In the course of business, situations frequently arise where a third party steps in to take responsibility for the debts or contractual obligations of an existing debtor. This process, known as "assumption of obligation" or saimu hikiuke (債務引受) in Japanese, can occur for various reasons, such as corporate restructuring, mergers and acquisitions, refinancing arrangements, or simply as part of a negotiated settlement. While the concept has long been recognized in Japanese legal practice and case law, the Japanese Civil Code, prior to its major amendments effective April 1, 2020, lacked explicit statutory provisions governing it. The amended Code now provides a clear framework, detailing the types of assumption, their requirements, and their effects on the creditor, the original debtor, and the assuming party.

Understanding the Two Main Types of Assumption

The amended Civil Code primarily distinguishes between two forms of assumption of obligation:

1. Co-existent Assumption of Obligation (Heizon-teki Saimu Hikiuke; 并存的債務引受): In this form, the assuming party (the third party, known as the hikiukenin or 引受人) undertakes the same obligation as the original debtor, but the original debtor is not released. Both the original debtor and the assuming party become liable to the creditor.
2. Exemptive (or Discharging) Assumption of Obligation (Menseki-teki Saimu Hikiuke; 免責的債務引受): Here, the assuming party takes over the obligation, and the original debtor is released (discharged) from their liability. The assuming party effectively replaces the original debtor.

The choice between these two types has significant consequences for all parties involved.

Co-existent Assumption of Obligation (Articles 470, 471)

This type of assumption essentially adds another party responsible for the debt, enhancing the creditor's security.

Effects of Co-existent Assumption

Under Article 470, Paragraph 1, the assuming party undertakes an obligation identical in content to that owed by the original debtor. Crucially, the assuming party and the original debtor become jointly and severally liable (rentai shite; 連帯して) to the creditor for this obligation. This means the creditor can demand full performance from either the original debtor or the assuming party, or from both. This statutory clarification aligns with previous Supreme Court case law (e.g., judgment of December 20, 1966 (Showa 41.12.20)). However, it's important to note that the general rules on "absolute effects" (events concerning one joint and several debtor automatically affecting others) were significantly revised in the amended Code, so the implications are not entirely identical to the old regime.

How is a Co-existent Assumption Created?

Article 470 outlines several ways:

• Agreement between the Creditor and the Assuming Party (Article 470, Paragraph 2): This is a common method. Notably, this agreement can be made without the consent of the original debtor, and even if it is against the debtor's will. The rationale is similar to allowing a suretyship to be undertaken without the principal debtor's consent (referencing a judgment of March 25, 1926 (Taisho 15.3.25)).
• Agreement between the Original Debtor and the Assuming Party (Article 470, Paragraphs 3 and 4): This form of assumption takes effect only when the creditor gives their consent to the assuming party. This structure is essentially a contract for the benefit of a third party (the creditor), and the general rules for such contracts apply.
• Tripartite Agreement: An agreement among all three parties (creditor, original debtor, and assuming party) is also a straightforward way to establish a co-existent assumption, though not separately detailed in Article 470 as it is considered self-evident.

Defenses Available to the Assuming Party (Article 471)

When the creditor seeks performance from the assuming party in a co-existent assumption:

• The assuming party can assert any defenses against the creditor that the original debtor could have asserted at the time the assumption became effective (e.g., invalidity of the original contract, prior performance by the debtor).
• If the original debtor has a right to rescind (torikeshi-ken; 取消権) or terminate (kaijo-ken; 解除権) the underlying contract with the creditor, the assuming party cannot exercise these rights directly. However, they can refuse to perform their assumed obligation to the extent that the original debtor would be discharged from the obligation if the debtor were to exercise such rights.
• If the original debtor has a right of set-off against the creditor, the rules for joint and several obligations (specifically Article 439, Paragraph 2, which allows other joint obligors to refuse performance up to the extent of the co-obligor's internal share that could be set off) will apply.

Co-existent Assumption and Suretyship (Hoshō; 保証)

Functionally, a co-existent assumption is very similar to a suretyship (hoshō), as it adds an additional party responsible for the debt. The legislative discussions leading to the amendments considered whether the protective rules for sureties (e.g., requirements for written agreements, information disclosure) should be applied to co-existent assumptions, particularly if the primary purpose was to guarantee the original debtor's obligation. However, this was ultimately not codified due to concerns about the ambiguity in determining when such an application would be appropriate. Therefore, whether suretyship-like protections apply to a co-existent assumption will depend on the specific interpretation of the individual agreement and circumstances.

Exemptive (Discharging) Assumption of Obligation (Articles 472, 472-2 to 472-4)

This type of assumption involves a more definitive shift in liability, as the original debtor is released.

Effects of Exemptive Assumption

According to Article 472, Paragraph 1, the assuming party undertakes an obligation identical in content to that of the original debtor, and, critically, the original debtor is discharged from their obligation. This results in a complete substitution of the debtor. For instance, if Company X (buyer) assumes Company Y's (original debtor) obligation to pay a supplier (creditor) for goods, and it's an exemptive assumption, Company Y is no longer liable to the supplier.

How is an Exemptive Assumption Created?

