What Constitutes Bankruptcy Crimes in Japan and What are the Consequences?

The Japanese bankruptcy system (破産手続 - hasan tetsuzuki) is designed to provide an orderly process for dealing with insolvency, aiming for a fair distribution of a debtor's assets among creditors and, for individuals, a chance for a financial fresh start. To protect the integrity of this system and deter actions that could undermine its objectives, the Japanese Bankruptcy Act (破産法 - Hasan Hō) includes a range of criminal provisions defining specific "bankruptcy crimes" (hasan hanzai - 破産犯罪). Engaging in such conduct can lead to severe penalties, including imprisonment and substantial fines, and can have other serious repercussions, such as the denial of debt discharge for individual debtors.

The Purpose of Criminal Sanctions in Bankruptcy

The criminal provisions within the Bankruptcy Act serve several key purposes:

• Protecting the Integrity of the Bankruptcy Process: Ensuring that the procedures are followed correctly and that all parties act in good faith.
• Safeguarding the Collective Interests of Creditors: Preventing actions by the debtor or others that would unfairly deplete the bankruptcy estate (破産財団 - hasan zaidan) or give undue preference to certain creditors.
• Ensuring Cooperation and Truthfulness: Mandating that debtors, their representatives, and other involved parties cooperate fully with the bankruptcy trustee (破産管財人 - hasan kanzainin) and the court, and provide accurate information.
• Deterrence: The threat of criminal sanctions aims to deter individuals and corporate representatives from engaging in fraudulent or obstructive behavior when facing insolvency.

Key Bankruptcy Crimes Under the Japanese Bankruptcy Act

The Bankruptcy Act, primarily in Articles 265 through 277, defines various offenses. Some of the most significant for businesses and individuals involved in or affected by bankruptcy include:

1. Fraudulent Bankruptcy (詐欺破産罪 - Sagi Hasan-zai) - Article 265

This is the most serious bankruptcy crime, targeting deliberate actions by the debtor (or, in the case of a corporation, its directors, auditors, liquidators, or other representatives) to deceive creditors and diminish the estate.

• Core Conduct: A debtor or their representative commits this crime if, with the intent to prejudice the interests of creditors, they:
  • (i) Conceal or destroy property belonging to the bankruptcy estate. This includes hiding assets, failing to disclose them, or physically destroying them.
  • (ii) Transfer property belonging to the bankruptcy estate to another party under false pretenses or dispose of it in any other manner disadvantageous to creditors. This could involve sham sales, transferring assets for no or grossly inadequate consideration.
  • (iii) Falsely increase the liabilities of the bankruptcy estate. This could involve acknowledging fictitious debts or inflating existing ones.
  • (iv) Transfer property belonging to the bankruptcy estate outside Japan without justifiable reason.
• Timing: These acts can constitute fraudulent bankruptcy whether committed before or after the formal commencement of bankruptcy proceedings, as long as the requisite intent to harm creditors is present in relation to the impending or actual bankruptcy.
• Penalties: Imprisonment with labor for up to 10 years, a fine of up to 10 million Japanese Yen, or both.

2. Providing Undue Benefits to Specific Creditors (特定の債権者等に対する担保の供与等の罪 - Tokutei no Saikensha tō ni Taisuru Tanpo no Kyōyo tō no Tsumi) - Article 266

This crime addresses egregious preferential treatment of certain creditors when bankruptcy is on the horizon, going beyond what might be subject to civil avoidance powers.

• Core Conduct: A debtor (or their representative) commits this offense if, with the intent to prejudice other creditors, they, at a time when the debtor is already unable to pay debts generally (支払不能 - shiharai funō) or after a bankruptcy petition has been filed:
  • Provide security for a pre-existing debt owed to a specific creditor when not legally obligated to do so.
  • Extinguish (e.g., repay) a pre-existing debt owed to a specific creditor when not legally obligated to do so.
    This targets actions that are not only preferential but are carried out with a culpable intent to harm the broader creditor body.
• Penalties: Imprisonment with labor for up to 5 years, a fine of up to 5 million JPY, or both.

3. Failure to Cooperate with the Trustee or Court; Obstruction (調査協力義務違反等の罪 - Chōsa Kyōryoku Gimu Ihan tō no Tsumi) - Article 268

This article criminalizes various failures by the debtor (including directors, auditors, liquidators of a corporate debtor, or their agents) to fulfill their duties of cooperation and transparency.

• Core Conduct:
  • (i) Refusing to provide explanations requested by the trustee or the court without justifiable reason, or providing false explanations. Debtors have a duty to explain their assets, liabilities, and conduct.
  • (ii) Refusing to submit books, documents, or other items requested by the trustee or court, or submitting items containing false statements.
  • (iii) Refusing, without justifiable reason, an inspection of books, documents, or other items by the trustee.
  • (iv) Failing to hand over property belonging to the bankruptcy estate to the trustee.
  • (v) Obstructing any other duties performed by the trustee.
• Penalties: Imprisonment with labor for up to 3 years, a fine of up to 3 million JPY, or both. This underscores the critical importance of full cooperation with the bankruptcy administration.

4. Obstruction of Trustee's Duties by Third Parties (第三者の管財業務妨害罪 - Daisansha no Kanzai Gyōmu Bōgai-zai) - Article 269

This provision extends criminal liability to third parties who intentionally interfere with the trustee's work.

• Core Conduct: A person (other than the debtor or their direct representatives covered by Art. 268) who, with the intent to benefit the debtor or to prejudice creditors:
  • Conceals, destroys, or falsifies the debtor's books, documents, or other items related to their property or business.
  • Provides false information to the bankruptcy trustee regarding the debtor's assets or liabilities.
• Penalties: Imprisonment with labor for up to 3 years, a fine of up to 3 million JPY, or both.

