Q: How Does Japanese Law Handle Changes to Assets Within a Registered Factory Mortgage (Article 3 Inventory)?

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read

The Japanese "factory mortgage" (Kojo Teito), governed by the Factory Mortgage Act (Act No. 54 of 1905), allows a mortgage on factory land or buildings to extend its reach to specific machinery, equipment, and other operational assets (kyōyō bukken). A critical component for this extended coverage, particularly for its enforceability against third parties, is the "Article 3 Inventory" (Dai-san-jō Mokuroku), which lists these ancillary assets. However, factories are dynamic environments: machinery is acquired, modified, replaced, or disposed of. Japanese law provides specific procedures for registering changes to this inventory to ensure the mortgage remains accurate and its perfected status over these assets is maintained.

The Importance of an Accurate and Updated Article 3 Inventory

As established by the Supreme Court of Japan in its ruling of July 14, 1994 (Heisei 6-nen (o) dai 1239-go), the listing of machinery and equipment in the registered Article 3 Inventory is a perfection requirement (taikō yōken). This means it is necessary to assert the mortgage's effect over these specific items against third parties, such as other creditors or subsequent purchasers.

Given this, if the actual machinery and equipment in the factory deviate significantly from what is listed in the registered inventory, the mortgagee's security over unlisted new items, or items whose descriptions are no longer accurate, could be compromised. Therefore, keeping the Article 3 Inventory current is not just an administrative task but a legal necessity for preserving the full scope of the perfected security interest.

The Factory Mortgage Act, by applying provisions originally designed for factory foundation inventories mutatis mutandis, places an obligation on the factory owner (shoyūsha) to apply for an amendment registration (henkō tōki) without delay whenever a change occurs to the matters recorded in the Article 3 Inventory (Factory Mortgage Act, Article 3, Paragraph 4, applying Article 38, Paragraph 1).

Common Scenarios Requiring Amendment to the Article 3 Inventory

Several types of changes to the factory's operational assets necessitate an amendment registration for the Article 3 Inventory:

1. Change in the Description of Listed Assets (Kiroku Bukken no Hyōji ni Henkō o Shōjita Toki)

If the recorded details of a machine or piece of equipment already in the inventory change, an amendment is required. This could include:

  • Significant modifications to a machine that alter its fundamental characteristics or specifications.
  • Renumbering of assets if a new internal asset tracking system is implemented.
  • Correction of previously erroneous descriptive data.
    The purpose is to ensure the inventory continues to accurately identify each specific encumbered item, preventing ambiguity.

2. Addition of New Machinery and Equipment (Arata ni Kikai, Kigu Nado o Sonaetsuke, Teitōken no Kōryoku ga Oyonda Toki)

When new machinery or equipment is acquired and installed in the factory for its operational use, it typically falls under the general scope of the factory mortgage as per Article 2 of the Act. However, to perfect the mortgage over these newly added items against third parties, they must be formally added to the Article 3 Inventory through an amendment registration. Failure to do so means the mortgage, while potentially valid between the mortgagor and mortgagee for these new items, might not be enforceable against other claimants regarding those specific additions. The priority of the mortgage over these newly added items, especially in relation to other mortgages on the same factory, can be a complex issue, potentially determined by the date of the amendment registration rather than the original mortgage's rank.

3. Loss or Destruction of Listed Assets (Kiroku Bukken ga Messhitsu Shita Toki)

If a machine or piece of equipment listed in the inventory is physically destroyed (e.g., by fire or irreparable damage) or is otherwise lost, its entry in the inventory needs to be updated to reflect this. The mortgage on that specific item is naturally extinguished with the item's demise. The amendment registration serves to accurately reflect the diminished scope of the collateral in the public record. This includes situations where a machine is so extensively overhauled that its identity is considered lost.

4. Extinguishment of Mortgage Effect on a Listed Item (Kiroku Bukken ni tsuki Teitōken ga Shōmetsu Shita Toki)

This scenario typically arises when a listed piece of machinery or equipment is separated from the factory's use (bunri) and the mortgage over that specific item is extinguished.

