My Japanese Debtor Fraudulently Transferred Assets. What is "Obligee's Action for Revocation" (Sagai Koi Torikeshi Ken) and How Can It Help Me Recover?

Japanese Attorney at Law - Bengoshi L.L.

04 Jun 2025 • 10 min read

When a debtor in Japan attempts to shield assets from creditors by transferring them to third parties, especially when facing insolvency, it can severely undermine a creditor's ability to recover what is owed. Japanese law provides a powerful judicial remedy to counteract such maneuvers: the "Obligee's Action for Revocation of a Fraudulent Act" (詐害行為取消権 - Sagai Koi Torikeshi Ken), governed by Article 424 and subsequent articles of the Civil Code. This action, often analogous to fraudulent conveyance or fraudulent transfer actions in other jurisdictions, allows creditors to effectively "claw back" assets that were improperly disposed of by the debtor.

Understanding the Obligee's Action for Revocation

At its core, the Sagai Koi Torikeshi Ken is a creditor's right to petition a court to nullify a legal act undertaken by the debtor if that act was done with the knowledge that it would prejudice (harm) their creditors. The action also typically seeks the return of the property or its value from the person who benefited from the act (the beneficiary) or any subsequent transferee.

Consider these illustrative scenarios:

A company facing mounting debts gratuitously transfers its valuable real estate to a related individual or entity to put it beyond the reach of its general creditors.
An insolvent individual, knowing they cannot pay all their debts, selectively repays a large debt to a favored creditor or grants them security over their remaining assets, thereby diminishing what's available for other creditors.
A debtor sells a significant asset for a demonstrably inadequate price, effectively dissipating its value from their estate, with the intent to hinder creditors.

Primary Purpose: Preservation of Assets for Creditors

The fundamental objective of this legal action is the preservation of the debtor's "responsible assets" (責任財産 - sekinin zaisan). These are the assets that would otherwise be available to satisfy the claims of the debtor's general creditors through compulsory execution. By revoking the fraudulent act, the disposed property (or its value) is, in principle, restored to the debtor's estate, making it accessible for the collective satisfaction of creditor claims. It serves as a critical tool for preparing the debtor's estate for effective enforcement proceedings.

While the action is initiated by an individual creditor, its ultimate effect is generally for the benefit of all creditors, as the recovered asset becomes part of the common pool. However, as we will see, the revoking creditor might sometimes achieve a de facto priority.

Relationship with Bankruptcy Avoidance Powers

The Sagai Koi Torikeshi Ken under the Civil Code operates independently of formal bankruptcy proceedings, though it shares similarities with the "avoidance powers" (否認権 - hininken) that a bankruptcy trustee can exercise. Key distinctions include:

Initiator: The Sagai Koi Torikeshi Ken is an individual creditor's right, exercisable outside of bankruptcy. Avoidance powers in bankruptcy are exercised by a trustee for the benefit of the entire bankrupt estate.
Scope and Context: The Civil Code action can be used even if the debtor is not formally bankrupt, focusing on individual prejudicial acts. Bankruptcy avoidance powers are part of a collective insolvency proceeding and often have a broader scope, including the ability to target certain preferential payments or security interests that might not be as easily challenged outside of bankruptcy.

Recent revisions to the Japanese Civil Code have aimed to achieve greater consistency between these two mechanisms, particularly concerning the types of acts that can be challenged (e.g., certain preferential acts).

Key Requirements for Revoking a Fraudulent Act

For a creditor to successfully revoke a debtor's act as fraudulent, several stringent requirements must be met. These requirements differ slightly depending on whether the action is against the initial beneficiary of the debtor's act or a subsequent transferee.

Action Against the Beneficiary (受益者 - Juekisha) (Article 424)

The creditor (plaintiff) typically needs to prove the following:

Existence of the Creditor's Preserved Claim (被保全債権の存在 - Hihozen Saiken no Sonzai):
The creditor must have a valid claim against the debtor. This claim is referred to as the "preserved claim."
- It generally needs to be a monetary claim or one that can be converted into a monetary claim, as the remedy aims to preserve assets for financial satisfaction. However, Japanese law, as interpreted by the Supreme Court (e.g., judgment of July 19, 1961, Minshu Vol. 15, No. 7, p. 1875), has allowed the preservation of claims for specific performance if their non-performance would result in a monetary damage claim and the revocation serves to protect the general pool of assets for all creditors, rather than just securing that specific item for the revoking creditor.
- The preserved claim does not necessarily need to be due or have been reduced to a judgment at the time of the fraudulent act or when the revocation action is filed.
- Crucially, the cause giving rise to the creditor's claim must have existed before the debtor committed the fraudulent act (Article 424, Paragraph 3). This is to protect parties who dealt with the debtor after the asset was already disposed of. For example, if a guarantee agreement was in place before the debtor's fraudulent act, a guarantor who subsequently pays the debt (giving rise to a reimbursement claim against the debtor) can use this reimbursement claim as a preserved claim, even if the actual payment and the crystallization of the reimbursement claim occurred after the fraudulent act.
The Debtor's Act Concerning Property Rights (財産権を目的とする行為 - Zaisanken o Mokuteki to suru Kōi):
The act committed by the debtor must be one that affects their property rights, typically diminishing their estate. This includes:
- Sales or gifts of assets (real estate, movables, claims).
- Creation of security interests (mortgages, pledges) over their assets.
- Release or waiver of claims the debtor held against others.
- Acts not primarily concerning property rights, such as purely personal decisions (e.g., marriage, divorce itself, adoption), are generally excluded (Article 424, Paragraph 2). However, property settlements made in connection with a divorce can be subject to revocation if they are found to be "unreasonably excessive" and effectively a disguised attempt to defraud creditors by transferring an undue amount of property (Supreme Court, December 19, 1983, Minshu Vol. 37, No. 10, p. 1532). Similarly, the renunciation of an inheritance by an insolvent heir has generally been held by Japanese courts not to be an act subject to revocation by the heir's creditors, as it's viewed as a refusal to acquire new assets rather than a disposal of existing ones (Supreme Court, September 20, 1974, Minshu Vol. 28, No. 6, p. 1202).
The Act Must Be Prejudicial to Creditors (詐害行為性 - Sagaikōi-sei – "Fraudulent Nature"):
This is a central requirement. The debtor's act must have harmed the creditors. This typically means the act caused or aggravated the debtor's insufficiency of assets (無資力 - mushiryoku) to meet their obligations. Mushiryoku generally refers to a state where the debtor's total liabilities exceed their total assets available to satisfy general creditors.
- The debtor's insolvency is usually assessed at the time of the prejudicial act and must generally persist until the conclusion of the revocation proceedings.
- Specific types of acts are often scrutinized for their prejudicial nature:
  - Gratuitous Transfers or Sales at Grossly Inadequate Prices: These are classic examples of acts that directly diminish the debtor's estate.
  - Preferential Acts (偏頗行為 - Henpa Kōi) (Article 424-3): Even if an act does not reduce the debtor's net worth (e.g., repaying an existing debt to one creditor, or providing security for an existing debt), it can be deemed prejudicial if done when the debtor is insolvent (or on the verge of it) and it harms the principle of creditor equality by favoring one creditor over others. The Civil Code now has specific rules allowing revocation of such preferential acts if certain conditions are met, such as the debtor being insolvent at the time, the act not being an obligation of the debtor (or if it was, the debtor and beneficiary colluded with intent to harm other creditors).
  - Disposal of Assets Even for Fair Value (相当価格処分行為 - Sōtō Kakaku Shobun Kōi) (Article 424-2): An act of selling an asset for a fair price can still be revoked if (a) it changes the nature of the asset in a way that facilitates concealment, gratuitous disposition, or other dissipation of the proceeds by the debtor (e.g., converting easily traceable real estate into easily hidden cash), (b) the debtor, at the time of the act, had the intention to conceal or dissipate these proceeds, AND (c) the beneficiary (purchaser) knew of the debtor's such intention.
Debtor's Knowledge of Prejudice (詐害の意思 - Sagai no Ishi – "Fraudulent Intent"):
The debtor must have known, at the time of performing the act, that it would prejudice their creditors. This does not require a specific intent to harm a particular creditor; general knowledge that the act would render the debtor unable to meet their overall obligations is usually sufficient. This knowledge is often inferred from objective circumstances, such as making substantial gifts while already insolvent or heavily indebted. For certain acts, like those covered under Articles 424-2 (disposal for fair value with intent to dissipate) and 424-3 (preferential acts), the required mental state of the debtor (and sometimes the beneficiary) is more specifically defined.

The Beneficiary's Defense: Good Faith

Even if all the above conditions are met by the creditor, the beneficiary (受益者 - juekisha) of the debtor's act has a crucial defense. The revocation cannot be granted if the beneficiary can prove that, at the time of the act, they did not know that the act would prejudice the debtor's creditors (Article 424, Paragraph 1, proviso). This is known as the "defense of good faith" (善意の抗弁 - zen'i no kōben), and the burden of proving this good faith (i.e., lack of knowledge of the prejudicial nature) rests on the beneficiary.

However, for certain types of acts, such as a disposal for fair value where the debtor intended to dissipate the proceeds (Art. 424-2) or certain preferential acts (Art. 424-3), the rules on whose knowledge is relevant and who bears the burden of proof for that knowledge are more specific and may shift some burden to the creditor.

