When a debtor fails to exercise their own rights against a third party, thereby impairing their ability to satisfy their obligations to their own creditor, Japanese law provides a mechanism known as the creditor's subrogation right (saikensha daii-ken). This allows a creditor, under certain conditions, to step into the debtor's shoes and exercise those rights directly against the third party. The primary traditional purpose of this right has been the preservation of the debtor's assets (sekinin zaisan no hozen). However, it has also been discussed in terms of its potential "debt collection function." The amendments to the Japanese Civil Code, effective April 1, 2020, have significantly clarified and, in some crucial aspects, altered the landscape of this right, particularly concerning its efficacy as a direct collection tool.

The Creditor's Subrogation Right: Core Principles

The creditor's subrogation right is principally governed by Article 423 of the Japanese Civil Code. It allows a creditor to exercise a right belonging to their debtor if it is necessary to preserve the creditor's own claim.

Key requirements for exercising this right generally include:

1. Existence of the Creditor's Claim: The creditor must have a valid claim (the "claim to be preserved" or hihozen saiken) against their debtor.
2. Necessity for Preservation: The exercise of the subrogation right must be necessary to preserve the creditor's claim. For monetary claims, this typically implies that the debtor is insolvent or that without exercising the subrogated right, the creditor's claim is at risk. [cite: 1] The amended code maintained this general "necessity" requirement rather than imposing a strict, explicit insolvency test in all cases. [cite: 523, 524]
3. Debtor's Failure to Exercise Their Right: The debtor must have neglected to exercise their own right against the third party (this right is the "subrogated right" or hi-daii kenri).
4. Nature of the Subrogated Right: The right to be subrogated must not be exclusively personal to the debtor (e.g., certain family law rights) and must not be a right that is prohibited from attachment (e.g., certain welfare benefits). [cite: 523, 524]
5. Creditor's Claim Must Be Due: Generally, the creditor's own claim against the debtor must be due and payable before they can exercise the subrogation right, although exceptions exist for acts of preservation (e.g., interrupting the prescription of the debtor's right). [cite: 523, 524]
6. Enforceability of Creditor's Claim: A notable clarification in the amended code is that the creditor cannot exercise the subrogation right if their own claim is one that cannot be realized through compulsory execution (e.g., a natural obligation). [cite: 523, 524]

Key Amendments and Their Practical Impact

The 2020 amendments brought several changes, many codifying existing case law, but some significantly altering the practical utility of the subrogation right.

1. Direct Payment or Delivery to the Subrogating Creditor (Article 423-3)

The amended Civil Code, in Article 423-3, explicitly permits a creditor exercising a subrogation right to demand that the third party (the debtor's debtor) make direct payment to the subrogating creditor if the subrogated right is for the payment of money, or deliver movable property directly to the subrogating creditor if the right concerns such delivery. [cite: 525] If the third party complies with this demand, the subrogated right is extinguished. [cite: 525]

This codifies what was largely accepted under previous case law. For instance, if Company A has an unpaid invoice to Company B (debtor), and Company B has an unpaid invoice from Company C (third party), Company A could, under the subrogation right, demand that Company C pay its debt directly to Company A, up to the amount of Company A's claim against Company B (if the subrogated right is divisible, see below).

However, while this provision seems to facilitate direct collection, its effectiveness is profoundly affected by other amendments, particularly those in Article 423-5.

