contracts, and other relevant documents. All assets are identified, including cash, bank deposits, accounts receivable (with an assessment of their recoverability), inventory, equipment, real estate (including leased properties and any associated rights or issues like unregistered structures or rent arrears ), vehicles, and intangible assets like intellectual property or valuable memberships. All liabilities are cataloged, including trade payables, bank loans, lease obligations, unpaid taxes, and any employee-related claims (though the case study company had no employees ).
  • Director's Personal Finances: A similar investigation is conducted into the director's personal assets (bank accounts, real estate, insurance policies with cash surrender value, investments) and liabilities (personal loans, and crucially, the extent of personal guarantees for company debts). The director's family income and living expenses are also reviewed.

2. Strategic Pre-Filing Actions and Advice:

  • Cessation of Business Operations (if applicable): If the company is still operating, a decision on when and how to cease operations is made in consultation with the lawyer.
  • Preservation of Assets: The lawyer will advise on securing company assets. This includes taking control of company seals, checkbooks, and bank passbooks to prevent unauthorized transactions or asset dissipation.
  • Halting Payments to Creditors: The company and director are instructed to stop all non-essential payments to existing creditors to avoid creating preferential payments (henpa bensai - 偏頗弁済), which a trustee could later seek to undo (avoidance powers or hinin-ken - 否認権).
  • Managing Bank Accounts: Funds are often withdrawn from company or director accounts held at banks to which debts are owed, as these banks might exercise a right of set-off upon learning of the impending bankruptcy. Arrangements for collecting any remaining accounts receivable into a new, neutral account (or the lawyer's trust account) might be made.
  • Strategic Sale of Director's Assets (Pre-Filing): In some instances, as illustrated in one of the case studies, it may be strategically beneficial for the director to sell certain personal assets before filing for bankruptcy. For example, a director's mortgaged personal residence might be sold. This requires:
    • Obtaining fair market valuations (e.g., from multiple real estate agents) to ensure the sale price is reasonable.
    • Negotiating with secured creditors (e.g., mortgage holders) for the release of their security interests upon receipt of sale proceeds.
    • Transparently accounting for all proceeds. Funds generated can be used to cover essential costs like the court deposit for the bankruptcy, the petitioning lawyer's fees, urgent moving expenses for the director, with any surplus potentially forming part of the bankruptcy estate. This is a complex area requiring careful legal guidance to avoid any appearance of improper asset disposal.
  • Handling Leased Premises/Contracts: The lawyer will assess ongoing leases (e.g., for offices or warehouses). Decisions might be made to terminate leases and surrender premises pre-filing if it reduces ongoing liabilities and simplifies matters for the eventual trustee.

3. Issuing the "Notice of Engagement" (Junin Tsuchi - 受任通知):
Once engaged, the lawyer sends a junin tsuchi to all creditors of both the company and the director. This notice:

  • Informs creditors of the lawyer's representation and the impending bankruptcy.
  • Requests creditors to direct all communications to the lawyer.
  • Typically requests a halt to collection activities from regulated lenders.
  • Is often accompanied by a letter of apology from the director to creditors, acknowledging the situation.
  • May include a creditor investigation form (saiken chōsa-hyō - 債権調査票) for creditors to confirm their claim details.

Filing Bankruptcy Petitions and the Initial Court Process

Petitions for bankruptcy for the company and the representative director are usually filed concurrently with the competent district court. The required documentation is extensive.

  • Documentation: Includes the formal petition, detailed schedules of assets and liabilities for both the company and the director, lists of creditors, recent financial statements for the company, the director's household financial situation, and a report detailing the history and causes of insolvency.
  • "Same-Day Interview" (Sokujitsu Mensetsu) (e.g., Tokyo District Court): The petitioning lawyer attends an interview with a judge. The judge reviews the case, asks questions, and determines the appropriate procedural track. If Shōgaku Kanzai is deemed suitable, the judge will also set the amount of the advance court deposit (yonōkin) required to cover the trustee's anticipated fees and initial expenses. This deposit must be paid promptly for the case to proceed.
  • Appointment of the Bankruptcy Trustee: Following the payment of the yonōkin, the court formally issues the bankruptcy commencement orders for both the company and the director and appoints a bankruptcy trustee, who is typically an independent lawyer.

