My Japanese Counterparty Filed for Insolvency: What Are the Different Types of Claims (Saiken no Shurui) and Their Priority in Japanese Civil Rehabilitation?

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read

When a Japanese business partner or counterparty initiates a formal insolvency proceeding, it's common for international business professionals to use the term "bankruptcy" as a general descriptor. However, Japan has distinct procedures for liquidation (Bankruptcy - 破産 Hasan) and reorganization. If your counterparty has filed for Civil Rehabilitation (民事再生 - Minji Saisei), they are aiming to restructure and continue their business, not to liquidate. For creditors, understanding how their claims (債権 - saiken) are classified and prioritized within this reorganization framework is paramount to assessing potential recovery and formulating a strategy. This article provides an overview of the different types of claims and their treatment in Japanese Civil Rehabilitation proceedings.

A Brief Overview of Civil Rehabilitation (Minji Saisei) in Japan

Civil Rehabilitation is a court-supervised process under Japan's Civil Rehabilitation Act (民事再生法 - Minji Saisei Hō) designed to help financially distressed companies (and individuals) rehabilitate their businesses or economic lives. Unlike bankruptcy, which leads to the dissolution of a company and liquidation of its assets, the primary goal of Civil Rehabilitation is the formulation and implementation of a "rehabilitation plan" (再生計画 - saisei keikaku). This plan typically involves restructuring debts (e.g., reducing principal amounts, extending payment terms) and implementing operational changes to restore the debtor to financial viability while allowing it to continue as a going concern.

The Critical Importance of Claim Classification

In any insolvency proceeding, not all claims are treated equally. The classification of a creditor's claim determines its payment priority, how it will be treated under the rehabilitation plan, and what rights the creditor has during the proceedings (such as voting rights on the plan). Understanding where your claim falls is the first step in navigating the process.

Claims in Civil Rehabilitation are broadly categorized based on when they arose (pre-petition vs. post-petition), whether they are secured, and whether they have statutory priority.

I. Claims Paid Outside and In Preference to the Rehabilitation Plan

Certain claims are considered so critical to the functioning of the rehabilitation process or hold such a high statutory priority that they are paid in full, as they become due, outside the constraints (and potential "haircuts") of the rehabilitation plan.

A. Common Benefit Claims (共益債権 - Kyōeki Saiken)

Common Benefit Claims are defined primarily in Article 119 of the Civil Rehabilitation Act. These claims are deemed to benefit all creditors collectively or are essential for the administration of the rehabilitation proceedings and the continuation of the debtor's business during this period. They have the highest priority for payment from the debtor's estate.

Rationale: These expenses are incurred for the common good of the estate and its stakeholders, facilitating a process that ideally leads to a better outcome for all creditors than immediate liquidation would.

Common Examples of Common Benefit Claims:

  1. Court Costs and Administrative Expenses: Fees for court procedures, expenses for public notices related to the rehabilitation.
  2. Remuneration for Court-Appointed Officials: Fees for the court-appointed supervisor (kantoku i'in - 監督委員), examiner, or trustee, if appointed.
  3. Post-Petition Operational Expenses:
    • Expenses incurred for the continuation of the debtor's business after the commencement of rehabilitation proceedings, provided they are within the ordinary course of business or specifically approved.
    • This often includes payments to essential suppliers for goods or services delivered post-petition to keep the business running. For significant or non-ordinary course transactions, the debtor may need to obtain the supervisor's consent or court permission, sometimes retroactively designating such claims as common benefit claims (共益債権化の承認申請 - kyōeki-saiken-ka no shōnin shinsei; Art. 120).
    • Post-petition wages for employees.
    • Rent for essential business premises accruing post-petition.
  4. Certain Post-Petition Tax Claims: Taxes, levies, or charges arising from the debtor's assets or business activities after the commencement of proceedings.
  5. Loans Made Post-Petition with Court Approval (DIP Financing): If the debtor obtains new financing after the petition with court approval to fund ongoing operations, these loans may be treated as common benefit claims.
  6. Expenses for Creditors' Committee Activities: If a creditors' committee is formed, reasonable expenses incurred by the committee.

