My Japanese Business Partner Filed for Bankruptcy: What Role Does Their Attorney Play?

When a business partner in Japan initiates bankruptcy proceedings (破産手続 - hasan tetsuzuki), a key figure involved from the outset is their legal counsel, commonly referred to as the "petitioner's agent" or debtor's counsel (申立代理人 - mōshitate dairinin). This attorney plays a distinct and crucial role that is separate from, yet complementary to, the court-appointed bankruptcy trustee (破産管財人 - hasan kanzainin). Understanding the functions and responsibilities of the debtor's counsel can provide valuable insight into the process, particularly for creditors and other stakeholders.

Unlike the bankruptcy trustee, who acts as a neutral administrator of the bankruptcy estate, the debtor's counsel is an advocate for the debtor (the company or individual filing for bankruptcy). Their involvement typically begins well before the formal court filing and continues throughout the proceedings.

The Debtor's Counsel (申立代理人 - Mōshitate Dairinin): Initial Engagement and Pre-Filing Responsibilities

The engagement of a debtor's counsel is often the first formal step a distressed Japanese entity takes towards addressing its insolvency. Their pre-filing responsibilities are extensive and foundational to the entire bankruptcy process:

1. Advising the Debtor: The counsel's initial role is to assess the debtor's financial situation and advise on the available legal options. This includes determining if bankruptcy is the most appropriate course of action, explaining the consequences, and outlining the debtor's duties and obligations.
2. Asset Preservation and Preliminary Investigations: Before filing, the counsel guides the debtor in preserving assets that will form the bankruptcy estate. This may involve advising against preferential payments to certain creditors or fraudulent transfers of assets. They will also conduct preliminary investigations into the debtor's financial affairs, liabilities, and contracts to prepare for the petition.
3. Preparation of the Bankruptcy Petition (破産手続開始の申立て - hasan tetsuzuki kaishi no mōshitate): This is a substantial undertaking. The debtor's counsel is responsible for meticulously preparing the bankruptcy petition and all accompanying documentation. This includes:
   • A detailed statement of the debtor's assets and liabilities.
   • A list of all known creditors (債権者一覧表 - saikensha ichiranhyō).
   • A financial statement or balance sheet (財産目録 - zaisan mokuroku).
   • An explanation of the circumstances leading to the insolvency.
   • Information regarding ongoing contracts, leases, and employment relationships.
     The accuracy and completeness of these documents are critical for the smooth progression of the case.
4. Handling Urgent Matters Pre-Filing: In many corporate bankruptcies, certain actions must be taken immediately before or concurrently with the filing to prevent further deterioration of the business or to comply with legal obligations. The debtor's counsel manages these:
   • Employee Dismissals and Related Procedures: If the business is ceasing operations, the counsel will advise on and oversee the lawful dismissal of employees, including procedures for unpaid wages, severance, and the issuance of necessary documentation for unemployment benefits (e.g., 離職票 - rishokuhyō).
   • Termination of Leases and Contracts: Where necessary and appropriate, the counsel may initiate the termination of burdensome leases or contracts before the trustee is appointed to mitigate ongoing liabilities.
   • Securing Premises and Records: Ensuring that business premises, important documents, and accounting records are secured and ready for handover to the eventual trustee.
5. Negotiating Preliminary Payments (予納金 - yonōkin): In Japan, the debtor must typically pay a preliminary sum to the court to cover initial administrative expenses of the bankruptcy proceeding, including a portion of the trustee's fee. The debtor's counsel may negotiate with the court regarding the amount, especially if they can demonstrate that pre-filing actions (like orderly wind-down of operations or securing assets) will reduce the trustee's workload. For instance, if the debtor's counsel has already managed the termination of business leases and the dismissal of employees, this may lead to a lower preliminary payment requirement.

Role During the Bankruptcy Proceedings (Post-Commencement)

Once the court issues a bankruptcy commencement order (破産手続開始決定 - hasan tetsuzuki kaishi kettei) and appoints a trustee, the role of the debtor's counsel shifts but remains vital.

1. Cooperation with the Bankruptcy Trustee (破産管財人との協力)

A primary and legally mandated responsibility of the debtor's counsel post-commencement is to cooperate fully with the bankruptcy trustee. This cooperation is essential for the trustee to efficiently administer the estate. Key aspects include:

• Smooth Handover of Assets and Information (財産及び資料の引継ぎ - zaisan oyobi shiryō no hikitsugi): The counsel facilitates the orderly transfer of all company assets, books, records, and relevant information to the trustee. This includes not just the items listed in the petition but also any other materials or insights that could be pertinent to the trustee's duties, such as details of ongoing disputes, potential claims the estate might have, or complex contractual arrangements. A well-prepared handover, potentially including a summary document of key issues prepared by the counsel, greatly aids the trustee.
• Providing Explanations and Clarifications (管財人への説明義務 - kanzainin e no setsumei gimu): The debtor and their counsel have a legal duty to explain the debtor's affairs to the trustee (Bankruptcy Act, Article 40, Paragraph 1, Item 2). The counsel assists the debtor in responding to the trustee's inquiries accurately and comprehensively. This duty is taken seriously, and failure to comply can lead to penalties, including issues with discharge for individual debtors or even criminal sanctions in severe cases (Bankruptcy Act, Article 268).
• Assisting in Trustee's Investigations: The trustee will conduct their own independent investigations. The debtor's counsel is expected to assist in this process by ensuring the debtor provides necessary access and information.