2. Denial of Prohibitory Effects on Debtor and Third Party (Article 423-5) – A Critical Change

This is arguably the most impactful amendment concerning the creditor's subrogation right. Article 423-5 introduces two crucial rules:

• Debtor’s Right to Collect or Dispose: Even if a creditor has initiated the exercise of a subrogation right (including filing a lawsuit), the debtor is not prevented from personally collecting on the subrogated right or otherwise disposing of it. [cite: 527, 531]
• Third Party’s Right to Perform to the Debtor: Correspondingly, the third party is not prohibited from performing their obligation (e.g., paying the debt) directly to the original obligee (the debtor), even if they are aware that a creditor is exercising a subrogation right concerning that obligation. [cite: 527, 531]

Profound Consequences of Article 423-5:
These provisions represent a significant departure from a previously strong line of case law and scholarly opinion that often recognized a "prohibitory effect" (shobun kinshi kō) on the debtor's ability to deal with the subrogated right once a creditor initiated subrogation, especially through litigation. The rationale behind this change in the amended Code was to favor more direct and definitive methods of execution and provisional remedies, and to avoid unduly restricting the debtor's or third party's actions based on a subrogation claim that might not yet be fully adjudicated.

The practical consequences are substantial:

• Risk of Creditor’s Efforts Being Nullified: A creditor might invest time and resources in pursuing a subrogation claim, only for the debtor to collect the debt from the third party, or for the third party to voluntarily pay the debtor. [cite: 531] If the subrogated right is extinguished through performance to the debtor, the creditor's subrogation action becomes moot. Even if a creditor obtains a judgment against the third party through subrogation, the third party could theoretically still pay the debtor, leaving the creditor to pursue the funds from the (potentially still insolvent) debtor. The commentary suggests that the creditor’s efforts, especially if a lawsuit was filed, could "come to naught." [cite: 531]
• Significant Weakening of the "Debt Collection Function": The "debt collection function" refers to the ability of a subrogating creditor to achieve a form of preferential satisfaction. Under the old system, if the third party paid the subrogating creditor directly, the subrogating creditor could then set off the amount received against their own claim against the debtor. With Article 423-5 in place, the third party can freely choose to pay the debtor. Given that the third party often has a closer relationship with the debtor, payment to the debtor is likely to be the more common outcome. [cite: 531] Consequently, the scenarios where a subrogating creditor can achieve this direct collection and effective preferential recovery are now extremely limited. The system now pushes creditors towards formal execution proceedings after obtaining a judgment against their own debtor, or using provisional attachment on the debtor's claim against the third party, rather than relying on subrogation for direct collection.

Consider the scenario from the case material: Company A sold real estate to Company B. Company B failed to pay the purchase price but subsequently sold the same property to Company C (a bona fide purchaser), and Company C has not yet paid Company B. Can Company A, by subrogating Company B's claim against Company C, collect the unpaid purchase price directly from Company C? Under Article 423-3, Company A can demand that Company C pay directly to Company A. However, Article 423-5 means that Company C can still choose to pay Company B, and Company B can still collect from Company C. If Company C pays Company B, Company A's subrogation effort regarding that specific payment is defeated, and Company A is left to pursue Company B.

3. Litigation Notice to the Debtor (Article 423-6)

When a creditor files a lawsuit to exercise a subrogated right, Article 423-6 mandates that the creditor must provide litigation notice to the debtor without delay. [cite: 529, 530] This keeps the debtor informed. However, there's a practical irony: given that Article 423-5 allows the debtor to continue to collect the claim, this mandatory notice might inadvertently prompt a debtor (who was previously inactive) to quickly collect the claim before the creditor's subrogation suit can conclude, thereby frustrating the creditor's efforts. [cite: 532]

4. Scope of Subrogation for Divisible Rights (Article 423-2)

If the subrogated right is divisible (e.g., a monetary claim of 10 million yen), and the subrogating creditor's own claim against the debtor is, for instance, 6 million yen, then Article 423-2 limits the creditor to exercising the subrogated right only up to the amount of their own claim (6 million yen in this example). [cite: 525] While this principle was discussed by scholars before, often in the context of the debt collection function, the amended Code establishes this limitation independently of the now-diminished practical debt collection capabilities. [cite: 525]

5. Third Party’s Defenses (Article 423-4)

The third party (the debtor's debtor) can assert any defenses against the subrogating creditor that they could have validly asserted against the original creditor (the subrogating creditor's debtor). [cite: 526] For example, if Company C in the earlier example had a valid reason not to pay Company B (e.g., a claim of defective goods from B), Company C can assert this defense against Company A when A tries to subrogate B's claim. This codifies established case law.

