When a borrower defaults on a loan secured by a Japanese "factory mortgage" (Kojo Teito) or a mortgage over a "factory foundation" (Kojo Zaidan), the lender (mortgagee) has the right to enforce its security interest. While the general framework for enforcing security rights over immovables is provided by Japan's Civil Execution Act (Act No. 4 of 1979), the Factory Mortgage Act (Act No. 54 of 1905) introduces specific provisions tailored to the unique nature of these industrial collateral arrangements. Understanding these key procedural aspects is crucial for creditors seeking to realize their security.

General Principles of Mortgage Enforcement in Japan

Typically, mortgage enforcement in Japan involves a court-supervised public auction (keibai) of the mortgaged property. The process is initiated by the mortgagee filing a petition with the competent court. If the court grants the petition, it will order the commencement of an auction. The proceeds from the sale are then distributed to creditors according to their priority. The Civil Execution Act governs the details of these auction procedures, including valuation, notice to interested parties, bidding, and the subsequent transfer of title to the successful bidder.

The Factory Mortgage Act builds upon this general framework, providing special rules to accommodate the particularities of factory collateral, which often involves a combination of real property and essential operational equipment.

Enforcing a "Narrow Sense" Factory Mortgage (Kojo Teito)

A "narrow sense" factory mortgage is established over the factory's land and/or buildings, with its scope extended to cover specific machinery, equipment, and other operational assets (kyōyō bukken) through their listing in a registered "Article 3 Inventory" (Dai-san-jō Mokuroku).

Unitary Nature of Execution (Factory Mortgage Act, Article 7)

A fundamental principle in enforcing a factory mortgage is the unitary treatment of the collateral. Article 7 of the Factory Mortgage Act stipulates:

1. An attachment (sashiosae), provisional attachment (kari-sashiosae), or provisional disposition (kari-shobun) levied on the mortgaged factory land or building automatically extends its effect to all items that are subject to the factory mortgage by virtue of Article 2 (i.e., integral fixtures and the machinery/equipment listed in the Article 3 Inventory).
2. Conversely, such machinery, equipment, and other items covered by Article 2 cannot be independently attached, provisionally attached, or provisionally disposed of separately from the land or building to which they are appurtenant or for whose use they are supplied.

This provision ensures that the factory, as an operational unit comprising both immovables and essential equipment, is treated cohesively during enforcement proceedings. It prevents the piecemeal seizure of vital machinery by other creditors, which could dismantle the factory's operational capacity and diminish the overall value of the mortgagee's security.

Auction Process

When a factory mortgage is foreclosed:

• The mortgaged land and/or buildings, along with all machinery and equipment duly listed in the registered Article 3 Inventory, are typically auctioned as a single package.
• The property description for the auction will detail the land and buildings and will also incorporate or expressly refer to the Article 3 Inventory to define the scope of the machinery and equipment being sold. This ensures potential bidders understand they are acquiring an operational unit.

Transfer of Title and Post-Auction Registration

• The successful bidder at the auction acquires title to the land and/or buildings, as well as the machinery and equipment specified in the Article 3 Inventory.
• For the immovable property (land/buildings), the court will typically commission the registration of ownership transfer to the buyer in the Real Property Register.
• For the movables (machinery, equipment), title generally passes by virtue of the successful auction bid and payment, supported by the official auction documentation. While movables themselves don't have individual title registers like land, their inclusion in the auctioned package via the Article 3 Inventory is key.

Enforcing a Mortgage on a Factory Foundation (Kojo Zaidan)

A Factory Foundation is a legally constituted single unit of immovable property, comprising various assets like land, buildings, machinery, and even industrial property rights. Enforcement of a mortgage on a factory foundation has distinct procedures outlined in the Factory Mortgage Act, primarily focusing on preserving its integrity as a going concern.

A. The Primary Method: En-Bloc Auction (Ikkatsu Keibai) (Factory Mortgage Act, Article 47, Paragraph 1)

The default and strongly preferred method for enforcing a mortgage on a Factory Foundation is an en-bloc auction, where the entire foundation is sold as a single, indivisible unit.

• Rationale: This approach aims to maximize the sale value by offering the factory as a complete, operational entity. It prevents the loss of synergistic value that would occur if the foundation were broken up.
• Court-Managed Post-Auction Registration Procedures: A unique and significant feature of foundation mortgage enforcement is the extensive role of the court clerk (saibansho shokikan) in managing post-auction registrations to ensure a clear transfer of all components of the foundation. According to Article 47, Paragraph 1 of the Factory Mortgage Act, upon the completion of an en-bloc sale:
  1. Transfer of the Factory Foundation Itself: The court clerk initiates the registration of transfer of ownership of the Factory Foundation to the successful bidder in the Factory Foundation Register.
  2. Extinguishment of Encumbrances on the Foundation: The clerk also arranges for the registration of cancellation of the foreclosed mortgage, any junior mortgages, and other encumbrances (such as attachments) that were registered against the Factory Foundation itself.
  3. Transfer of Registered Constituent Assets: Crucially, the court clerk is also responsible for undertaking the procedures to register the transfer of ownership for each individually registered constituent asset that was part of the foundation. This includes assets like land parcels, buildings, registered ships, industrial property rights (patents, trademarks, etc.), specified automobiles, and dam operation rights. These transfers are recorded in their respective primary public registers (e.g., the Land Register, Building Register, Patent Register, Trademark Register, etc.), reflecting the new ownership by the foundation's purchaser. The notations in these individual registers that previously linked them to the foundation (under Article 34 of the Act) remain, but now reflect that the foundation (and thus its components) is under new ownership.