The spirit of this cooperation is to enable the trustee to perform their duties effectively for the benefit of all creditors. The petitioner's counsel is often encouraged to think from the perspective of what they would need if they were the trustee, thereby anticipating the trustee's requirements.

2. Representing the Debtor's Interests

While cooperation is paramount, the debtor's counsel continues to represent the legal interests of the debtor. This is particularly relevant in several areas:

• Discharge Proceedings (for Individuals) (免責手続 - menseki tetsuzuki): For individual debtors, achieving a discharge of debts is usually the primary goal. The counsel guides the debtor through this process, responds to any objections, and advocates for the debtor's discharge, especially if grounds for denial of discharge (免責不許可事由 - menseki fukyoka jiyū) are alleged but a discretionary discharge (裁量免責 - sairyō menseki) is sought. They must ensure the debtor cooperates fully with any investigations by the court or trustee related to discharge (Bankruptcy Act, Article 250, Paragraph 2). Proactively disclosing and explaining potentially unfavorable facts, rather than attempting to hide them, is generally considered the better strategy for obtaining a discretionary discharge.
• Matters Concerning Free Assets (自由財産 - jiyū zaisan): In individual bankruptcies, the counsel assists the debtor in identifying and claiming exempt assets (free assets) and, where applicable, in petitioning for an "expansion of free assets" (自由財産拡張制度 - jiyū zaisan kakuchō seido) to allow the debtor to retain assets necessary for their rehabilitation.
• Addressing Allegations or Disputes: If the debtor faces allegations of misconduct or disputes arise concerning their pre-bankruptcy actions, the counsel will represent them in these matters.
• Ensuring Debtor Compliance: The counsel advises the debtor on their ongoing duties during the bankruptcy, such as restrictions on changing residence or travel, and the obligation to keep the trustee informed of any changes in their circumstances.

3. Facilitating a Smooth and Efficient Process

By thoroughly preparing the case pre-filing and ensuring full cooperation post-commencement, the debtor's counsel plays a significant role in the overall efficiency of the bankruptcy proceedings. A well-prepared petition with comprehensive information allows the trustee to quickly grasp the situation, identify key issues, and commence their administrative tasks without undue delay. This ultimately benefits all parties by potentially reducing administrative costs and expediting distributions to creditors.

For instance, if the debtor's counsel ensures that employee-related matters (like dismissals and paperwork for unemployment benefits) are properly handled before the trustee's appointment, it streamlines a complex part of the administration. Similarly, providing clear documentation and analysis of ongoing contracts or potential avoidance actions allows the trustee to make informed decisions more rapidly.

Distinction from the Bankruptcy Trustee

It is essential for all parties, especially foreign creditors, to understand the clear distinction between the debtor's counsel and the bankruptcy trustee:

• Debtor's Counsel (Petitioner's Agent):
  • Represents the interests of the debtor.
  • Acts as an advocate for the debtor.
  • Their fees are typically paid by the debtor (or from pre-petition assets arranged for this purpose).
  • Focuses on guiding the debtor through the process, preparing the filing, and representing the debtor in specific matters like discharge.
• Bankruptcy Trustee (Court-Appointed Administrator):
  • Acts as a neutral administrator of the bankruptcy estate.
  • Represents the interests of all creditors collectively and the integrity of the bankruptcy estate.
  • Their fees and expenses are paid from the bankruptcy estate as an administrative claim.
  • Focuses on investigating, collecting, managing, and distributing the debtor's assets, and may take legal action against the debtor or third parties if necessary (e.g., avoidance actions).

While their roles are different, effective communication and cooperation between the debtor's counsel and the bankruptcy trustee are fundamental to the successful administration of a Japanese bankruptcy case.

Legal and Ethical Obligations

The debtor's counsel operates under specific legal and ethical obligations. As mentioned, the Bankruptcy Act (Article 40) imposes a duty to explain matters to the trustee. This duty is not merely a suggestion; non-compliance can have serious repercussions.

Furthermore, as attorneys, they are bound by the Japanese Code of Ethics for Practicing Attorneys (弁護士職務基本規程 - Bengoshi Shokumu Kihon Kitei), which mandates duties such as acting in good faith, maintaining competence, and avoiding conflicts of interest. In the context of bankruptcy, this means providing competent advice, ensuring the accuracy of information presented to the court, and not participating in any actions intended to defraud creditors or abuse the bankruptcy system.

The significance of thorough preparation by the debtor's counsel cannot be overstated. A poorly prepared petition or a lack of cooperation can lead to delays, increased costs, and a more arduous process for both the trustee and the creditors. Conversely, a diligent and cooperative debtor's counsel is an invaluable asset in navigating the complexities of Japanese bankruptcy law.

Conclusion

The attorney for a Japanese business partner filing for bankruptcy, the mōshitate dairinin, is far more than just a filer of documents. They are deeply involved in the strategic planning leading up to the bankruptcy, the meticulous preparation of the petition, and the crucial post-commencement phase of cooperation with the bankruptcy trustee. Their responsibilities include advising the debtor, preserving assets, ensuring compliance with legal duties, and facilitating the smooth transfer of information and control to the trustee. While they advocate for the debtor's interests, their cooperative role is enshrined in law and is vital for the efficient, fair, and effective administration of the bankruptcy estate under Japanese law. For international business partners and creditors, recognizing the defined role and duties of the debtor's counsel can lead to a better understanding of the proceedings and more effective interaction with the Japanese bankruptcy system.