Payment Terms: Common Benefit Claims are paid in full, as they become due, and take precedence over all other types of pre-petition claims, including general priority claims and rehabilitation claims.

B. General Priority Claims (一般優先債権 - Ippan Yūsen Saiken)

General Priority Claims are pre-petition claims that are granted priority over general unsecured rehabilitation claims by provisions of the Civil Code, Commercial Code, or other general statutes (Art. 122, Civil Rehabilitation Act). These are distinct from common benefit claims (which are largely post-petition or process-related) and secured claims (which relate to specific collateral).

Rationale: These claims are recognized as having a higher societal or legal importance deserving of preferential treatment even before specific insolvency laws are invoked.

Common Examples of General Priority Claims:

  1. Pre-Petition Employee Wage Claims: Claims for employee salaries, wages, and severance pay that accrued before the commencement of rehabilitation proceedings often have priority (e.g., under Article 306(ii) and Article 308 of the Civil Code regarding general liens for employee claims, often covering several months of wages prior to insolvency).
  2. Certain Pre-Petition Tax and Social Security Claims: Many national and local tax obligations, as well as social security contributions (e.g., pension and health insurance arrears), that accrued pre-petition are treated as general priority claims. These are typically not subject to reduction under the rehabilitation plan and must eventually be paid in full, often through a negotiated installment plan with the authorities.

Payment Terms: General Priority Claims are also paid in full, generally as they become due or according to arrangements made with the relevant authorities/claimants. They rank below Common Benefit Claims but above ordinary Rehabilitation Claims.

II. Claims Handled Separately from the Rehabilitation Plan (Potentially)

Secured Claims / Right of Separate Execution (別除権 - Betsujo-ken)

Secured Claims are those backed by a security interest (e.g., mortgage, pledge, statutory lien, or retention of title) over specific assets of the debtor company. The holders of such claims are known as secured creditors.

Right of Separate Execution (Betsujo-ken; Art. 53, Civil Rehabilitation Act):
The defining characteristic of secured claims is that secured creditors generally have the "right of separate execution." This means they can, in principle, enforce their security interest against the collateralized asset(s) outside the framework of the rehabilitation proceedings and the constraints of the rehabilitation plan. They are not typically bound by the "haircuts" or payment schedules imposed on unsecured rehabilitation creditors concerning the secured portion of their claim.

Valuation of Collateral and Deficiency Claims:
The value of the collateral is crucial.

  • If the value of the collateral is sufficient to cover the entire secured debt, the creditor can satisfy their claim from the proceeds of that collateral.
  • If the value of the collateral is less than the amount of the secured debt, the secured creditor can recover up to the value of the collateral through their security right. The remaining shortfall (the deficiency) is then treated as an unsecured Rehabilitation Claim and is subject to the terms of the rehabilitation plan along with other general unsecured debts.

Practical Treatment and Negotiations:
While secured creditors have strong rights, their actions can significantly impact the debtor's ability to reorganize, especially if the collateral is essential to the business operations (e.g., key machinery, factory premises). Therefore, several practical approaches are common:

  1. Negotiated Agreements (Betsujo-ken Kyōtei - 別除権協定): The debtor company may negotiate an agreement with the secured creditor. This could involve:
    • The debtor "buying back" the essential asset by agreeing to pay the secured creditor an amount equivalent to the current value of the collateral, often in installments.
    • Modifying the terms of the secured loan.
  2. Stay of Execution by Court Order: In certain situations, the court may issue an order temporarily staying the enforcement of a security right if it is deemed necessary for the rehabilitation of the business (Art. 31). This provides a window for negotiation.
  3. Voluntary Sale (任意売却 - Nin'i Baikyaku): The debtor, with the consent of the secured creditor and often the court/supervisor, may arrange for a private sale of the collateralized asset, with the proceeds used to satisfy the secured claim. This can sometimes achieve a better price than a forced auction.

III. Claims Subject to the Terms of the Rehabilitation Plan

Rehabilitation Claims (再生債権 - Saisei Saiken)

Rehabilitation Claims constitute the largest category of debts in most Civil Rehabilitation proceedings.

