Q: What is the "Movable Property Assignment Registration System" in Japan and How Does It Relate to Securing Factory Assets?

While Japanese law offers specialized mechanisms like factory mortgages and factory foundations for securing industrial assets, there's another important tool in the secured financing landscape, particularly relevant for corporate movables: the "Movable Property Assignment Registration System" (Dōsan Jōto Tōki Seido). This system provides a way to perfect security interests over a wide range of movable assets, including those found within a factory, without requiring the creditor to take physical possession. Understanding this system is crucial as it can complement or sometimes offer an alternative to the more complex factory-specific security regimes.

The Genesis: Addressing Limitations in Traditional Movable Security

Historically, creating effective non-possessory security over movable assets in Japan posed challenges:

1. Pledge (Shichiken): The primary Civil Code security for movables, a pledge, generally requires the creditor to take possession of the pledged asset. This is often impractical for business assets like inventory, machinery, or equipment that need to remain in the debtor's use for ongoing operations.
2. Security Assignment (Jōto Tanpo): To overcome the possession issue, businesses often used "security assignments." In this arrangement, the debtor assigns title to the movable assets to the creditor for security purposes, with an agreement that title will revert upon repayment of the debt. The debtor typically retained physical possession of the assets. Perfection of this assignment against third parties often relied on "constructive possession by continued occupation by the assignor" (sen'yū kaitei), where the assignor (debtor) holds the assets as if on behalf of the assignee (creditor). However, sen'yū kaitei as a perfection method against third parties was considered legally uncertain and could lead to disputes, especially regarding priority if multiple assignments were made or if other creditors levied attachments.

To address these uncertainties and facilitate financing based on movable assets, Japan introduced a dedicated registration system. This was achieved by amending the "Act on Special Provisions, etc. of the Civil Code Concerning Requirements for Countering Transfer of Claims," which was subsequently retitled the "Act on Special Provisions, etc. of the Civil Code Concerning Requirements for Perfection of Assignment of Movables and Claims" (Act No. 104 of 1998, as amended – often referred to as the "Movables and Claims Assignment Perfection Act" or, for our purposes, the "Movables Assignment Registration Act" - MARA). The movable property assignment registration system under this Act became effective on October 3, 2005.

Overview of the Movable Property Assignment Registration System

The system established under the MARA provides a centralized public registry for assignments of movable property by corporations.

Key Features:

• Eligible Assignors: The system is available only when the assignor (the party transferring the movables, typically the debtor in a security assignment) is a corporation (hōjin). Individuals or unincorporated associations generally cannot use this system as assignors.
• Type of Transaction Covered: It covers the "assignment" (jōto) of movables. This includes outright sales, but its most significant use in the financing context is for security assignments where title is transferred for the purpose of securing an obligation.
• Centralized Registry: Registrations are handled by a specialized national registry office, which is the Tokyo Legal Affairs Bureau. This centralized system means a creditor can perfect their security assignment of movables located anywhere in Japan through a single registration point.
• Local "Outline Files": While the main registration is central, the registry office in the jurisdiction of the assignor corporation's head office maintains a "Movable Property Assignment Registration Matters Outline File" (dōsan jōto tōki jikō gaiyō file). This local file contains summary information like the assignor's name and address and a general indication that an assignment registration exists, but it does not contain the specific details of the movables assigned. Its purpose is primarily to alert local searchers to the existence of a central registration.
• Legal Effect of Registration – Perfection: The core effect of registration under the MARA is that it is deemed equivalent to "delivery" (hikiwatashi) as stipulated in Article 178 of the Civil Code for the purpose of perfecting the assignment against third parties. Article 178 states that an assignment of rights over movables cannot be asserted against third parties unless the movable is delivered. Thus, registration under MARA provides a statutory method of achieving this perfection without actual physical transfer of possession from the assignor to the assignee. This allows the assignor (e.g., a factory) to continue using the assigned movables in its business.
• Priority: Generally, priority among competing perfected assignments of the same movables is determined by the chronological order of registration or other perfection acts (like actual delivery).
• Limitations of Registration: It is crucial to understand that the registration itself does not guarantee the existence of the assigned movables or that the assignor actually owned them or had the right to assign them. The registration perfects the assignment transaction assuming the underlying conditions (like assignor's ownership) are met. Due diligence on these aspects remains essential for the assignee.

Specifying Movables for Registration

For a registration to be effective, the assigned movable property must be adequately specified. The MARA and its implementing regulations provide two main methods for this:

1. Individual Specification (Kobetsu Dōsan Shikibetsu): This method is used for individually identifiable items, such as specific pieces of machinery or equipment. The registration would include details like:
   • Type of movable
   • Manufacturer
   • Model number
   • Serial number
   • Other distinguishing characteristics.
2. Collective Specification by Location (Shūgōbutsu Jōto ni okeru Tokutei Hōhō): This method is designed for pools or collections of movables, particularly those that may fluctuate over time, such as inventory, raw materials, or a collection of similar smaller equipment. The movables are specified by:
   • Their type or kind.
   • Their specific storage location (e.g., "all [type of goods] located at [address of warehouse/factory section]").
     This allows for security over a changing pool of assets at a particular place. For such collectively specified movables, the assignment generally covers all items of the specified type existing at that location at any given time, including those acquired after the registration (if the agreement so provides and the description is adequate to cover future assets).

