Q: A Step-by-Step Guide: How Do You Establish and Register a Factory Foundation (Kojo Zaidan) in Japan?

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read

The Japanese "Factory Foundation" (Kojo Zaidan) system, established under the Factory Mortgage Act (Act No. 54 of 1905), offers a unique method for businesses to consolidate a wide array of factory-related assets—including land, buildings, machinery, equipment, and even intangible rights like industrial property—into a single legal entity treated as immovable property. This entity can then be mortgaged as a whole. While powerful, the process of establishing and registering a Factory Foundation is intricate and demands careful adherence to specific legal procedures. This guide outlines the key steps involved.

Step 1: Preliminary Determinations and Asset Selection

Before initiating any formal procedures, a business must undertake crucial preliminary planning:

A. Defining the Scope of the Foundation:
A Factory Foundation can be established for:

  • A single factory.
  • Multiple factories, even if these factories belong to different owners. In the latter case, the resulting Factory Foundation will be co-owned by the respective factory owners.

The definition of a "factory" itself is broad, encompassing not just manufacturing sites but also facilities for processing, printing, photography, and even business operations for electricity/gas supply or telecommunications services.

B. Selecting Constituent Assets (Sosei Bukken):
The business must decide which specific assets will form the Factory Foundation. The Factory Mortgage Act (Article 11) permits a wide range of assets to be included:

  • Land and structures (buildings, workshops, etc.) belonging to the factory.
  • Machinery, instruments, tools, electrical poles and wires, pipes, rails, and other ancillary items.
  • Superficies (chijoken – a right akin to a long-term ground lease, allowing ownership of structures on another's land).
  • Leasehold rights over items (immovables or movables), provided the lessor's consent is obtained if required by the underlying lease or law.
  • Industrial Property Rights (kogyo shoyuken), such as patents, utility model rights, design rights, and trademark rights, including registered licenses for these.
  • Dam Operation Rights (damu shiyoken).

It is not mandatory to include every eligible asset from a factory into the foundation. The selection is strategic, often based on the financing needs and the desire to create a valuable collateral package. However, a critical requirement is that each factory unit contributing to the foundation must include some form of "locational" asset – typically land or buildings, or rights such as superficies or registered leaseholds relating to them. A foundation cannot be formed solely from movable assets or intangible rights without this real property base that defines the "place" of the factory.

C. Verifying Asset Eligibility Requirements (Article 13, Factory Mortgage Act):
Each asset selected must meet stringent criteria:

  1. Ownership: The asset must be owned by the applicant(s) wishing to establish the foundation.
  2. No Conflicting Third-Party Rights: The asset must not already be the subject of another person's rights that would conflict with its unencumbered inclusion in the foundation for mortgage purposes. This means it generally cannot be subject to existing mortgages, pledges, rights of retention, or certain types of leases (unless those leases themselves are being included with consent).
  3. No Attachments or Provisional Measures: The asset must not be under attachment (sashiosae), provisional attachment (kari-sashiosae), or provisional disposition (kari-shobun).
  4. Not Part of Another Foundation: An asset cannot simultaneously belong to two Factory Foundations or other similar statutory foundations (e.g., a mining foundation).
  5. Pre-Registration (if applicable): If an asset type has its own distinct registration system (e.g., real estate, industrial property rights, certain ships or vehicles), it must be duly registered in the name of the applicant before it can be incorporated into the Factory Foundation. For example, any unregistered land or buildings intended for the foundation must first undergo ownership preservation registration (shoyuken hozon toki) in the standard land/building registers (Article 12, Factory Mortgage Act).

Step 2: Preparation of Essential Documents

Once the assets are selected and confirmed eligible, meticulous documentation is required:

A. Factory Foundation Inventory (Kojo Zaidan Mokuroku):
This is arguably the most crucial document. It is a detailed, itemized list of every single asset that will constitute the Factory Foundation.

  • Content Specificity: The Factory Mortgage Registration Rules dictate the level of detail required for describing each type of asset. For example:
    • Land: Location, lot number, land category, area.
    • Buildings: Location, house number, type, structure, floor area.
    • Machinery/Equipment: Type, structure, quantity, manufacturer, date/year of manufacture, model/serial numbers, and any other unique identifiers.
    • Industrial Property Rights: Type of right (e.g., patent), registration number, name/title of the invention/design, date of registration.
  • Separate Inventories: If the foundation comprises multiple factories, a separate inventory must be prepared for each factory.
  • Applicant's Attestation: The inventory must be signed (or named and sealed) by the applicant(s) or their representative.
    Upon successful registration of the foundation, this inventory becomes an integral part of the Factory Foundation Register and its contents are legally deemed to be registered matters.

