My Japanese Debtor Fraudulently Transferred Assets: How Can I Void the Transaction?

Creditors worldwide face the risk of debtors attempting to shield their assets from collection efforts through fraudulent transfers or dispositions. Japanese law provides a powerful remedy for such situations: the "Obligee's Right to Revoke a Fraudulent Act" (詐害行為取消権 - sagaikōi torikeshi ken). This right, often referred to as the Japanese equivalent of a fraudulent conveyance action or "action paulienne," allows a creditor, under specific conditions, to demand that a court nullify a juristic act undertaken by their debtor if that act was intended to prejudice the creditor's ability to obtain satisfaction of their claim.

Understanding the intricacies of this right is crucial for anyone extending credit to or dealing with Japanese entities, as it can be a vital tool for asset recovery. This article will explore the purpose, key requirements, effects, and procedural aspects of the sagaikōi torikeshi ken, including important clarifications and codifications introduced by the 2020 amendments to the Japanese Civil Code.

1. What is the Obligee's Right to Revoke a Fraudulent Act?

The Obligee's Right to Revoke a Fraudulent Act is principally governed by Article 424 et seq. of the Japanese Civil Code. Its primary purpose is to preserve the debtor's assets that would otherwise be available to satisfy creditors' claims. When a debtor engages in an act (a "fraudulent act") that diminishes their estate to the detriment of their creditors, this right allows an aggrieved creditor to seek a court order revoking that act, thereby restoring the transferred asset or its value to a state where it can be accessed for debt satisfaction.

It is important to note that this right is not about punishing the debtor or the beneficiary; rather, it's about ensuring a measure of fairness among creditors by preventing the debtor from improperly depleting their estate. The right must be exercised through a lawsuit (裁判上の請求 - saibanjō no seikyū); a mere out-of-court demand is insufficient.

2. Key Requirements for Revocation

Successfully invoking the right to revoke a fraudulent act requires the creditor to satisfy several stringent conditions:

• The Creditor's Claim (被保全債権 - hihozen saiken - the claim to be preserved):
  • The creditor seeking revocation must have a valid claim against the debtor. This claim is referred to as the "preserved claim."
  • Nature of the Claim: Generally, the preserved claim must be a monetary claim, as the purpose of revocation is typically to make assets available for monetary execution.
  • Timing of the Claim: Crucially, the preserved claim must, as a general rule, have arisen before the debtor committed the fraudulent act. The Great Court of Cassation judgment of January 22, 1918 (Minroku Vol. 23, p. 8) established this principle. However, Article 424, paragraph 3 of the Civil Code (as amended in 2020) somewhat relaxes this by stating that revocation is permissible if the preserved claim is "based on a cause that occurred prior to" the fraudulent act. This allows, for example, interest or damages accruing after the fraudulent act but stemming from a pre-existing contractual relationship to be considered part of the preserved claim.
  • Due Date: It is not strictly necessary for the preserved claim to be due for payment at the time the fraudulent act was committed or when the revocation action is filed, although certain aspects of "prejudice" may relate to the debtor's ability to meet obligations as they fall due.
• A "Fraudulent Act" (詐害行為 - sagaikōi) by the Debtor:
  This refers to any juristic act (e.g., a contract, a unilateral act like waiving a claim, or even establishing a security interest for only one creditor) undertaken by the debtor concerning their property that has the effect of diminishing their net assets available to satisfy creditors. Common examples include:
  • Gifting away property.
  • Selling property at a significantly undervalued price.
  • Incurring new, substantial debts without corresponding assets.
  • Providing security for an existing unsecured debt to only one creditor, thereby preferring them over others when already insolvent.
• Prejudice to Creditors (債権者を害すること - saikensha o gaisuru koto):
  The debtor's act must objectively "prejudice the creditor(s)." This is generally determined by an "insolvency test": the act causes the debtor's total liabilities to exceed their total assets, or it worsens an already existing state of insolvency. The focus is on the reduction of the debtor's overall estate available for satisfying all creditors.
• Debtor's Knowledge of Prejudice (債務者の悪意 - saimusha no akui):
  The debtor must have known, at the time of performing the act, that it would prejudice their creditors (i.e., reduce their ability to satisfy their claims). This knowledge (often termed "bad faith" or akui) is a subjective requirement but is frequently inferred from the objective circumstances, such as the debtor's financial situation and the nature of the transaction. If a debtor in dire financial straits gifts away their last valuable asset, their knowledge of prejudice is usually presumed.
• Beneficiary's Knowledge (受益者の悪意 - juekisha no akui):
  The person who directly benefited from the debtor's act (the "beneficiary" - 受益者, juekisha) must also have known, at the time of the act, that it would prejudice the debtor's creditors (Article 424, paragraph 1, proviso). If the beneficiary was unaware of the prejudicial effect (i.e., acted in "good faith" - 善意, zen'i), the act cannot be revoked against them. The burden of proving the beneficiary's bad faith generally lies with the creditor. However, if the transaction was gratuitous (e.g., a gift to a family member when the debtor was insolvent), the beneficiary's knowledge might be more readily inferred, or the legal standard for what they "should have known" might be applied less stringently by courts.
• Subsequent Acquirer's Knowledge (転得者の悪意 - tentokusha no akui):
  If the property has been further transferred from the initial beneficiary to a subsequent acquirer (転得者 - tentokusha), the creditor can only seek revocation against this subsequent acquirer if the subsequent acquirer also knew, at the time of their acquisition, that the original act by the debtor was prejudicial to creditors (Article 424-5). If the subsequent acquirer was in good faith, the property is generally beyond the reach of revocation, though the creditor might still claim monetary restitution from the (bad faith) initial beneficiary.