The Role and Responsibilities of the Shōgaku Kanzai Trustee

Upon appointment, the bankruptcy trustee takes charge of the bankruptcy estates of both the company and the director. Even in a Shōgaku Kanzai case, the trustee has significant responsibilities:

  1. Securing and Managing Assets: The trustee immediately secures all known assets, including bank accounts, company records, seals, and any physical property. Mail addressed to the bankrupt company and director is redirected to the trustee, who reviews it for information about undisclosed assets or liabilities.
  2. Investigation:
    • Assets and Liabilities: The trustee conducts further investigations to verify the accuracy of the filed schedules, search for any undisclosed assets, and assess the validity of creditor claims.
    • Director's Conduct: For the director's personal bankruptcy, the trustee investigates whether any grounds for non-discharge of debts exist (e.g., significant pre-bankruptcy dissipation of assets, fraudulent conduct).
    • Avoidance Actions (否認権行使 - Hinin-ken Kōshi): The trustee examines pre-bankruptcy transactions for any preferential payments, fraudulent conveyances, or undervalued asset sales that could be "avoided" (undone) to recover value for the estate.
  3. Liquidation of Assets: The trustee liquidates any remaining company assets that have value. This could involve:
    • Collecting outstanding accounts receivable.
    • Selling inventory, machinery, or equipment.
    • Pursuing legal claims the company might have (e.g., a civil rehabilitation claim against a debtor of the bankrupt company, as seen in one case study where the trustee negotiated the sale of such a claim to a third party).
    • Dealing with low-value or unsaleable assets. For instance, if the company held worthless assets like defunct golf club memberships or old resort memberships, the trustee might seek court permission to abandon them (資産放棄許可 - shisan hōki kyoka) to avoid ongoing costs.
  4. Communication with Creditors: The trustee serves as the primary point of contact for creditors, providing them with information about the progress of the bankruptcy and the claims process.
  5. Distribution to Creditors (if applicable): If, after covering administrative expenses and the trustee's remuneration, there are funds remaining, the trustee makes distributions to creditors according to statutory priorities (e.g., tax claims and employee wage claims often have priority over general unsecured claims). In many Shōgaku Kanzai cases, particularly for SMEs, distributable assets may be minimal or non-existent.

Creditors' Meetings and Conclusion of Proceedings

  • Creditors' Meeting(s) (債権者集会 - Saikensha Shūkai): The trustee convenes at least one creditors' meeting to report on their administration of the estate, the status of asset realization, investigations, and the prospects for any distribution. In straightforward Shōgaku Kanzai cases, the first meeting may also be the final one. Creditors have the opportunity to ask questions.
  • Conclusion of Company's Bankruptcy: If there are no assets to distribute to creditors (or after a final distribution is made), the company's bankruptcy proceeding is concluded. This is often done through an order of "abolition due to lack of distributable property" (haishi - 廃止, specifically iji haishi - 異時廃止 if it occurs after the first meeting). Upon the conclusion of the bankruptcy, the company is struck from the commercial register and ceases to exist.
  • Director's Discharge: For the representative director's personal bankruptcy, after the trustee has completed their investigations, they will submit an opinion to the court regarding whether grounds for non-discharge exist. If no significant issues are found, or if discretionary discharge is deemed appropriate, the court will grant the director a discharge from their personal debts, including those arising from personal guarantees for the company's obligations.

Key Considerations for International Stakeholders

If a Japanese subsidiary or a key Japanese business partner (and its director) enters Shōgaku Kanzai bankruptcy, foreign parent companies or creditors should be aware:

  • Communication will primarily be with the court-appointed trustee, not the former management.
  • Claims must be filed according to Japanese bankruptcy procedures and deadlines.
  • Recovery prospects for unsecured creditors in SME bankruptcies are often low.
  • Understanding the interplay between the corporate and personal bankruptcies is crucial if claims exist against both.

Conclusion

The Shōgaku Kanzai (Small-Scale Trusteeship) procedure provides an important, pragmatic mechanism within the Japanese legal system for handling the insolvency of small to medium-sized enterprises and their personally liable directors. By streamlining certain aspects of the trusteeship process and managing costs, it facilitates an orderly liquidation of the company and offers a path for the director to achieve a discharge from overwhelming personal and guaranteed debts. While still a formal court-supervised bankruptcy involving a trustee, Shōgaku Kanzai is tailored to the realities of smaller insolvencies, aiming for efficiency and a conclusive resolution for all parties involved. Thorough pre-filing preparation by experienced legal counsel is key to leveraging this procedure effectively.