B. Factory Plan/Diagram (Kojo Zumen):
A detailed plan or diagram of the factory premises must also be prepared.

  • Content: It must accurately depict the layout of the factory, the location of land parcels, important structures (buildings, etc.), and the general placement of significant ancillary items (machinery, equipment) that are listed in the inventory.
  • Requirements: The Factory Mortgage Registration Rules and supplementary directives provide standards for its preparation, including scale, clarity, and the information to be displayed. It must be prepared for each factory within the foundation.
  • Attestation: Similar to the inventory, the factory plan usually requires attestation by the applicant and potentially the preparer.

Step 3: Determining the Competent Registry Office (Kankatsu Tokijo)

The application for establishing a Factory Foundation must be filed with the correct Legal Affairs Bureau (or its branch office) that has jurisdiction.

  • Single Factory, Single Jurisdiction: If the factory is located entirely within the jurisdictional area of a single registry office, that office is competent.
  • Multiple Jurisdictions: If a single factory spans the jurisdictions of multiple registry offices, or if the foundation will comprise multiple factories located in different registry jurisdictions, the applicant must first apply to a higher authority (the Minister of Justice, or the Director of the regional Legal Affairs Bureau, depending on the scope of the jurisdictions involved) to designate one specific registry office as the competent office for that particular Factory Foundation (Article 17, Paragraph 2, Factory Mortgage Act). This application is formally known as an "Application for Designation of Competent Registry Office for Factory Foundation" (Kojo Zaidan Kankatsu Tokijo Shitei Shinseisho). The resulting designation document becomes part of the subsequent application package.

Step 4: Application for Registration of Ownership Preservation of the Factory Foundation

This is the formal legal step that, upon approval and execution by the registry, brings the Factory Foundation into existence.

A. Applicant(s): The owner(s) of the factory(ies) that will form the foundation.

B. Application Information (Article 21, Paragraph 3, Factory Mortgage Act; Article 18, Factory Mortgage Registration Rules):
The application form must include:

  • Purpose of Registration: "Preservation of Ownership" (Shoyuken Hozon) of the Factory Foundation.
  • Applicant(s) Details: Name, address, etc.
  • Factory Foundation Details: For each factory composing the foundation:
    • Name and location of the factory.
    • Location of its principal business office (which may differ from the factory's physical location).
    • Type of business conducted at the factory.
  • List of attached documents.
  • Date of application.
  • The competent registry office.
  • Registration and license tax information.

C. Attached Documents (Article 22, Factory Mortgage Act; Article 21, Factory Mortgage Registration Rules):
A comprehensive set of documents must accompany the application:

  1. Factory Foundation Inventory (Kojo Zaidan Mokuroku): As described in Step 2A.
  2. Factory Plan/Diagram (Kojo Zumen): As described in Step 2B.
  3. Certificate of Designation of Competent Registry Office: If applicable (see Step 3).
  4. Proof of Applicant's Identity and Address: For individuals, a certificate of residence; for corporations, a corporate registration certificate.
  5. Corporate Registration Certificate: For corporate applicants, this verifies legal existence and representative authority.
  6. Power of Attorney: If the application is filed by an agent.
  7. Consents and Permissions:
    • Lessor's consent if including leasehold rights over items where such consent is necessary for transfer or encumbrance.
    • Consent from holders of industrial property rights if registered licenses are being included and such consent is required for their effective inclusion or subsequent mortgage.
    • Permit from the Minister of Land, Infrastructure, Transport and Tourism if including Dam Operation Rights.
  8. Proof of Pre-registration for Registrable Assets: Evidence that assets like land, buildings, IP rights, etc., are already properly registered in the applicant's name. This might involve submitting copies of relevant registers or registration certificates.
  9. Registration and License Tax Payment Receipt.
  10. Copy of the Application Form (required for some older, non-digitized procedures for issuing the registration certificate).

Step 5: Registry Office Examination and Procedures Prior to Execution

Upon receiving the application, the registry office undertakes a thorough examination and several procedural steps:

A. Scrutiny of Application (Article 27, Factory Mortgage Act):
The registrar examines the application for formal compliance and substantive eligibility. Grounds for rejection include general reasons (e.g., lack of jurisdiction, application not in proper form) and specific reasons under the Factory Mortgage Act, such as:

  • A constituent asset being found to be already subject to a conflicting third-party right or attachment as evidenced by public registers.
  • Discrepancies between the information in the Factory Foundation Inventory and the official registers for those assets.
  • Failure to resolve claims made during the public notice period for movables (see below).

