Utilizing Experts in Japanese Bankruptcy Administration: When Does a Trustee Need Outside Help?

Japanese Attorney at Law - Bengoshi L.L.

• 7 min read

Japanese bankruptcy proceedings (破産手続 - hasan tetsuzuki) are typically managed by a court-appointed bankruptcy trustee (破産管財人 - hasan kanzainin), who is almost invariably a lawyer (弁護士 - bengoshi). While these trustees possess extensive legal knowledge and experience in insolvency matters, the complexities of modern businesses, diverse asset types, and specialized legal or financial issues often necessitate the engagement of external experts. The prudent use of such specialists is a key aspect of effective estate administration, aimed at maximizing asset realization, ensuring compliance, and fulfilling the trustee's comprehensive duties.

The Trustee's Duty of Care and the Need for Expertise

A fundamental obligation of a bankruptcy trustee in Japan is the "duty of care of a good manager" (善管注意義務 - zenkan chūi gimu). This requires the trustee to administer the bankruptcy estate (破産財団 - hasan zaidan) with the diligence and prudence that a reasonably skilled professional in their position would exercise. In many instances, fulfilling this duty means recognizing the limits of one's own expertise and seeking assistance from specialists who possess the particular knowledge or skills required for a specific task.

Engaging external experts is not a sign of inadequacy on the part of the trustee; rather, it is often a demonstration of responsible and diligent administration aimed at:

  • Accurate Valuation: Properly assessing the value of diverse assets like real estate, intellectual property, or complex financial instruments.
  • Effective Realization: Employing specialized strategies to sell unique or challenging assets for the best possible price.
  • Legal and Regulatory Compliance: Navigating intricate areas such as tax law, environmental regulations, or intellectual property maintenance.
  • Investigative Support: Uncovering financial irregularities or tracing concealed assets.

While the Japanese Bankruptcy Act (破産法 - Hasan Hō) may not contain an exhaustive list of experts a trustee can hire, the authority to do so is generally implied from the trustee's broad duties to manage, administer, and dispose of estate property (e.g., Bankruptcy Act, Article 78). For example, the Act explicitly allows the trustee, with court permission, to sell real estate, transfer a business, or abandon property – actions that often benefit from expert input.

A crucial aspect of engaging external experts is court approval.

  • Permission Required: For most significant engagements, particularly where the expert's fees will constitute a substantial expense for the estate, the trustee must apply for and obtain permission from the bankruptcy court. This involves justifying the need for the expert, outlining the scope of their work, and providing an estimate of their fees.
  • Court Scrutiny: The court will review the request to ensure that the engagement is necessary for the proper administration of the estate and that the proposed fees are reasonable in light of the complexity of the task and the potential benefit to creditors.
  • Compensation as Administrative Expense: If the court approves the engagement, the fees and expenses of the external expert are typically treated as administrative expenses (財団債権 - zaidan saiken) of the bankruptcy estate. This means they are paid with high priority from the estate's assets, before distributions are made to general bankruptcy creditors.

Common Types of External Experts Engaged by Trustees and Their Roles

Bankruptcy trustees in Japan may call upon a variety of specialists depending on the nature of the case:

1. Real Estate Appraisers (不動産鑑定士 - Fudōsan Kanteishi) and Brokers (不動産仲介業者 - Fudōsan Chūkai Gyōsha)

  • When Engaged: When the bankruptcy estate includes real property (land, buildings, condominiums).
  • Role of Appraisers: To provide formal, independent valuation reports (kantei hyōka-sho - 鑑定評価書) for real estate. This is crucial for setting appropriate sale prices, for court approval of sales, and for determining the value of collateral for secured creditors.
  • Role of Brokers: To assist the trustee in marketing and selling real estate through "voluntary sale" (nin-i baikyaku - 任意売却) processes. They provide market insights, list properties, connect with potential buyers, and facilitate negotiations and closing. Their commission is typically a percentage of the sale price and is an administrative expense.

2. Accountants (公認会計士 - Kōnin Kaikeishi) and Tax Advisors (税理士 - Zeirishi)

  • When Engaged: For a wide range of financial and tax matters, especially in corporate bankruptcies.
  • Roles:
    • Financial Investigation & Reconstruction: Assisting in understanding complex financial transactions, reconstructing incomplete accounting records, or conducting forensic accounting if fraud or financial irregularities are suspected.
    • Tax Compliance: Preparing and filing various tax returns for the bankrupt company (e.g., for the "dissolution business year" - 解散事業年度, and subsequent "liquidation business years" - 清算事業年度), including corporate income tax, consumption tax, and local taxes.
    • Tax Planning and Advice: Advising the trustee on the tax implications of asset sales, debt forgiveness, and other actions taken during the bankruptcy administration.
    • Tax Refund Claims: Identifying and pursuing potential tax refunds for the estate (e.g., from loss carrybacks, overpaid interim taxes, consumption tax credits).
    • Liaison with Tax Authorities: Assisting the trustee in communications and negotiations with national and local tax offices.

3. Business Valuators / M&A Advisors

  • When Engaged: If a part of the bankrupt company's business is considered viable and there is an opportunity to sell it as a going concern (事業譲渡 - jigyō jōto).
  • Role: To conduct a valuation of the business unit as an ongoing enterprise (which may differ significantly from a simple asset valuation), identify potential purchasers (strategic buyers, financial investors), assist in structuring the sale, and support negotiations.

