Priority of Claims in Japanese Bankruptcy: Administrative Claims (Zaidan Saiken) vs. Bankruptcy Claims (Hasan Saiken)

When a Japanese entity enters bankruptcy proceedings (破産手続 - hasan tetsuzuki), one of the most critical aspects for all stakeholders is understanding the "waterfall" – the order in which different types of claims will be paid from the debtor's assets. Not all claims are created equal. Japanese bankruptcy law establishes a strict hierarchy, primarily distinguishing between "Administrative Claims" (財団債権 - zaidan saiken), which are paid first, and various categories of "Bankruptcy Claims" (破産債権 - hasan saiken), which are paid subsequently according to their respective priorities.

This article delves into this hierarchy, explaining the nature of these claim categories and the order in which they are satisfied.

I. Administrative Claims (財団債権 - Zaidan Saiken): The Highest Priority

Administrative claims, or zaidan saiken, represent obligations that are given the highest priority for payment from the bankruptcy estate (破産財団 - hasan zaidan). These claims are paid preferentially, in full, before any distributions are made to general bankruptcy creditors (Bankruptcy Act, Article 151). They are considered essential for the proper functioning of the bankruptcy process itself or are granted priority due to specific public policy considerations. Unlike bankruptcy claims, administrative claims are typically paid by the bankruptcy trustee (破産管財人 - hasan kanzainin) as they become due or as funds become available, without needing to go through the formal proof of claim and distribution (配当 - haitō) process applicable to bankruptcy claims (Bankruptcy Act, Article 2, Paragraph 7).

The main categories of administrative claims are defined in Article 148 of the Bankruptcy Act and other related provisions:

1. Expenses for Judicial Proceedings for the Common Benefit of Creditors (Art. 148(1)(i)):
   This includes costs incurred in initiating or conducting judicial proceedings that benefit all creditors collectively. For instance, if a creditor successfully petitions for the debtor's bankruptcy, their reasonable costs associated with the petition might be recognized as an administrative claim.
2. Expenses for the Administration, Liquidation, and Distribution of the Bankruptcy Estate (Art. 148(1)(ii)):
   This is arguably the most significant category and often enjoys the very top priority within administrative claims. It encompasses all necessary costs incurred by the bankruptcy trustee in performing their duties:
   • Trustee's Remuneration and Expenses: Fees for the trustee and reimbursement for their operational expenses.
   • Costs of Preserving and Liquidating Assets: Expenses related to securing, maintaining, insuring, appraising, and selling the assets of the bankruptcy estate.
   • Certain Post-Petition Taxes: Taxes that arise after the commencement of bankruptcy proceedings and are directly related to the assets of the estate or their administration and disposal. Examples include:
     • Fixed asset tax (固定資産税 - kotei shisan zei) and city planning tax (都市計画税 - toshi keikaku zei) on real estate held by the trustee during the bankruptcy period (for tax years commencing after the bankruptcy start).
     • Consumption tax (消費税 - shōhi zei) on sales of estate assets made by the trustee.
3. Certain Pre-Petition Tax Claims (Art. 148(1)(iii)):
   Specific national and local tax claims (租税等の請求権 - sozei tō no seikyūken) that arose from causes existing before the bankruptcy commencement are granted administrative status if:
   • Their statutory payment due date had not yet arrived at the time of the bankruptcy commencement; OR
   • Their statutory payment due date had arrived, but not more than one year had passed between the due date and the bankruptcy commencement.
     This provision elevates relatively recent tax obligations to administrative claim status.
4. Claims Arising from Acts of the Trustee After Their Appointment (Art. 148(1)(iv)):
   If the trustee, in the course of administering the estate, enters into new contracts or takes actions that give rise to claims against the estate, these claims are administrative claims. For example, if the trustee continues a business operation for a short period and incurs new supply costs.
5. Claims Based on Unjust Enrichment of the Estate or Management of Affairs Without Mandate (Jimu Kanri) After Bankruptcy Commencement (Art. 148(1)(v)):
   If the bankruptcy estate is unjustly enriched after the commencement of proceedings, or if a third party necessarily incurs expenses managing an urgent affair of the estate without a formal mandate but for its benefit, their claim for reimbursement may be an administrative claim.
6. Claims Arising from the Trustee's Assumption of Executory Contracts (Art. 148(1)(vii)):
   If the trustee decides to assume (i.e., continue) an executory contract (a contract where both parties still have obligations to perform), the counterparty's claims under that assumed contract, including those for performance by the estate, become administrative claims.
7. Certain Employee Claims (Art. 149):
   Japanese law provides strong protection for employee claims:
   • Wages for the three months prior to the commencement of bankruptcy proceedings.
   • Retirement allowances (退職金 - taishokukin) that are equivalent to the total amount of wages for:
     • (a) the three months immediately preceding the employee's retirement, OR
     • (b) the three months immediately preceding the commencement of the employer's bankruptcy proceedings,
       whichever amount is greater.
       (Note: Wages for work performed post-petition for employees who are retained by the trustee to assist with the winding-down or administration of the estate would typically fall under Art. 148(1)(ii) or (iv) as direct administrative costs.)

Priority Among Administrative Claims

While all administrative claims rank ahead of bankruptcy claims, there is also a statutory priority among administrative claims themselves if the estate is insufficient to pay all administrative claims in full (Bankruptcy Act, Article 152).

• Highest Priority: Generally, claims under Article 148(1)(i) (judicial costs for common benefit) and Article 148(1)(ii) (estate administration, liquidation, and distribution expenses, including trustee's fees and direct asset management/sale costs) take precedence over other categories of administrative claims listed in Article 148(1).
• Pro Rata Payment: If funds are insufficient to pay all administrative claims of the same rank, they are paid on a pro-rata basis.

