When securing assets related to industrial or enterprise operations in Japan, businesses and lenders encounter specialized legal frameworks that go beyond standard Civil Code pledges and real estate mortgages. Three notable statutory systems are the "narrow sense" factory mortgage (Kojo Teito), the factory foundation (Kojo Zaidan)—both governed by the Factory Mortgage Act (Act No. 54 of 1905)—and enterprise hypothecation (Kigyo Tanpo), governed by the Enterprise Hypothecation Act (Act No. 106 of 1958). Each offers a different approach to collateralizing business assets, with distinct features, scopes, and practical implications. This article provides a comparative overview of these three systems.

1. The "Narrow Sense" Factory Mortgage (Kojo Teito)

• Governing Law: Factory Mortgage Act (Act No. 54 of 1905).
• Core Concept: This is a mortgage established on the land and/or buildings belonging to a "factory" (as defined by the Act). Its key characteristic is that its scope is legislatively extended to also cover specific machinery, instruments, and other operational equipment (kyōyō bukken) that are installed on the premises and used for the factory's operations.
• Identification of Ancillary Assets: The specific machinery and equipment covered are identified and listed in a registered "Article 3 Inventory" (Dai-san-jō Mokuroku). The Supreme Court of Japan ruled on July 14, 1994, that listing in this inventory is a requirement for the mortgage's effect over these ancillary assets to be opposable to third parties.
• Primary Use: Suited for securing loans against a specific factory site where the primary collateral components are the real estate and its key, installed operational machinery.
• Nature of Collateral: The land/buildings are immovables. The inventoried machinery, while often movable, is treated as part of the mortgage security package linked to the primary immovables.

2. The Factory Foundation (Kojo Zaidan)

• Governing Law: Factory Mortgage Act (Act No. 54 of 1905).
• Core Concept: This system involves the legal creation of a new, single "immovable" property called a Factory Foundation. This foundation is formed by bundling together a diverse collection of assets belonging to one or more factories. These assets can include:
  • Land and buildings/structures.
  • Machinery, equipment, tools, and other ancillary items.
  • Industrial property rights (patents, trademarks, etc.).
  • Superficies (chijoken).
  • Registered leasehold rights (with necessary consents).
  • Dam operation rights.
    The foundation comes into legal existence through a "registration of preservation of ownership" (shoyuken hozon toki) in a dedicated Factory Foundation Register. Once established, this entire foundation is treated as a single unit of real property and can be mortgaged as such.
• Identification of Assets: All constituent assets are meticulously listed in a "Factory Foundation Inventory" (Kojo Zaidan Mokuroku), which is an integral part of the foundation's registration.
• Primary Use: Designed for substantial, often long-term, financing of large, integrated factory operations. It allows for the collateralization of the factory as a going concern, potentially maximizing its value for lending purposes.
• Nature of Collateral: The foundation itself is legally deemed a single immovable, even though it comprises various types of assets, including movables and intangibles.

3. Enterprise Hypothecation (Kigyo Tanpo)

• Governing Law: Enterprise Hypothecation Act (Act No. 106 of 1958).
• Core Concept: This is a form of security interest that can be created over the entirety of a company's assets (sōzaisan) as a fluctuating pool or a whole. It is akin to a floating charge found in some other jurisdictions.
  • The security attaches to all assets belonging to the company at the time of creation and automatically extends to after-acquired property without needing specific amendments for each new asset.
  • The company can generally continue to dispose of assets in its ordinary course of business until the charge "crystallizes" upon certain events (e.g., default, initiation of insolvency proceedings).
• Eligible Debtor: This security can only be created by a Kabushiki Kaisha (stock company).
• Secured Obligation: Enterprise hypothecation can only be used to secure corporate bonds (shasai) issued by the company. It cannot secure general bank loans or other types of debt.
• Creation and Perfection: Requires the execution of an enterprise hypothecation deed in the form of a notarial deed (kōsei shōsho) and registration in the company's Commercial Register (shōgyō tōkibo).
• Primary (Intended) Use: To provide security for corporate bond issues by giving bondholders a claim over the company's entire undertaking.

Comparative Analysis

Let's compare these three systems across several key parameters:

Key Distinguishing Features Summarized

• Factory Mortgage (Narrow Sense): Attaches to existing immovables and extends specifically to operational machinery via a detailed inventory. Offers focused security on a specific production site.
• Factory Foundation: Creates a new legal entity out of diverse assets, treating the entire bundle as one piece of real estate for mortgage purposes. Offers the most comprehensive "asset bundle" security with strong protections against piecemeal dismantling.
• Enterprise Hypothecation: A "floating" type charge over all company assets, intended for bond security. Its most defining feature is its breadth of coverage (including future assets) counterbalanced by its extremely weak priority against almost all other forms of secured or preferential claims.

Strategic Considerations: When Might Each Be Preferred?

• Choose a "Narrow Sense" Factory Mortgage when:
  • Financing is tied to a specific factory site and its core operational machinery.
  • The primary assets are the land, buildings, and key installed equipment.
  • The complexity and cost of creating a full Factory Foundation are not justified or desired.
  • A reasonably strong security position (ranking by registration against other mortgages) is needed.
• Choose a Factory Foundation when:
  • Seeking to maximize the collateral value of a large, highly integrated industrial operation by treating it as a single going concern.
  • Significant value lies in a diverse range of assets including not just immovables and machinery, but also industrial property rights, specific leaseholds, or other unique operational rights.
  • Substantial, long-term financing is involved, and the lender requires a highly robust, comprehensive security interest with strong control over the asset pool's integrity.
  • The parties are prepared for the significant administrative complexity and cost involved in its creation and maintenance.
  • The six-month rule (requiring a mortgage to be placed on the foundation within six months of its creation) can be met.
• Consider Enterprise Hypothecation (with caution) when:
  • The financing is through the issuance of corporate bonds by a stock company.
  • The intention is to provide bondholders with a theoretical "blanket lien" over all company assets as a form of comfort, even if its practical security value is limited due to low priority.
  • Other, stronger forms of specific security are unavailable or insufficient, and this is seen as a supplementary, albeit weak, recourse.
  • Its primary utility is often undermined by its subordination to virtually all other secured and preferential claims, making it a rarely chosen option for creditors seeking substantial protection.

Conclusion

Japan's legal system offers these three distinct statutory frameworks for securing assets related to factory or broader enterprise operations. The "narrow sense" factory mortgage provides a focused way to secure key immovables and operational equipment. The factory foundation offers a powerful, albeit complex, method to bundle diverse assets into a single, highly secured entity. Enterprise hypothecation, while broad in its theoretical scope over all company assets, is severely hampered by its low priority status, limiting its practical utility for creditors.

The choice among these (or indeed, relying on standard Civil Code mechanisms where appropriate) depends heavily on the specific nature and composition of the assets to be secured, the type and scale of the financing involved, the desired level of security and control for the lender, and the borrower's capacity and willingness to undertake the associated administrative burdens. Given the legal intricacies, particularly with factory foundations and the critical priority issues concerning enterprise hypothecation, obtaining specialized legal advice is indispensable when navigating these Japanese factory and enterprise collateral systems.