Article 472 provides for the following methods:

• Agreement between the Creditor and the Assuming Party (Article 472, Paragraph 2): This is permissible. However, for the exemptive assumption to take effect and for the original debtor to be discharged, the creditor must notify the original debtor of this agreement. Unlike some interpretations under the old case law (e.g., judgment of May 9, 1921 (Taisho 10.5.9) suggesting the debtor's non-objection was implicitly needed), the amended law does not require the debtor's consent, reasoning that a creditor is generally free to unilaterally release a debtor. The notification requirement serves to inform the debtor of their discharge and the change in their legal position.
• Agreement between the Original Debtor and the Assuming Party (Article 472, Paragraph 3): This form of exemptive assumption is also possible, but it requires the creditor's consent (given to the assuming party) to become effective. The creditor's consent is essential here because their original counterparty is changing, and the creditworthiness and reliability of the new assuming party are of direct concern to the creditor.
• Tripartite Agreement: An agreement among the creditor, original debtor, and assuming party is also a clear method for effecting an exemptive assumption.

Defenses Available to the Assuming Party (Article 472-2)

The rules are largely similar to those for co-existent assumption:

• The assuming party can assert against the creditor any defenses that the original debtor could have asserted at the time the exemptive assumption took effect.
• If the original debtor had grounds to rescind or terminate the underlying contract, the assuming party can refuse to perform their obligation to the extent the original debtor would have been discharged by exercising such rights.
• A key difference arises with set-off: If the original debtor had a claim against the creditor that could be used for set-off, the assuming party generally cannot invoke this. Because the original debtor is discharged by the exemptive assumption, they are no longer a party to the obligation in a way that would allow the application of rules pertaining to co-debtors' set-off rights.

Assuming Party’s Right of Recourse Against the Original Debtor (Article 472-3)

A crucial aspect of exemptive assumption is that, generally, the assuming party who performs the assumed obligation does not automatically acquire a right of recourse (kyūshō-ken; 求償権) against the original debtor. The underlying rationale is that by undertaking an exemptive assumption, the assuming party is considered to have taken the debt on as their own, intending to bear the ultimate cost.
However, this default rule does not prevent:

• A separate agreement between the assuming party and the original debtor under which the original debtor provides consideration or reimbursement to the assuming party.
• The assuming party from claiming reimbursement if the assumption was undertaken at the entrustment of the original debtor, based on principles of mandate (Articles 649 and 650 of the Civil Code, dealing with reimbursement of expenses incurred by a mandatary).

Transfer of Security Interests and Guarantees in Exemptive Assumptions (Article 472-4)

This is a particularly important area, especially when the assumed debt was secured. Article 472-4 provides a mechanism for security interests (like mortgages or pledges) and guarantees to continue in relation to the assumed debt:

• Creditor’s Right to Transfer Security: The creditor can transfer a security interest that was established to secure the original debtor's (now discharged) obligation, so that it now secures the new obligation of the assuming party.
• Consent of Security Provider is Key: If the security (e.g., a mortgage on property) was provided by someone other than the assuming party, their consent is required for the security interest to be transferred to secure the new debtor's obligation. This "someone other" can include the original debtor (if they provided their own property as collateral but are not the same entity as the assuming party) or a third-party security provider (e.g., a butsujō hoshōnin; 物上保証人, a person who provides their property as security for another's debt).
  This consent requirement is vital because changing the debtor can significantly alter the risk profile for the security provider. Previous case law (e.g., Supreme Court, March 18, 1971 (Showa 46.3.18)) often led to the extinguishment of third-party security upon an exemptive assumption unless special circumstances were present. The amended law now offers a clearer path to continue the security, provided the necessary consents are obtained.
• Manifestation of Transfer: The transfer of the security interest by the creditor must be manifested by a declaration of intention made to the assuming party, either before or at the same time as the exemptive assumption takes effect.
• Guarantees: Similar rules apply to guarantees. A guarantee that secured the original debt can be transferred to secure the assumed debt. However, if the guarantor is someone other than the assuming party, that guarantor's consent is required. This consent must be in writing or by way of an electromagnetic record (e.g., email that meets certain formality requirements).

Practical Applications and Considerations

The introduction of explicit rules for assumption of obligations brings greater clarity to common commercial practices.

• Clarity in Documentation: It is essential to clearly document whether an assumption is co-existent or exemptive, as their legal effects are vastly different. The method of creation (e.g., bipartite or tripartite agreement, notifications, consents) should also be meticulously recorded.
• Managing Consents: Parties must ensure all legally required consents—from the creditor, the original debtor (in some contexts of forming the agreement, though not necessarily for its validity if made between creditor and assuming party for co-existent type), or crucial third-party security providers—are obtained and documented appropriately.
• Secured Debt Restructuring: For exemptive assumptions involving secured debts (e.g., when a company acquiring assets also assumes the related secured loans), the procedures for transferring security interests and obtaining consents from collateral providers and guarantors are critical to maintaining the creditor's secured position. The commentary describes a scenario: Creditor A holds a mortgage on Debtor B's property. B's debt is exemptively assumed by C. Creditor A can declare its intention to transfer the mortgage to secure C's new debt. Since B is the property owner (and a person other than the assuming party C, in the context of who provided the security for B's original debt), B's consent is necessary for the mortgage to now secure C's debt. The registration of the change of debtor under the mortgage would then follow.
• Real Estate Transactions: Exemptive assumption is relevant, for example, where a buyer of mortgaged real estate also assumes the seller's mortgage debt, with the purchase price being adjusted to reflect this assumption.

Conclusion

The new provisions in the Japanese Civil Code on assumption of obligations offer a much-needed statutory framework for these important commercial arrangements. By clearly distinguishing between co-existent and exemptive assumptions, and by specifying the requirements for their creation and their effects (including on defenses, recourse, and particularly on the transfer of security interests and guarantees), the amended law provides greater predictability and certainty. Businesses involved in transactions in Japan where a third party might take over existing obligations should familiarize themselves with these rules to ensure their agreements are structured effectively and their rights are protected.