II. Bankruptcy Claims (破産債権 - Hasan Saiken): Claims Subject to the Distribution Process

Bankruptcy claims are monetary claims against the debtor that arose from causes existing before the commencement of the bankruptcy proceedings and do not qualify as administrative claims (Bankruptcy Act, Article 2, Paragraph 5). These claims are subject to the formal bankruptcy process, including filing a proof of claim, investigation by the trustee, and receiving distributions (dividends) from the estate after all administrative claims have been paid in full.

Bankruptcy claims themselves are further divided into a hierarchy:

1. Priority Bankruptcy Claims (優先的破産債権 - Yūsenteki Hasan Saiken)

These are pre-petition claims that, by virtue of other laws, are granted a priority over general unsecured claims, though they remain subordinate to all administrative claims (Bankruptcy Act, Article 98). The internal order of priority among these claims is determined by the general laws of Japan that create such priorities (e.g., Civil Code, tax collection laws). This typically results in the following sub-hierarchy:

• (a) Certain Tax Claims and Public Dues (公租・公課 - Kōso/Kōka):
  • National and Local Taxes (Kōso): Pre-petition tax claims that do not qualify for administrative claim status (e.g., those where the payment due date was more than one year prior to bankruptcy commencement). These usually rank highest among priority bankruptcy claims.
  • Other Public Dues (Kōka): Claims other than taxes that are collectible under procedures similar to national tax collection, such as certain social insurance premiums. These typically rank after kōso taxes.
• (b) Certain Private Claims with General Statutory Liens (一般の先取特権を有する私債権 - Ippan no Sakidori Tokken o Yūsuru Shisaiken):
  • The Civil Code and other statutes grant general liens (priority rights over the debtor's general assets) for certain types of claims. A key example relevant here is employee claims for wages that extend beyond the portion treated as administrative claims (Civil Code, Article 306, Item 2; Article 308). These generally rank after the public tax and dues claims.

2. General Unsecured Bankruptcy Claims (一般破産債権 - Ippan Hasan Saiken)

This is the most common category of claims. It includes all pre-petition unsecured debts that do not have any special statutory priority. Examples include:

• Trade creditors for goods or services supplied.
• Unsecured loans.
• Claims for damages arising from breach of contract.
• Deficiency claims of secured creditors after they have realized their collateral.
  Creditors in this category share pro-rata in any assets remaining after administrative claims and priority bankruptcy claims have been paid.

3. Subordinated Bankruptcy Claims (劣後的破産債権 - Retsugoteki Hasan Saiken)

These claims are paid only after all administrative claims, priority bankruptcy claims, and general unsecured bankruptcy claims have been paid in full. They are detailed in Article 99, Paragraph 1 of the Bankruptcy Act and include:

• Interest accruing after the commencement of bankruptcy proceedings on bankruptcy claims.
• Damages or penalties for delay in performance arising after bankruptcy commencement.
• Costs incurred by creditors for participating in the bankruptcy proceedings (e.g., costs of filing claims, attending meetings).
• Certain tax additions or penalties (e.g., 加算税 - kasanzei, which are penalties for tax understatements or failures to file, are treated as subordinated).

4. Contractually Subordinated Bankruptcy Claims (約定劣後破産債権 - Yakujō Retsugo Hasan Saiken)

This is the lowest-ranking category of claims. It consists of claims for which the creditor and the debtor had, prior to the bankruptcy, entered into an agreement stipulating that such claims would be subordinated to other general unsecured debts in the event of the debtor's bankruptcy (Bankruptcy Act, Article 99, Paragraph 2). This is often seen with certain types of shareholder loans or subordinated debt instruments.

Summary of Claim Priority

The general waterfall for payment in Japanese bankruptcy is as follows:

1. Administrative Claims (財団債権 - Zaidan Saiken)
   • Highest Priority: Expenses for estate administration, liquidation, and distribution (including trustee's fees) and certain judicial common benefit costs.
   • Other Administrative Claims: Recent taxes, claims from trustee's actions, certain pre-petition employee wages, etc.
2. Bankruptcy Claims (破産債権 - Hasan Saiken) (Paid only if administrative claims are fully satisfied)
   • a. Priority Bankruptcy Claims (優先的破産債権 - Yūsenteki Hasan Saiken)
     • i. Certain pre-petition national and local taxes (kōso).
     • ii. Other pre-petition public dues (kōka).
     • iii. Certain private claims with general statutory liens (e.g., remaining employee wages).
   • b. General Unsecured Bankruptcy Claims (一般破産債権 - Ippan Hasan Saiken)
   • c. Subordinated Bankruptcy Claims (劣後的破産債権 - Retsugoteki Hasan Saiken)
   • d. Contractually Subordinated Bankruptcy Claims (約定劣後破産債権 - Yakujō Retsugo Hasan Saiken)

If the funds available in the bankruptcy estate are insufficient to pay all claims within a particular class or sub-class in full, the creditors within that class or sub-class will receive a pro-rata distribution based on the amount of their allowed claims.

Conclusion

The hierarchy of claims is a fundamental aspect of Japanese bankruptcy law, designed to ensure an orderly and predictable process for the application of a debtor's limited assets. The distinction between administrative claims (zaidan saiken), which are paid first to facilitate the bankruptcy process itself, and the various tiers of bankruptcy claims (hasan saiken) dictates the flow of funds and the ultimate recovery for different types of creditors. For any creditor dealing with a Japanese counterparty in bankruptcy, understanding where their claim falls within this priority structure is essential for managing expectations and assessing potential recovery.