4. Industry-Specific Experts / Technical Specialists

  • When Engaged: When the estate includes assets requiring specialized technical knowledge for their valuation, maintenance, or disposal.
  • Examples:
    • Machinery and Equipment Appraisers: For specialized industrial machinery.
    • Art or Antiques Appraisers: For valuable collectibles.
    • Agricultural Experts: For farms or agricultural produce.
    • IT Specialists: For valuing or securing digital assets, software, or complex IT systems.
  • Role: Provide technical assessments, market valuations within their specific field, and advice on the most effective methods for liquidation or preservation.

5. Patent Attorneys (弁理士 - Benrishi)

  • When Engaged: If the bankruptcy estate includes valuable intellectual property (IP) rights such as patents, trademarks, industrial designs, or copyrights.
  • Role:
    • IP Portfolio Assessment: Evaluating the validity, scope, enforceability, and commercial potential of the debtor's IP assets.
    • Valuation of IP: Determining the market value of IP rights.
    • Maintenance: Advising on the necessity and cost-effectiveness of maintaining IP registrations (e.g., paying patent annuities) during the bankruptcy.
    • Transfer and Licensing: Assisting the trustee in selling or licensing the IP rights to third parties.

While the bankruptcy trustee is a lawyer, the complexity or specific nature of certain legal issues may warrant engaging other lawyers who have deeper specialization.

  • When Engaged:
    • Complex Litigation: For pursuing or defending large-scale or highly specialized lawsuits on behalf of the estate (e.g., significant avoidance actions, major contractual disputes, securities litigation).
    • Highly Specialized Areas of Law: Matters involving environmental law (e.g., if the estate owns contaminated property), complex financial instruments, or international trade law.
    • Foreign Jurisdictional Issues: If the estate has assets or legal disputes in foreign countries, the trustee will almost certainly need to engage local counsel in those jurisdictions.
  • Role: Provide expert legal advice, draft specialized legal documents, and provide representation in specific legal proceedings.

7. Auctioneers / Specialized Sales Agents

  • When Engaged: For the public auction or specialized sale of particular types of assets where their expertise can maximize returns.
  • Examples: Fine art, antiques, large quantities of diverse inventory, specialized equipment.
  • Role: To manage the auction process, attract appropriate bidders, and conduct the sale efficiently.

8. Security Services / Property Management Companies

  • When Engaged: To protect and maintain physical assets of the estate, especially if they are vulnerable or require ongoing management.
  • Examples: Securing vacant business premises or residential properties against unauthorized entry, theft, or vandalism; managing tenanted properties until they can be sold; undertaking essential maintenance to prevent deterioration.
  • Role: Provide physical security, access control, and basic property management services.

The Process of Engaging Experts

  1. Need Identification: The trustee identifies a specific task or issue that requires expertise they do not possess or cannot efficiently provide.
  2. Selection: The trustee researches and selects a qualified expert. This selection is often based on the expert's reputation, relevant experience, proposed methodology, and quoted fees. Trustees may obtain multiple quotes for significant engagements.
  3. Application for Court Permission: The trustee submits an application to the bankruptcy court for permission to engage the chosen expert and for approval of their proposed fee structure, especially if the fees are expected to be substantial. The application will explain the necessity of the expert's services and the anticipated benefit to the estate.
  4. Engagement and Performance: Upon court approval, the trustee formally engages the expert. The expert performs the agreed-upon work, often submitting interim and final reports or deliverables to the trustee.
  5. Payment of Fees: The expert submits their invoices to the trustee, who, after verification (and often with further court approval for the final fee amount), pays the fees from the bankruptcy estate as an administrative expense.

Benefits of Utilizing Experts

The strategic use of external experts in Japanese bankruptcy administration offers numerous benefits:

  • Maximizing Asset Value: Accurate valuations and specialized sales or recovery strategies can lead to significantly higher returns for the estate.
  • Ensuring Legal and Regulatory Compliance: Experts help ensure that complex matters like tax filings, IP maintenance, or environmental issues are handled correctly.
  • Increased Efficiency: Specialists can often perform complex tasks more quickly and effectively than a generalist trustee attempting to handle everything alone.
  • Risk Mitigation: Proper expert advice can reduce the risk of errors, omissions, or legal challenges in the administration of complex assets or issues.
  • Fulfilling the Trustee's Duty of Care: Engaging experts when necessary is a demonstration of the trustee's commitment to conducting a diligent and professional administration of the estate.

Considerations and Potential Limitations

  • Cost vs. Benefit: The primary consideration is always whether the cost of engaging an expert is justified by the anticipated benefit to the estate. The court plays a crucial role in scrutinizing these costs to protect creditor interests.
  • Availability and Selection: Finding appropriately qualified and experienced experts for very niche assets or highly specialized situations can sometimes be challenging.
  • Trustee's Ultimate Responsibility: It is vital to remember that while experts provide advice, reports, and services, the ultimate responsibility for all decisions made in the administration of the bankruptcy estate remains with the bankruptcy trustee. The trustee must critically evaluate expert advice and make final judgments.

Conclusion

In the multifaceted world of Japanese bankruptcy administration, bankruptcy trustees cannot be experts in every conceivable field. The effective utilization of external specialists—be they accountants, tax advisors, real estate appraisers, patent attorneys, or industry-specific consultants—is not only permissible but often essential for a thorough and successful administration. By judiciously engaging experts under the supervision of the court, trustees can enhance their capacity to accurately value assets, navigate complex legal and technical issues, ensure compliance, and ultimately maximize the recovery for creditors, thereby fulfilling their core fiduciary duties.