  • Separation with Mortgagee's Consent: Article 6 of the Factory Mortgage Act provides that if the factory owner, with the consent of the mortgagee, separates an item (that was part of the Article 2 scope) from the land or building, or ceases to use an installed item for the factory's purpose, the mortgage on that specific item is extinguished. An amendment to the inventory is then needed to remove the item.
  • Other Reasons for Extinguishment: While less common for items properly inventoried, if a third party were to acquire full, unencumbered rights over an item (e.g., through processes that defeat the mortgage, though difficult if perfected), the inventory would also need amendment.

The amendment registration perfects the fact that the item is no longer subject to that specific factory mortgage.

5. Correction of Errors in the Inventory (Dai-san-jō Mokuroku no Kiroku no Kōsei Tōki o Subeki Toki)

If the initial Article 3 Inventory or a subsequent amendment contained errors—such as incorrect descriptions, typographical mistakes, or the erroneous inclusion of items that were not actually subject to the mortgage (e.g., property belonging to a third party, or items intended to be excluded by agreement)—a registration of correction (kōsei tōki) is necessary to rectify the public record.

The Amendment Registration (Henkō Tōki) Process

The procedure for amending the Article 3 Inventory mirrors, in many respects, the rules applicable to amending factory foundation inventories, due to the mutatis mutandis application of Articles 38 through 42 of the Factory Mortgage Act by Article 3, Paragraph 4.

Applicant

Generally, the factory owner (who is typically the mortgagor) is the party responsible for applying for the amendment registration (FMA Art. 3(4) applying Art. 38(1)). This is a sole application by the owner, which differs from the joint application usually required for creating or altering mortgage rights themselves. However, the requirement for mortgagee consent (see below) means there's an element of bilateral involvement.

Key Application Information (Shinsei Jōhō)

The application for amendment must specify:

  1. Identification of the Mortgage: The specific factory mortgage being amended (usually identified by its registration number and rank in the property register).
  2. Purpose of Registration: E.g., "Amendment to Article 3 Inventory Record," "Addition to Article 3 Inventory," "Deletion from Article 3 Inventory."
  3. Cause and Date of Change: The reason for the amendment and the date the change occurred (e.g., "Separation on [Date]," "Acquisition and Installation on [Date]," "Destruction on [Date]," "Correction of Error").
  4. Details of the Change:
    • For additions: Full description of the new items.
    • For deletions: Identification of the items being removed.
    • For descriptive changes: The old description and the new corrected/updated description.
      This information can often be provided by referencing an attached supplementary or revised inventory list (e.g., "Additional Inventory as per attached list," "Deletion of items as per attached list").

Essential Attached Information (Tempu Jōhō)

  1. Mortgagee's Consent (FMA Art. 3(4) applying Art. 38(2)): This is arguably the most critical piece of supporting documentation for most amendments to the Article 3 Inventory. The law requires information evidencing the consent of the mortgagee(s) whose Article 3 Inventory is being affected, or a court judgment substituting for such consent.
    • Rationale: The inventory defines a key part of the mortgagee's security. Changes, especially deletions or separations, can directly impact the collateral value. Therefore, the mortgagee's agreement is generally necessary to protect their interests.
    • Scope of Consent: The consent document should be specific, detailing the particular changes being agreed to (e.g., consent to add machine X, consent to separate machine Y upon its sale).
    • Whose Consent? Typically, it's the consent of the mortgagee(s) of the specific factory mortgage to which the Article 3 Inventory pertains. If there are multiple mortgagees for that same mortgage (e.g., syndicated loan), all may need to consent.
  2. Evidence of the Cause of Change: Depending on the nature of the amendment, supporting documents might be required, such as purchase agreements for new machinery (for additions), disposal records or certificates of destruction (for deletions/loss), or evidence clarifying correct specifications (for corrections).
  3. Amended or Supplementary Inventory Lists: Properly formatted lists detailing the additions, deletions, or changes.
  4. Standard Application Attachments: Corporate certificates for the applicant, power of attorney if an agent is used, etc.