This comprehensive, court-managed registration process for all registered components is designed to provide the purchaser with clear and consolidated title to the entire operational enterprise represented by the foundation.

B. The Alternative: Piecemeal Sale of Constituent Assets (Kobetsu Uriwatashi) (Factory Mortgage Act, Articles 46 and 47, Paragraph 2)

While en-bloc sale is preferred, the Factory Mortgage Act provides an alternative under specific circumstances.

• Court Order Required (Article 46): If an en-bloc sale of the Factory Foundation is deemed impractical, or if the mortgagee petitions the court arguing that a piecemeal sale would be more advantageous or necessary to satisfy the debt, the court has the discretion under Article 46 to order that the constituent assets of the foundation be sold off individually or in smaller lots, rather than as a single unit. This is an exception to the general rule.
• Auction of Individual Components: If such an order is made, the various assets comprising the foundation (land, buildings, machinery, etc.) are auctioned separately or in designated groups.
• Consequences and Post-Auction Procedures (Article 47, Paragraph 2):
  1. Transfer of Sold Registered Assets: For each individually registered asset sold through this piecemeal process, the court clerk again manages the registration of transfer of its ownership to its respective buyer in that asset's individual register.
  2. Cancellation of Foundation Linkage Notations: As these assets are now being separated from the (dismantling) foundation, the court clerk also arranges for the cancellation of the notations previously made under Articles 23 and 34 of the Factory Mortgage Act in their individual registers (i.e., the notes stating that the asset was designated for or belonged to the Factory Foundation).
  3. Dissolution of the Factory Foundation: Since the piecemeal sale effectively dismantles the Factory Foundation as a unified entity, Article 47, Paragraph 2, mandates that the court clerk must also undertake the procedures to register the dissolution (shōmetsu) of the Factory Foundation in the Factory Foundation Register. The register for that specific foundation is then closed.

This piecemeal sale route is clearly a secondary option and leads to the termination of the Factory Foundation as a legal entity.

The Overarching Role of the Civil Execution Act (Minji Shikkō Hō)

It is important to remember that the Civil Execution Act provides the general procedural law for all types of civil executions in Japan, including mortgage foreclosures. This includes rules regarding the initiation of enforcement proceedings, the conduct of court auctions, the rights of interested parties, and the distribution of proceeds. The provisions within the Factory Mortgage Act concerning enforcement are special rules that supplement or modify the general procedures of the Civil Execution Act to specifically address the unique characteristics of factory mortgages and factory foundations. Where the Factory Mortgage Act is silent, the Civil Execution Act applies.

Key Objectives of the Enforcement Procedures

The specialized enforcement procedures under the Factory Mortgage Act serve several key objectives:

• Maximizing Recovery for Creditors: The strong preference for en-bloc sale, particularly in the context of Factory Foundations, is driven by the aim to achieve a higher sale price by offering a complete, operational entity to the market, rather than just its disassembled parts.
• Providing Clear and Comprehensive Title to Purchasers: The active involvement of the court clerk in managing a wide range of post-auction registrations (especially under Article 47 for foundations) is designed to ensure that the purchaser receives clear, unencumbered, and publicly recorded title to all assets acquired, whether the foundation is sold en-bloc or its components are sold piecemeal.
• Balancing Interests: While protecting the mortgagee, the procedures also provide a framework for dealing with other interested parties and ensure an orderly realization of the collateral's value.

Conclusion

Enforcing a factory mortgage or a mortgage on a factory foundation in Japan involves a blend of general civil execution procedures and highly specific rules found within the Factory Mortgage Act. For "narrow sense" factory mortgages, the principle of unitary execution ensures that the land/buildings and the inventoried operational equipment are treated as a cohesive whole. For factory foundations, the system strongly favors an en-bloc sale to preserve operational value, with the court playing a significant administrative role in registering the transfer of the foundation and all its registered constituent parts. The alternative of a piecemeal sale of a foundation's assets, while possible under court order, leads to the foundation's legal dissolution. These specialized procedures underscore the Japanese legal system's efforts to provide effective and value-preserving enforcement mechanisms for complex industrial collateral.