Definition (Art. 84, Civil Rehabilitation Act):
These are generally all pre-petition monetary claims against the debtor that are not Common Benefit Claims, General Priority Claims, or fully secured by the value of collateral under a betsujo-ken. They are claims based on causes that arose before the court's decision to commence rehabilitation proceedings. The timing of when the payment is due (pre- or post-petition) is not the determining factor; rather, it is when the underlying cause of the claim arose.

Common Examples of Rehabilitation Claims:

  • General trade payables for goods or services delivered pre-petition.
  • Unsecured bank loans and bonds.
  • Lease obligations (for future rent after rejection of a lease, or damages).
  • Unsecured portions of employee claims (e.g., severance amounts exceeding priority limits).
  • Deficiency portions of secured claims (after realization of collateral).
  • Contractual damages for pre-petition breaches.

Treatment under the Rehabilitation Plan:
Rehabilitation Claims are the primary target of the restructuring efforts within the rehabilitation plan. Their treatment typically involves:

  • Principal Reduction ("Haircut"): A significant portion of the principal amount of these claims is often forgiven. The percentage of reduction varies greatly depending on the case but must satisfy the "liquidation value test" (i.e., creditors must receive more than they would in a bankruptcy liquidation).
  • Extended Repayment Terms: The reduced principal is typically repaid in installments over a period outlined in the plan, often extending up to 10 years for corporate rehabilitations, though shorter periods are common for SMEs.
  • Waiver of Interest: Pre-petition and post-petition interest on rehabilitation claims is usually waived or substantially reduced.
  • Principle of Equality of Creditors (債権者平等の原則 - Saikensha Byōdō no Gensoku): Within the class of general rehabilitation creditors, all are generally treated proportionally and equitably according to the nature and amount of their claims. Different treatment for sub-classes is possible but requires justification.

The Claims Filing and Determination Process

For creditors to have their claims recognized and participate in the Civil Rehabilitation, they must typically follow a formal process:

  1. Notification: The court and/or the debtor (or supervisor) will notify known creditors of the commencement of proceedings and the deadline for filing claims.
  2. Filing Proof of Claim (債権届出 - Saiken Todokeide): Creditors must file a proof of claim with the court within the specified period, detailing the amount and basis of their claim.
  3. Debtor's Review and Statement of Approval/Rejection (債権認否 - Saiken Ninpi): The debtor (often with the supervisor's input) reviews all filed claims and submits a statement to the court indicating which claims (and in what amounts) are accepted (認めた債権 - mitometa saiken) and which are disputed (異議のある債権 - igi no aru saiken).
  4. Resolution of Disputed Claims: If a claim is disputed by the debtor, or if another creditor objects to a claim, there is a court process for determining the validity and amount of the disputed claim.

Implications of Claim Classification for Creditors

Understanding the classification of one's claim is vital for a creditor because it directly impacts:

  • Likelihood and Amount of Recovery: Common Benefit Claims and General Priority Claims are generally paid in full. Secured creditors recover from their collateral. Rehabilitation Claims usually face significant reductions.
  • Timing of Payment: Common Benefit and General Priority Claims are paid relatively quickly. Rehabilitation Claims are paid over the extended period set out in the plan.
  • Voting Rights: Generally, only holders of Rehabilitation Claims have the right to vote on the proposed rehabilitation plan. The approval thresholds are based on these voting rights.
  • Strategic Decisions: Knowing the status of their claim helps creditors decide on their level of engagement in the proceedings, whether to support or oppose the plan, or whether to negotiate specific terms (e.g., for continued supply as a common benefit claimant, or terms for a betsujo-ken kyōtei if a secured creditor).

Conclusion

When a Japanese counterparty enters Civil Rehabilitation (Minji Saisei), the landscape of creditor rights and recoveries is fundamentally altered and structured by the legal classification of claims. Common Benefit Claims and General Priority Claims receive preferential treatment and are typically paid in full. Secured Creditors can look to their collateral, while general unsecured Rehabilitation Creditors will see their claims modified under the terms of a court-approved rehabilitation plan, often involving significant haircuts. For any creditor, promptly identifying the nature and classification of their claim, filing a proper proof of claim, and understanding the associated rights and priorities are essential steps to protecting their interests and navigating the complexities of a Japanese corporate reorganization.