Protecting Employee Claims in a Japanese Corporate Bankruptcy

When a company in Japan succumbs to financial distress and enters formal bankruptcy proceedings (破産手続 - hasan tetsuzuki), its employees are often among the most vulnerable stakeholders. Concerns about unpaid wages, accrued retirement benefits, and the abrupt loss of livelihood become paramount. Japanese bankruptcy law, along with related labor protection statutes, provides a framework aimed at safeguarding certain core claims of employees, granting them a degree of priority in the distribution of the company's remaining assets and offering a safety net through a government-administered wage advance system.

The bankruptcy trustee (破産管財人 - hasan kanzainin) appointed by the court plays a central role in identifying, verifying, and ensuring the proper treatment of these employee claims (労働債権 - rōdō saiken).

Identifying Key Employee Claims (労働債権の特定)

The primary types of monetary claims that employees may have against a bankrupt corporate employer include:

1. Unpaid Wages/Salary (未払給料・賃金 - miharai kyūryō/chingin): This encompasses regular salary, overtime pay, and other allowances that form part of the employee's standard compensation and have accrued but not been paid.
2. Retirement Allowance / Severance Pay (退職金・退職手当 - taishokukin/taishoku teate): Many Japanese companies have provisions for retirement or severance payments, the amount of which usually depends on the employee's length of service and salary.
3. Payment in Lieu of Notice of Dismissal (解雇予告手当 - kaiko yokoku teate): If an employee is dismissed without the statutory notice period (typically 30 days), they are entitled to a payment equivalent to their average wage for the notice period not given.
4. Accrued Bonuses: If bonuses are a fixed component of the compensation structure and have accrued pre-bankruptcy, they may also form part of the claim.
5. Reimbursed Expenses: Outstanding claims for legitimate work-related expenses advanced by the employee.

It's important to distinguish these from the remuneration of company directors or statutory auditors (役員報酬 - yakuin hōshū), which are generally not treated with the same priority as employee wages unless the individual also had a clear dual status as an employee performing distinct employee duties.

Priority of Employee Claims in Japanese Bankruptcy

Japanese bankruptcy law accords a preferential status to certain employee claims, recognizing their societal importance and the direct impact on individuals' livelihoods. This priority is structured in tiers:

A. Administrative Claims (財団債権 - Zaidan Saiken) – The Highest Priority

Certain core labor claims are treated as administrative claims, meaning they are paid out of the bankruptcy estate before other categories of bankruptcy claims, as and when funds become available (Bankruptcy Act, Article 151). This provides a significant level of protection for recent earnings. Article 149 of the Bankruptcy Act specifically designates the following as administrative claims:

1. Wages for the Three Months Prior to Bankruptcy Commencement: This covers salaries and other regular wage components earned during the three-month period immediately preceding the date the bankruptcy proceedings were formally commenced by the court. The calculation is based on the actual earnings during that specific timeframe.
2. A Portion of Retirement Allowances: The portion of an employee's retirement allowance that qualifies as an administrative claim is the amount equivalent to the total wages for:
   • (a) the three months immediately preceding the employee's retirement (if they retired or were dismissed before the bankruptcy commencement), OR
   • (b) the three months immediately preceding the commencement of the employer's bankruptcy proceedings,
     whichever of these two calculated three-month wage totals is greater.

The rationale for granting administrative status to these claims is the acute need to protect employees' most recent earnings, which are often critical for their immediate living expenses.

B. Priority Bankruptcy Claims (優先的破産債権 - Yūsenteki Hasan Saiken) – Next Level of Protection

Labor claims that do not qualify as administrative claims but still warrant protection ahead of general unsecured debts are treated as priority bankruptcy claims. These are paid after all administrative claims have been satisfied in full but before any distributions are made to general unsecured creditors (Bankruptcy Act, Article 98, Paragraph 1). This priority status often derives from general lien provisions in the Civil Code (民法 - Minpō), such as Article 306, Item 2 (general lien for employee claims) and Article 308 (scope of priority for employee claims).

The main types of labor claims falling into this category include:

1. Wages Accrued More Than Three Months Before Bankruptcy Commencement: Unpaid wages earned outside the three-month window for administrative claims.
2. Remaining Portion of Retirement Allowances: The part of the retirement allowance that exceeds the amount classified as an administrative claim.
3. Payment in Lieu of Notice of Dismissal (解雇予告手当 - kaiko yokoku teate): This payment, due when an employer dismisses an employee without the required 30-day notice, is generally treated as a priority bankruptcy claim. (Although some court practices, notably in Tokyo, might allow this as an administrative claim under very specific circumstances, such as when the dismissal is effected by the trustee immediately after commencement due to operational cessation, this is not the universal rule.)
4. Other Labor-Related Claims: This can include claims for reimbursed expenses or other similar employment-related dues not covered above.

Within the broader category of priority bankruptcy claims, labor claims themselves generally rank high among private claims, after certain public claims like taxes and social insurance premiums.

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

Any residual employment-related monetary claims that do not fit into the administrative or priority bankruptcy claim categories (which would be rare for core compensation elements) would fall into the general unsecured pool.