The choice of specification method depends on the nature of the movables being assigned.

Relevance of the System to Securing Factory Assets

The Movable Property Assignment Registration System can play a significant role in securing assets related to factory operations, often serving as a complement or, in certain situations, an alternative to the more specialized Factory Mortgage Act regimes:

1. Complementary Security for Assets Not Covered by Factory Mortgage/Foundation:

The Factory Mortgage (narrow sense) with its Article 3 Inventory, and the Factory Foundation, are excellent for securing core immovables and installed operational equipment or a comprehensively bundled undertaking. However, certain factory-related movables may not fit neatly or practically into these systems:

• Inventory (Raw Materials, Work-in-Progress, Finished Goods): These are typically not "installed equipment" for an Article 3 Inventory, nor are they easily managed within the more static framework of a Factory Foundation Inventory due to their high turnover. A registered security assignment specifying inventory by location can be a more suitable tool for securing these current assets.
• Standalone or Non-Essential Machinery: Equipment that is not "installed for the factory's use" in the strict sense of Article 2 of the FMA, or items that a business wishes to keep separate for greater transactional flexibility (e.g., easily saleable equipment not core to the main production line), might be better secured via a registered assignment.
• Off-Site Factory-Owned Movables: If a factory-operating corporation owns movables that are stored off-site, leased out to third parties, or used in ancillary operations away from the main factory premises, including them in a site-specific factory mortgage or foundation could be problematic. A registered assignment can cover these regardless of their precise location, as long as they are adequately described.

In such cases, a lender might take a factory mortgage/foundation over the core fixed assets and, in addition, secure inventory or other specific movables through a registered security assignment.

2. Alternative for Simpler or More Flexible Movable Security:

• If a business (that is a corporation) only needs to provide security over a few specific high-value machines and does not wish to undertake the complexity of establishing a full factory mortgage (with its Article 3 Inventory) or a Factory Foundation, a registered security assignment of those specific machines could be a more straightforward option.
• It can also be used when the assets belong to a corporation that operates a facility that might not strictly qualify as a "factory" under the Factory Mortgage Act, but which still has valuable movable equipment.

Comparing Movables Assignment Registration with Factory Mortgage/Foundation for Securing Movables

Noted Challenges and Limitations of the Movables Assignment Registration System

While innovative, the system has faced some practical criticisms:

• Lack of Amendment/Correction Process: Historically, there was no straightforward statutory process for amending or correcting a filed movable assignment registration. This could be problematic if details change or errors are discovered. (Current practice may have evolved, but this was a noted issue).
• No Priority Notices or Ancillary Registrations: The system did not readily accommodate priority notices (sakidori tokken no yokoku tōki - though this term is for statutory liens) or the registration of ancillary rights related to the secured claim (like a pledge over the claim itself) directly within its framework.
• Strictness of Movable Identification: The rules for specifying movables, especially for collective assets, could be quite strict and challenging to meet perfectly.
• System Organization: The register is organized by the name of the assignor corporation. This means that while one can search for assignments made by a particular company, it is difficult for a third party to search whether a specific asset is encumbered without knowing who might have previously assigned it. This creates a risk of "double assignments" or hidden prior perfected assignments that thorough due diligence on the assignor aims to mitigate.
• Limited to Corporate Assignors: Individual business owners cannot use this system to provide security over their movables.

It's important to note that legal systems and their practical applications evolve, and some of these administrative challenges may have been addressed by subsequent operational improvements or minor regulatory changes since the observations made around 2016. However, the fundamental structure and purpose remain.

Strategic Considerations for Lenders and Businesses

• When to Use MARA for Factory-Related Movables: It is particularly useful for securing pools of fluctuating assets like raw materials or finished goods inventory, which are ill-suited for the more static FMA inventories. It can also be a pragmatic choice for specific, high-value, standalone machines where the full FMA regime is considered too burdensome.
• Layered Security: Lenders might employ a strategy of using a factory mortgage or foundation for the core immovable and installed operational assets, and then layering on registered security assignments for inventory and receivables.
• Due Diligence: Given that the MARA registration does not guarantee the assignor's ownership or the non-existence of prior unfiled (but perhaps perfected by possession) rights, thorough due diligence on the assignor and the assets remains critical. This includes searching the MARA registry for any assignments made by the proposed assignor.

Conclusion

The Movable Property Assignment Registration System is a significant feature of Japan's secured transactions landscape, providing a vital mechanism for corporations to use their movable assets as collateral without surrendering possession. In the context of factory assets, it serves as an important complementary tool to the specialized Factory Mortgage and Factory Foundation systems. While a factory mortgage or foundation can provide comprehensive security over an integrated industrial operation, the MARA offers flexibility for securing specific categories of movables, like inventory, or for situations where the full FMA regimes are not applicable or practical.

Lenders and businesses should be aware of its availability, understand its processes for specification and perfection, and also be mindful of its inherent limitations and the critical need for thorough due diligence to effectively utilize it in structuring robust collateral packages for factory-related assets in Japan.