5. Bribery Involving Bankruptcy Trustees or Auditors (破産管財人等の収賄罪・贈賄罪 - Hasan Kanzainin tō no Shūwai-zai / Zōwai-zai) - Articles 270 & 271

These articles address corruption within the bankruptcy process itself.

• Accepting a Bribe (Art. 270): A bankruptcy trustee, an agent acting on behalf of the trustee, or a bankruptcy auditor (監査委員 - kansa iin, appointed in some complex cases) who, in connection with their official duties, accepts, demands, or agrees to accept a bribe (不正な利益 - fusei na rieki).
  • Penalties for Recipient: Imprisonment with labor for up to 5 years, a fine of up to 5 million JPY, or both. Any illicit gains received may also be confiscated.
• Giving a Bribe (Art. 271): Any person who gives, offers, or promises to give such a bribe to a trustee, their agent, or an auditor.
  • Penalties for Giver: Imprisonment with labor for up to 3 years, a fine of up to 3 million JPY, or both.

6. Offenses Related to Creditors' Meetings (債権者集会関係の罪 - Saikensha Shūkai Kankei no Tsumi) - Article 272

This targets attempts to improperly influence the outcomes of creditors' meetings.

• Core Conduct: A debtor, a creditor, or their respective representatives who give, offer, or promise to give (or receive, demand, or agree to receive) any undue benefit in exchange for:
  • Exercising (or not exercising) voting rights at a creditors' meeting.
  • Joining (or not joining) a lawsuit related to the bankruptcy.
• Penalties: Imprisonment with labor for up to 3 years, a fine of up to 3 million JPY, or both.

7. Continuing Business Operations Without Justifiable Reason and Harming the Estate (Art. 273)

• Core Conduct: A debtor who, after ceasing payments (支払の停止 - shiharai no teishi) or after a bankruptcy petition has been filed against them, continues to conduct business operations without a justifiable reason and thereby causes significant harm to the property constituting the bankruptcy estate (e.g., by recklessly incurring new losses or dissipating remaining assets).
• Rationale: This aims to prevent debtors from making a bad situation worse through continued irresponsible business activities when insolvency is clear.
• Penalties: Imprisonment with labor for up to 3 years, a fine of up to 3 million JPY, or both.

8. Failure to Obtain Required Court Permission for Certain Acts (Art. 274)

Certain actions by the trustee, or sometimes by the debtor, require prior permission from the bankruptcy court (e.g., sale of real estate by the trustee, certain significant transactions by the debtor if restrictions are in place).

• Core Conduct: A bankruptcy trustee, a debtor with restricted capacity, or other relevant parties who undertake an action for which court permission is mandated by the Bankruptcy Act, without obtaining such permission.
• Penalties: Imprisonment with labor for up to 3 years, a fine of up to 3 million JPY, or both.

9. Unauthorized Disclosure of Confidential Information (Art. 275)

• Core Conduct: A bankruptcy trustee, their agent, or a bankruptcy auditor who, without justifiable reason, discloses confidential information that came to their knowledge in the course of performing their duties.
• Penalties: Imprisonment with labor for up to 1 year, a fine of up to 1 million JPY, or both. This highlights the duty of confidentiality placed on those administering the estate.

Dual Liability for Corporations (両罰規定 - Ryōbatsu Kitei) - Article 277

A significant feature of Japanese corporate criminal law, also applicable in bankruptcy, is the concept of "dual liability." If a representative of a corporation (e.g., a director), an agent, an employee, or other worker commits certain bankruptcy crimes (such as fraudulent bankruptcy, preferential acts, or obstruction of trustee's duties) in connection with the corporation's business or assets:

• Not only is the individual offender subject to the prescribed penalties, but
• The corporation itself can also be subject to a fine up to the maximum monetary penalty specified for the individual offense (e.g., if a director commits fraudulent bankruptcy under Art. 265, the corporation could be fined up to 10 million JPY).

This ensures that corporations cannot easily escape accountability when their agents engage in bankruptcy-related criminal conduct.

The Trustee's Role in Reporting Crimes

Bankruptcy trustees are not criminal prosecutors. However, if, in the course of their duties, a trustee discovers facts that give rise to a reasonable suspicion that a bankruptcy crime (or any other crime) has been committed, they have a professional, and often an implicit legal, duty to report these findings to the public prosecutor's office or other appropriate law enforcement agencies. This is part of the trustee's broader obligation to ensure the fair and lawful administration of the bankruptcy estate.

Consequences Beyond Criminal Penalties

Beyond the direct criminal sanctions of imprisonment or fines, being implicated in or convicted of a bankruptcy crime can have other severe consequences:

• For Individual Debtors: A conviction for certain bankruptcy crimes (especially fraudulent bankruptcy or serious failure to cooperate) can be a strong ground for the denial of discharge of debts (menseki fukyoka jiyū), meaning the individual would remain liable for their debts even after the bankruptcy.
• Professional Disqualification: Conviction for crimes involving dishonesty or breach of fiduciary duty can lead to disqualification from holding certain professional licenses or corporate directorships.
• Reputational Damage: The stigma associated with criminal conduct can have long-lasting personal and professional repercussions.

Conclusion

The criminal provisions embedded within the Japanese Bankruptcy Act serve as a critical deterrent against actions that could compromise the fairness, transparency, and effectiveness of the insolvency system. From deliberate fraud aimed at harming creditors to obstruction of the trustee's duties or corruption, these offenses carry significant penalties. The potential for both individual and corporate liability, along with the severe impact on an individual debtor's ability to obtain a discharge, underscores the importance that Japanese law places on honest and cooperative conduct by all parties involved in bankruptcy proceedings.