Execution of Amendment Registration by the Registry Office

Upon receiving a valid application:

  1. The registry officer examines the application and supporting documents.
  2. If approved, the officer makes the corresponding changes to the official Article 3 Inventory record associated with the specific factory mortgage.
    • Additions: New items are appended to the inventory list, along with the date and registration number of the amendment.
    • Deletions (due to separation, destruction, etc.): The entry for the item in question is marked as deleted (e.g., by being struck through or annotated), and the date/number of the amendment is recorded.
    • Changes in Description/Corrections: The original entry for the item is appropriately modified or annotated to reflect the correct information, again with the amendment's registration details.

The registration of an amendment to the Article 3 Inventory has specific legal consequences:

  • For Additions: The amendment perfects the factory mortgage's lien over the newly added machinery or equipment from the date of the amendment registration. This makes the mortgage on these new items opposable to third parties from that point forward.
  • For Separations (with consent) or Deletions due to Loss/Destruction: The amendment publicly records the fact that the specific item is no longer part of the mortgaged collateral under that particular factory mortgage. If an item was separated with the mortgagee's consent (leading to the extinguishment of the mortgage on that item), the amendment perfects the factory owner's ability to treat that item as unencumbered by that specific mortgage when dealing with third parties (e.g., selling it).
  • For Changes in Description or Corrections: These amendments ensure the continued accuracy and identifiability of the encumbered assets, reinforcing the overall perfection and clarity of the mortgage. They help prevent disputes that might arise from discrepancies between the registered inventory and the actual assets.

Broader Changes Affecting the Factory Mortgage Itself

Beyond item-specific changes in the inventory, there are situations where the nature of the mortgage itself transforms, which also impacts the Article 3 Inventory:

  • Ordinary Mortgage Becoming a Factory Mortgage: If a property was initially under a standard real estate mortgage and later becomes a "factory" with machinery and equipment installed for its use, the parties can agree to convert the mortgage into a factory mortgage. This requires an amendment to the mortgage registration itself to reflect its new character and, crucially, involves creating and registering an Article 3 Inventory for the relevant machinery and equipment.
  • Factory Mortgage Becoming an Ordinary Mortgage: Conversely, if all the machinery and equipment listed in the Article 3 Inventory are removed from a factory (typically with the mortgagee's consent under FMA Article 6, leading to the extinguishment of the mortgage on those items), and the property ceases to function as a "factory" under the Act, the factory mortgage can be amended to become an ordinary real estate mortgage. This would involve a registration of change to remove the reference to the Article 3 Inventory, effectively closing that inventory for the specific mortgage.

These transformations are considered amendments to the mortgage right itself, requiring agreement between the mortgagor and mortgagee and formal registration.

Practical Implications and Best Practices

Managing changes to assets under a Japanese factory mortgage requires diligence:

  • Internal Asset Tracking: Factory owners should maintain accurate internal records of all machinery and equipment that are, or should be, listed in the Article 3 Inventory.
  • Timely Communication: Prompt communication between the factory owner and the mortgagee(s) is essential when changes to key assets occur or are planned, especially for obtaining necessary consents for amendments.
  • Prompt Registration of Amendments: To avoid gaps in perfected security, applications for amendment registration should be filed without undue delay after a relevant change occurs.
  • Cost and Administrative Effort: Businesses should factor in the potential costs (registration taxes, professional fees) and administrative effort associated with maintaining and amending the Article 3 Inventory, particularly if asset turnover is high.

Conclusion

The Japanese legal framework provides clear, albeit detailed, procedures for handling changes to assets included in a registered factory mortgage's Article 3 Inventory. These amendment registrations are not mere administrative updates; they are crucial for maintaining the accuracy of the public record and, most importantly, for preserving the perfection of the mortgage lien over the specific machinery and equipment against third-party claims. While the process requires diligence from the factory owner and often the consent of the mortgagee, it is an integral part of the Factory Mortgage Act's design to provide robust and transparent security over the operational assets of an industrial enterprise.