The Role of the Bankruptcy Trustee Regarding Employee Claims

The bankruptcy trustee has several important responsibilities concerning employees and their claims:

1. Verification of Claims: A crucial task for the trustee is to accurately ascertain the amount and nature of each employee's claims. This involves a careful review of company records, including payroll ledgers (賃金台帳 - chingin daichō), employment contracts, work rules (就業規則 - shūgyō kisoku), and retirement benefit regulations (退職金規程 - taishokukin kitei). The trustee will also liaise with former HR and accounting personnel if available.
2. Dismissal Procedures: If the company's business operations cease upon bankruptcy and employees have not already been dismissed, the trustee will manage the formal dismissal process. This includes providing statutory notice of dismissal or making payments in lieu of notice, as appropriate.
3. Issuing Necessary Documentation: The trustee is responsible for ensuring that departing employees receive essential documents, such as:
   • Statement of Separation (離職票 - rishokuhyō): Required for claiming unemployment insurance benefits.
   • Certificate of Withholding Tax (源泉徴収票 - gensen chōshūhyō): Needed for the employee's personal income tax reconciliation.
   • Notice of Disqualification from Health/Pension Insurance (資格喪失届 - shikaku sōshitsu todoke): Necessary for employees to transition to national health and pension schemes or new employer schemes.
4. Information Provision: The Bankruptcy Act (Article 86) obliges the trustee to endeavor to provide employees with necessary information regarding their bankruptcy claims and participation in the proceedings, recognizing that employees may lack the resources or knowledge of other commercial creditors. This often includes explaining their claim priorities and the Unpaid Wage Advance System.

The Unpaid Wage Advance System (未払賃金立替払制度 - Miharai Chingin Tategae Barai Seido)

Recognizing that even with priority status, actual payment from a bankrupt estate can be delayed or uncertain, Japan has a government-administered "Unpaid Wage Advance System." This system provides a crucial safety net for employees.

• Administering Body: The system is primarily operated by the Laborers' Health and Welfare Organization (労働者健康福祉機構 - Rōdōsha Kenkō Fukushi Kikō, often referred to as "機構 - Kikō").
• Purpose: To provide swift, partial payment of certain "regular wages" and "retirement allowances" that were unpaid due to the employer's bankruptcy.
• Eligibility:
  • The employer must be legally declared bankrupt (or meet criteria for de facto bankruptcy) and generally must have been operating for at least one year.
  • The employee must have retired or been dismissed within a specific timeframe (typically starting from 6 months before the bankruptcy petition and extending up to 2 years after, depending on the circumstances).
• Covered Payments: The system covers "regular wages" (定期賃金 - teiki chingin) and "retirement allowances" (taishokukin). It generally does not cover bonuses, payment in lieu of notice of dismissal, or other irregular payments. The wages/retirement allowances must have become due for payment within the six months preceding the employee's retirement/dismissal.
• Amount Advanced: The system typically advances 80% of the eligible unpaid amount. This 80% figure is chosen because it approximates net pay after typical deductions. However, there are age-based maximum limits on the total unpaid amount that can be considered and thus on the total advance. For example, for employees aged 45 and over, the maximum total unpaid wages and retirement allowance considered might be 3.7 million JPY, leading to a maximum advance of 2.96 million JPY. There is also usually a minimum total unpaid amount (e.g., 20,000 JPY) for the system to be utilized.
• Trustee's Role in Certification (証明 - Shōmei): A critical step for employees is to obtain certification from the bankruptcy trustee (or, in some de facto bankruptcy cases, from the Labor Standards Inspection Office). The trustee verifies the details of the unpaid wages and retirement allowances based on the company's records and issues a certificate (証明書 - shōmeisho). This certification is then submitted by the employee to the Laborers' Health and Welfare Organization as part of their application for the advance payment. This places a significant burden on the trustee to accurately and promptly assess these claims.
• Subrogation (代位 - Dai-i): When the Laborers' Health and Welfare Organization makes an advance payment to an employee, it becomes subrogated to the employee's original claim against the bankruptcy estate to the extent of the payment made. This subrogated claim generally retains the same priority status (administrative or priority bankruptcy) that the original employee claim held. The Supreme Court ruling of November 22, 2011 (Saikō Saibansho, Heisei 23-nen (Ju) No. 1078, Minshū Vol. 65, No. 8, p. 3165) confirmed that the Organization steps into the priority position of the employee.
• Tax Treatment: Payments received by employees through this advance system are generally treated as retirement income for Japanese income tax purposes, which can often result in a lower tax burden for the employee compared to if it were treated as regular wage income.

Practical Considerations

The accurate calculation of unpaid wages, particularly determining the portions eligible for administrative claim status versus priority bankruptcy claim status, and those eligible for the government advance system, can be complex. It requires careful examination of pay periods, payment due dates, employment contract terms, and company regulations. The trustee often works closely with former accounting or HR personnel of the bankrupt company to gather and verify this information.

For debtor companies and their counsel preparing for a bankruptcy filing, organizing employee-related records and clearly calculating outstanding obligations in advance can significantly smooth the process for both the employees and the subsequently appointed trustee.

Conclusion

While the bankruptcy of an employer is undoubtedly a difficult period for employees, Japanese law provides a structured approach to protect their core financial claims. Through a combination of priority status within the bankruptcy distributions (administrative claims for recent wages and a portion of retirement pay, and priority bankruptcy status for other labor dues) and the crucial safety net of the Unpaid Wage Advance System, efforts are made to mitigate the financial hardship faced by workers. The bankruptcy trustee is central to this process, tasked with the accurate verification of these claims and facilitating access to available protections, including certifying amounts for the government advance scheme.