Special Application: Subrogation for Claims for Registration (Real Estate) (Article 423-7)

The creditor's subrogation right has a distinct application in preserving rights related to registration, particularly vital in real estate transactions. This is often referred to as the "diversion" or "application" (ten'yō) of the subrogation right, where the creditor’s aim is not necessarily to secure monetary assets from an insolvent debtor, but to perfect their own title or a security interest.

Article 423-7 codifies a common scenario: A person who has acquired property for which registration is necessary to assert rights against third parties (e.g., a purchaser of real estate) may exercise the transferor's right to demand registration from a further third party (e.g., a previous owner still on the register), if the transferor fails to take steps to secure that registration. [cite: 530] For example, if A sold land to B, and B sold it to C, but the title is still registered in A's name, and B is not taking action to get the registration from A, C can subrogate B's right to demand that A cooperate in registering the title first to B (so C can then register from B), or in some interpretations, potentially directly to C under specific circumstances if B’s cooperation is also part of the claim.

Crucially for this type of subrogation, the debtor's (the intermediate transferor's) insolvency is not a requirement. The "necessity" lies in perfecting the subrogating creditor's own property rights.

Article 423-7 makes Articles 423-4 (third party's defenses), 423-5 (debtor's right to dispose/third party's right to perform to debtor), and 423-6 (litigation notice) applicable to this type of subrogation. [cite: 530] The application of Article 423-5 here is particularly noteworthy. It means that even while the ultimate acquirer (C) is trying to subrogate B's registration claim against A, B could still independently pursue the registration from A, or A could directly complete the registration procedures with B. [cite: 532] This introduces a level of uncertainty and potential for obstruction by an uncooperative intermediate party (B) or the original registered owner (A). [cite: 532]

Consider a situation described in the commentary: Creditor A has a monetary claim against Debtor B. B's only significant asset is a piece of real estate, but the title is still registered under C's name. For A to levy execution on this property, it generally needs to be registered in B's name. A might file a subrogation lawsuit against C to compel C to transfer the registration to B. However, due to Article 423-5, even if A wins this lawsuit, before A can initiate execution proceedings against the property (which requires it to be in B's name and then attached), B, having regained registered title, might sell the property to a new party D and transfer the registration to D. Alternatively, during A's lawsuit, B and C might complete the registration to B, and B immediately sells to D. The commentary questions the effectiveness of provisional dispositions (e.g., prohibiting C from transferring to anyone but B, or prohibiting B from selling if title is restored) in these scenarios, given that the subrogation right itself is subject to Article 423-5.

Conclusion: A Tool Clarified but Also Blunted

The amendments to the creditor's subrogation right in the Japanese Civil Code have brought welcome clarity to several procedural rules and codified established case law regarding its general requirements and use in specific contexts like perfecting registration claims.

However, the most significant change, the explicit denial of any automatic prohibition on the debtor collecting the subrogated right or the third party performing directly to the debtor (Article 423-5), represents a fundamental shift. While intended to perhaps streamline legal relationships and encourage more direct execution methods, this change has substantially blunted the creditor's subrogation right as an effective tool for direct debt collection or for reliably "freezing" a debtor's claim against a third party.

Creditors in Japan, and those advising them, must now be acutely aware that exercising a subrogation right, especially for monetary claims, carries a significant risk that their efforts may be rendered futile by the independent actions of their debtor or the third party. While the right to demand direct payment to the creditor exists, its practical realization is less certain. Consequently, reliance on provisional measures like attachment of the debtor's claim against the third party, where feasible, or focusing on obtaining and enforcing a judgment directly against the primary debtor, may often be more robust strategies than depending on the subrogation right for actual recovery of funds. For specific non-monetary claims like registration, while the right is codified, the lack of a prohibitory effect on the debtor's actions introduces new strategic complexities.