B. Notations on Registers of Constituent Assets (Article 23, Factory Mortgage Act):
To prevent disposition of assets during the application process:

  • For registered assets (land, buildings, IP rights, etc.) under its own jurisdiction, the registrar makes a provisional notation in their individual registers indicating that an application for inclusion in a Factory Foundation has been filed, along with the application date and number.
  • For registered assets under other jurisdictions (another Legal Affairs Bureau, Patent Office, etc.), the registrar notifies these authorities, who then make similar provisional notations on their respective registers. These authorities also send back confirmation or copies of their updated registers.

C. Public Notice for Unregistered Movables (Article 24, Factory Mortgage Act):
For movable assets listed in the inventory that do not have their own specific registration system (this applies to most machinery and equipment):

  • The registry office must publish a notice in the Official Gazette (Kanpo).
  • This notice announces the application and states that any third parties claiming rights over these specified movables (e.g., undisclosed ownership, existing pledges) must declare their rights to the registry office within a designated period (between one and three months, often set at 32 days in practice).
  • If valid claims are made, the applicant is notified and given an opportunity to resolve or refute them. If a claim is not withdrawn or proven unfounded within a week after the notice period ends, the application to include that specific asset (or even the entire foundation registration if the asset is critical) may be rejected.
  • If no valid claims are made and substantiated, any such undisclosed third-party rights concerning those movables may be deemed non-existent or lose their effect against the foundation (Article 25, Factory Mortgage Act).

Step 6: Execution of the Ownership Preservation Registration

Once all examinations are complete, public notice periods have expired, any claims are resolved, and confirmations from other registries are in order, the registrar proceeds with the formal registration:

A. Timing:
The actual registration of the Factory Foundation's ownership preservation can only occur after all these preliminary steps are concluded. This means there can be a significant time lag between application and final registration.

B. Actions by the Registry:

  1. Recording in the Factory Foundation Register: The ownership preservation of the Factory Foundation is officially recorded in the Factory Foundation Register (Kojo Zaidan Tokibo). This register has a "title section" (hyodaibu) describing the foundation (based on the application details like factory names, locations, types of business) and a "rights section" (kenribu), specifically the "Ko-ku" (甲区) for ownership details.
  2. Assignment of Registration Number: A unique registration number is assigned to the new Factory Foundation.
  3. Filing of Inventory and Plan: The submitted Factory Foundation Inventory and Factory Plan are officially filed and become integral annexes to the registration. The inventory, in particular, is legally deemed part of the register.
  4. Definitive Notations on Constituent Asset Registers (Article 34, Factory Mortgage Act):
    • For each constituent asset that has its own pre-existing registration (land, buildings, IP rights, etc.), the provisional notation (from Step 5B) is updated to a definitive one. The registrar (or the notified authority) records in the "Ko-ku" (ownership section) of that asset's individual register that it "has become part of Factory Foundation Registration No. X" (kojo zaidan ni zokushita). This publicly links the individual asset to the foundation and subjects it to the foundation's legal regime, including restrictions on separate disposition.
  5. Issuance of Registration Completion Certificate: The applicant receives a certificate confirming the registration of ownership preservation (historically a toki-zumisho; under more digitized systems, a notification of registration identification information, toki shikibetsu joho tsuchi, though the Factory Foundation system has seen slower digitization).

At this point, the Factory Foundation legally exists as a single, mortgageable immovable property.

Step 7: The Critical Post-Establishment Requirement – The Six-Month Mortgage Clock

The creation of the Factory Foundation is almost invariably a prelude to mortgaging it. The Factory Mortgage Act (Article 10) imposes a strict deadline:

  • A mortgage must be registered on the newly created Factory Foundation within six months of the date of its ownership preservation registration.
  • If no mortgage is registered within this six-month window, the ownership preservation registration of the Factory Foundation loses its legal effect. This means the foundation essentially dissolves, and the constituent assets revert to their individual legal status, no longer bound as a single entity.

This "use it or lose it" provision underscores that Factory Foundations are intended to be active instruments for secured financing, not dormant asset-holding structures.

The establishment and registration of a Factory Foundation in Japan is a complex, document-intensive, and time-consuming process. It requires meticulous planning, accurate asset identification and valuation, adherence to specific documentary and procedural rules, and careful navigation of various registry interactions. Given the significant legal implications, businesses typically engage legal professionals specializing in Japanese property and security law to manage this process.