Personal Guarantees for Business Loans in Japan: What Are the New Restrictions and Requirements for Their Validity?

Japanese Attorney at Law - Bengoshi L.L.

• 6 min read

Historically, individuals in Japan—often family members, friends, or even company directors in their personal capacity—have provided personal guarantees for business-related debts, sometimes leading to severe financial hardship and personal ruin if the business failed. Recognizing this significant social issue, the Japanese Civil Code was reformed (effective April 1, 2020, building on earlier protections) to introduce stringent restrictions and requirements for the validity of such personal guarantees, particularly when they concern "loan, etc. debts" incurred by businesses. These rules, found primarily in Articles 465-6 to 465-9, aim to prevent individuals from undertaking potentially devastating guarantee obligations without full awareness and specific procedural safeguards.

Scope of the Special Protective Rules

These special rules apply under specific conditions:

  1. Personal Guarantors: The guarantor must be an individual. These protections generally do not extend to corporate guarantors (though some rules, like maximum limits for continuing guarantees on loan debts, might apply to corporations too).
  2. Principal Obligation must be a "Loan, etc. Debt" Incurred for Business: The underlying debt being guaranteed must meet two criteria:
    • It must be a "loan, etc. debt" (kashikin-to saimu 金銭の貸渡し又は手形の割引を受けることによって負担する債務). This typically means:
      • Obligations arising from the borrowing of money (monetary loans).
      • Obligations arising from the discounting of bills of exchange or promissory notes.
    • This loan, etc. debt must have been incurred by the principal debtor "in connection with their business" (jigyo ni kanshite futan shita mono 事業に関して負担したもの). This means the funds were borrowed or the bill was discounted for business purposes, not for purely personal consumption by the principal debtor.

If a personal guarantee is provided for a debt fitting these descriptions, the following strict requirements for validity come into play.

The General Rule: Mandatory Notarized Declaration of Intent to Guarantee (Art. 465-6, Paras. 1 & 3)

The cornerstone of the new protections is the requirement for a formal declaration of intent before a notary public.

  • The Requirement: A personal guarantee contract for a business loan, etc. debt (as defined above) is absolutely void (muko 無効) unless the individual guarantor, within one month prior to concluding the guarantee contract, has made a declaration of their intent to guarantee (hosho ishi senmei 保証意思宣明) before a notary public. This declaration must be recorded by the notary in a notarized document (kosei shosho 公正証書).
  • Purpose of this Strict Formality:
    • Ensuring Understanding: To ensure that the individual guarantor fully comprehends the significant financial risks associated with guaranteeing a business loan. The notary has a duty to confirm the guarantor's understanding.
    • Preventing Rash or Coerced Guarantees: The involvement of a neutral legal professional (the notary) and the formal procedure are intended to prevent individuals from being pressured or misled into providing such guarantees without due consideration.
    • Clear Documentation: The notarized document provides unambiguous evidence of the guarantor's informed intent.
  • Content of the Notarized Declaration: The declaration typically involves the notary confirming with the guarantor the details of the principal debt, the scope of the guarantee, the potential consequences of default by the principal debtor, and the guarantor's genuine and voluntary intention to undertake the guarantee despite these risks.
  • Consequence of Non-Compliance: Failure to comply with this notarized declaration requirement (where it applies) renders the entire personal guarantee contract void from the outset. The creditor cannot enforce it against the individual.

Exceptions: When a Notarized Declaration of Intent is NOT Required (Art. 465-7)

The stringent requirement for a notarized declaration of intent is waived if the individual guarantor falls into certain categories of persons who are deemed to have a sufficiently close and substantial involvement in, or understanding of, the principal debtor's business and its associated risks. These "excepted guarantors" are presumed not to need the same level of external protection provided by the notary procedure.

Article 465-7 lists these exceptions. A notarized declaration is not required if the individual guarantor is:

  1. A Partner or Member of the Principal Debtor Entity:
    • A person who is a partner (kumiai-in) of a partnership (e.g., a general partnership or limited partnership) that is the principal debtor.
    • A member (shain) of a company that is the principal debtor (this typically refers to members of a Japanese LLC (Godo Kaisha) rather than simply any shareholder of a stock company).
  2. Key Management Personnel of a Corporate Principal Debtor:
    • A director (torishimariyaku 取締役), an executive officer (shikko-yaku 執行役), or a person in a position equivalent to these (e.g., an auditor involved in management, or an accounting advisor if a certain type of company), who is actually engaged in the business operations of the principal debtor (if the principal debtor is a corporation). Mere title is not enough; active involvement in the business is key.
  3. Persons with Significant Control or Ownership Relationship with a Corporate Principal Debtor (if a Stock Company - Kabushiki Kaisha 株式会社):
    • An individual who directly holds a majority of the voting rights of all shareholders of the stock company that is the principal debtor.
    • An individual who indirectly holds a majority of the voting rights through a subsidiary structure (e.g., the individual controls Company A, which in turn controls Company B, the principal debtor).
    • If the principal debtor is a stock company that itself holds a majority of the voting rights of all shareholders of a guarantor company, and the individual is a director, etc., of that guarantor company engaged in its business (this covers specific interlocked scenarios).
  4. Spouse of an Individual Principal Debtor Actively Involved in the Business:
    • If the principal debtor is an individual (not a corporation), their spouse is exempt if the spouse is either (a) jointly engaged in the principal debtor's business (e.g., as a co-manager or key employee) or (b) engaged in a business that is indivisibly connected with the principal debtor's business (e.g., their businesses are interdependent).
  5. Co-entrepreneurs (Kyodo Jigyo-sha 共同事業者) with an Individual Principal Debtor:
    • A person who jointly carries on the business with an individual principal debtor as a co-entrepreneur. This implies a partnership-like involvement in the business.

If an individual guarantor falls into any of these excepted categories, their personal guarantee for a business loan, etc. debt can be valid even without the prior notarized declaration of intent.

Special Rules for Personal Continuing Guarantees (Ne-Hosho) for Business Loans, etc. (Art. 465-8)

The rules become even more specific when an individual provides a continuing guarantee (kojin ne-hosho 個人根保証) – a guarantee covering a range of unspecified future debts – for business loan, etc. debts.

  1. Notarized Declaration Still Generally Required: A personal continuing guarantee for business loan, etc. debts is subject to the mandatory notarized declaration of intent requirement (under Art. 465-6, as described above) for its validity, unless the individual guarantor is one of the "excepted persons" listed in Article 465-7.
  2. Mandatory Stipulation of a "Principal Determination Date" (Ganpon Kakutei Kijitsu 元本確定期日) (Art. 465-8, Para. 1):
    • If an individual (who is not an excepted person under Art. 465-7) provides a continuing guarantee for business loan, etc. debts, that guarantee contract is void if it does not explicitly set a "principal determination date".
    • This "principal determination date" is the date on which the "floating" range of future debts covered by the guarantee becomes fixed or crystallized. After this date, the guarantee only covers the principal amount determined as of that date (plus subsequent interest and damages on that fixed amount) and does not cover new principal debts arising thereafter.
    • Crucial Difference from General Personal Continuing Guarantees: For general personal continuing guarantees (not specifically for business loans, or for business loans guaranteed by an "excepted person"), if no determination date is agreed, the law provides default determination periods (e.g., 3 or 5 years under Art. 465-3). However, for personal continuing guarantees for business loans by non-excepted individuals, there is no such statutory default. The date must be explicitly agreed upon and stated in the contract, otherwise the guarantee is void.
  3. Exception for "Excepted Guarantors" Regarding Principal Determination Date (Art. 465-8, Para. 2):
    • If the individual guarantor providing the continuing guarantee for business loan, etc. debts is one of the "excepted persons" under Article 465-7 (e.g., a director actively involved in the business), then the strict requirement of an explicitly agreed principal determination date under Article 465-8, Paragraph 1 does not apply.
    • In such cases, the general rules for principal determination dates for personal continuing guarantees (found in Article 465-3, including its default periods if no date is set) would apply instead.

Consequences of Non-Compliance

The consequences of failing to comply with these special requirements are severe: the personal guarantee contract is rendered void. This means the creditor cannot enforce the guarantee against the individual, and the individual guarantor has no legal obligation under that void agreement.

Conclusion

Japanese law has implemented significant safeguards to protect individuals from the potentially ruinous consequences of guaranteeing business loans and similar debts. The requirement for a notarized declaration of intent to guarantee for most individuals providing such guarantees is a cornerstone of this protection, ensuring informed consent and preventing rash decisions. While exceptions exist for individuals with substantial involvement in or control over the principal debtor's business, these are specific and narrowly defined. Furthermore, for personal continuing guarantees covering business loan debts, the rules regarding the mandatory stipulation of a principal determination date (for non-excepted guarantors) add another layer of protection. Businesses extending credit that relies on personal guarantees in Japan must be acutely aware of these stringent validity requirements to ensure their security is enforceable. Conversely, individuals asked to provide such guarantees should understand these protections afforded to them by law.