3. Special Considerations for Certain Types of Acts (Post-2020 Reforms)

The 2020 Civil Code amendments codified and refined rules for specific types of acts that might otherwise be considered fraudulent, aiming for greater predictability:

• Dispositions of Property for Reasonable Consideration (Article 424-2): An act of disposing property is generally not considered fraudulent if the debtor received reasonable consideration for it, and that consideration was retained by the debtor (e.g., the cash proceeds were kept and are available to creditors). However, if there are other elements of fraud, such as a conspiracy to hide the proceeds, revocation might still be possible.
• Payment of Existing Due Debts or Provision of Reasonable Security (Articles 424-2 and 424-3):
  Ordinarily, paying a due debt is not a fraudulent act, even if the debtor is insolvent, as it simply extinguishes an existing liability. Similarly, providing reasonable security for an existing debt is often permissible.
  However, Article 424-3, paragraph 1, provides that such an act can be revoked if two conditions are met:
  1. The debtor was insolvent (支払不能 - shiharai funō, unable to pay debts generally as they become due) at the time of the act; AND
  2. The act was done with the debtor and the benefiting creditor (beneficiary) colluding (通謀 - tsūbō) with the intent to prejudice other creditors.
     This targets preferential payments or security provisions that are made not merely to satisfy one creditor but as part of a scheme to unfairly disadvantage others. The Supreme Court judgment of September 26, 1958 (Minshū Vol. 12, No. 13, p. 3022) already required collusion for revoking such preferential payments, and the 2020 reforms have integrated this with the insolvency requirement. A mere strong demand for payment by one creditor is generally not, by itself, sufficient to prove collusion.
• Excessive Gratuitous Acts (Article 424-4):
  Even if a debtor is not technically insolvent at the time, if they engage in a gratuitous act (or an act for grossly inadequate consideration) that is excessive in light of their financial situation and assets, and this act thereby prejudices a creditor's existing claim, it can be revoked. This addresses situations where a debtor, while not yet insolvent, makes overly generous gifts that jeopardize their ability to meet future obligations arising from pre-existing causes.

4. Exercising the Right and its Effects

• Method: Lawsuit (Article 424, paragraph 1): The creditor must file a lawsuit to demand revocation.
• Defendants (Article 424-7): The lawsuit is brought against the beneficiary of the fraudulent act or any subsequent acquirer from whom recovery is sought. The debtor is not a defendant in the revocation suit itself but must be given notice of the lawsuit by the plaintiff creditor without delay.
• Effects of Revocation:
  • Restoration of Property to the Debtor's Estate (Article 424-6): The primary effect of a successful revocation is that the transferred property (or its value) is, in principle, restored to the debtor's estate. This makes the asset available for execution by all of the debtor's creditors, not just the creditor who brought the revocation suit (though in practice, the diligent creditor who initiated the action is often in the best position to benefit).
  • Restitution in Kind (現物返還 - genbutsu henkan): If the property itself still exists and can be returned (e.g., land), this is the primary remedy.
  • Monetary Restitution (価額償還 - kagaku shōkan): If the property cannot be returned in kind (e.g., it has been consumed, destroyed, or transferred to a bona fide further acquirer against whom revocation is not possible), its monetary value must be restituted by the party against whom revocation is successful.
  • Creditor's Right to Direct Receipt (Article 424-9): This is an important provision, particularly clarified by the 2020 reforms. If the revoked act was a payment of money by the debtor to the beneficiary, or if monetary restitution is ordered (because the property itself cannot be returned), the revoking creditor can demand that such payment or restitution be made directly to themselves, up to the amount of their own preserved claim. This allows the creditor who took action to achieve direct satisfaction, rather than merely having the funds returned to the potentially uncooperative debtor's estate.
• Limitation on Scope of Revocation (Article 424-8): A creditor can only demand revocation to the extent necessary to preserve their own claim. If the value of the fraudulently transferred property exceeds the creditor's claim, the revocation is limited to the amount of that claim.

5. Time Limits for Exercise (Article 426)

The right to demand revocation of a fraudulent act is subject to prescription (extinction by lapse of time):

• It is extinguished if not exercised within two years from the time the creditor became aware of the fraudulent act AND became aware of the cause for revocation (i.e., knowledge of both the act and its prejudicial nature).
• In any event, it is extinguished if not exercised within ten years from the time of the fraudulent act itself, regardless of the creditor's knowledge.
  These periods are now clearly defined as prescription periods, meaning they can be subject to postponement or renewal under general prescription rules, which was a point of debate under the pre-2020 law where the 20-year period was often seen as a non-extendable "period of exclusion."

Conclusion: A Vital but Complex Creditor Remedy

The Obligee's Right to Revoke a Fraudulent Act (sagaikōi torikeshi ken) is a critical, albeit complex, tool in the Japanese legal system for protecting creditors against debtors who attempt to dissipate their assets. While its aim is to preserve the debtor's estate for the benefit of creditors, its successful invocation requires meeting stringent criteria regarding the nature of the creditor's claim, the debtor's act and mental state, and the knowledge of the beneficiaries or subsequent acquirers. The 2020 Civil Code reforms have provided significant clarification and codification of many aspects of this long-standing doctrine, particularly concerning different types of potentially fraudulent acts and the effects of revocation. For businesses dealing with Japanese debtors, understanding the availability and limitations of this right is essential for assessing credit risk and pursuing effective remedies when faced with a debtor's attempts to evade their obligations through asset transfers. Due to its complexity and the necessity of court action, seeking specialized legal advice in Japan is paramount when considering such a claim.