Action Against a Subsequent Transferee (転得者 - Tentokusha) (Article 424-5)

If the property has been transferred from the initial beneficiary to a subsequent transferee (tentokusha), the creditor's ability to revoke the transaction and recover the property from the tentokusha becomes more restricted:

Prerequisites: All the conditions for revocation against the initial beneficiary must be met (including the beneficiary's bad faith – i.e., their knowledge that the debtor's act was prejudicial).
Subsequent Transferee's Bad Faith: In addition, the subsequent transferee themselves must have been in bad faith at the time they acquired the property. This means the tentokusha must have known that the original act by the debtor (the transfer to the beneficiary) was prejudicial to the debtor's creditors.
Chain of Bad Faith: If there has been a series of transfers (debtor → beneficiary → transferee 1 → transferee 2, etc.), the action for revocation against the current holder (e.g., transferee 2) requires that every party in the chain of transfer (the initial beneficiary and all intermediate transferees) must have been in bad faith regarding the original debtor's fraudulent act. If any intermediary in the chain acquired the property in good faith, the chain of bad faith is broken, and the creditor generally cannot recover the property from that good-faith acquirer or any subsequent transferees, even if those later transferees were in bad faith.
Burden of Proof for Transferee's Bad Faith: Unlike the action against the initial beneficiary (where the beneficiary proves their good faith), when suing a subsequent transferee, the creditor generally bears the burden of proving the bad faith of that specific transferee and any intermediate transferees in the chain.

Effects of a Successful Revocation Action

If the court grants the creditor's request for revocation:

Restoration of Property (現物返還の原則 - Genbutsu Henkan no Gensoku): The primary legal effect is the nullification of the fraudulent act as against the creditors. The property that was improperly transferred is, in principle, to be returned to the debtor's estate (Article 424-6). If the property is money or movables, the revoking creditor can often demand direct delivery to themselves (Article 424-9), after which they may be able to achieve a de facto priority via set-off.
Monetary Restitution (価額償還 - Kagaku Shōkan): If the physical return of the specific property is impossible or impractical (e.g., it has been consumed, destroyed, or has passed to a further bona fide purchaser who is protected), the court may order the beneficiary or liable transferee to make monetary restitution equivalent to the value of the property (Article 424-6). The value is generally assessed as of the time of the conclusion of oral arguments in the revocation lawsuit (Supreme Court, December 1, 1975, Minshu Vol. 29, No. 11, p. 1847).
Scope of Revocation (Article 424-8): If the object of the fraudulent act was divisible (e.g., a sum of money), the creditor can only seek revocation up to the amount of their own preserved claim. If the object was indivisible (e.g., a single piece of real estate), the entire act is typically revoked, even if the property's value exceeds the revoking creditor's claim, with the excess value benefiting the debtor's estate for all creditors.
Effect on All Creditors and the Debtor (Article 425): A final and binding judgment revoking a fraudulent act is effective not only against the defendant (beneficiary or transferee) but also with respect to the debtor and all other creditors of the debtor. The recovered asset or its value becomes part of the debtor's general assets.
Rights of the Beneficiary/Transferee: If a beneficiary or transferee is forced to return property or its value, and they had originally given consideration to the debtor (or their transferor), they may have rights to recover that consideration from their counterparty, or their original claim against the debtor (if the fraudulent act was, for instance, a preferential repayment) may be revived (Articles 425-2 to 425-4).

Time Limits for Bringing the Action (出訴期間 - Shusso Kikan)

Strict time limits apply to the Obligee's Action for Revocation (Article 426):

The action must be initiated within two years from the time the creditor became aware of (a) the fraudulent act itself and (b) the fact that the debtor performed the act with knowledge that it would prejudice creditors.
Regardless of the creditor's knowledge, the action cannot be brought if ten years have passed since the time of the fraudulent act.

These periods are considered "periods for filing an action" (shusso kikan), which are generally interpreted as strict jurisdictional limits, not ordinary statutes of limitation that can be interrupted or suspended. Missing these deadlines typically results in the loss of the right to bring the action.

Conclusion

The Obligee's Action for Revocation of a Fraudulent Act (Sagai Koi Torikeshi Ken) is a vital judicial instrument in Japanese law, providing creditors with a means to challenge and undo transactions made by a debtor that improperly deplete the assets available for debt satisfaction. Its purpose is to restore such assets to the debtor's estate, thereby preserving the responsible property for the benefit of the general body of creditors. However, successfully pursuing this remedy requires careful navigation of its complex requirements, including proving the debtor's financial state, their knowledge of prejudice, and, in many cases, the state of mind of the beneficiaries or subsequent transferees. The strict time limits for initiating the action also demand prompt attention from creditors who suspect that a debtor's dispositions may be jeopardizing their recovery.