What is "Pledge of Rights" (Kenri-jichi) in Japan and How Can Claims be Collateralized?

Japanese Attorney at Law - Bengoshi L.L.

• 14 min read

In the Japanese system of secured transactions, the concept of a "pledge" (質権 - shichi-ken) extends beyond tangible movable and immovable property. The Civil Code, in Article 362, explicitly allows for "property rights" (財産権 - zaisanken) themselves to be used as collateral. This form of security is known as a "pledge of rights" (権利質 - kenri-jichi). It provides a crucial mechanism for businesses and individuals to leverage intangible assets, most notably monetary claims but also a variety of other rights, to secure obligations.

This article explores the nature of the pledge of rights in Japan, focusing primarily on the pledge of monetary claims (債権質 - saiken-jichi) as regulated by the Civil Code, while also touching upon how this concept applies to other significant rights often encountered in commercial dealings. We will delve into how such pledges are created, perfected against third parties, and ultimately enforced.

The Broad Scope of "Property Rights" as Collateral

Article 362(1) of the Japanese Civil Code states that a pledge may be created over a property right. This general provision opens the door to a wide array of intangible assets being used as security. The scope of "property rights" in this context is broad, but it logically excludes the ownership of tangible movables and immovables, as these are already covered by the standard rules for movable pledge (動産質 - dōsan-jichi) and immovable pledge (不動産質 - fudōsan-jichi).

Instead, kenri-jichi typically involves:

  • Monetary Claims (金銭債権 - kinsen saiken): This is the most frequently encountered object of a pledge of rights, such as accounts receivable, loan claims, or rental income streams.
  • Rights Relating to Use of Property: Such as leasehold rights (賃借権 - chinshakuken) over real estate, or more robust real rights like superficies (地上権 - chijōken).
  • Corporate Shares (株式 - kabushiki): Shares in companies represent a bundle of rights that can be pledged.
  • Intellectual Property Rights (無体財産権 - mutai zaisanken): Rights like patents, copyrights, and trademarks can, in principle, be pledged, though specific statutes often govern these.
  • Other Transferable Rights: Various other rights that have economic value and are capable of being transferred can potentially be pledged.

Article 362(2) stipulates that the general provisions concerning pledges (including those for movable and immovable pledges) apply mutatis mutandis (with necessary modifications) to pledges of rights, taking into account the specific nature of the right being pledged. For example, if a superficies (a right to use another's land for owning structures, etc.) is pledged, the rules governing immovable pledges would largely apply. This could mean a maximum duration of 10 years (Civil Code Art. 360), a requirement for the pledgee to effectively take "possession" or control of the underlying land for the superficies (analogous to Civil Code Art. 344), the pledgee gaining the right to use and profit from the superficies (analogous to Civil Code Art. 356), and perfection of the pledge against third parties requiring registration.

It's also important to note that for certain types of rights, specific laws outside the Civil Code provide detailed rules for their pledging:

  • Pledges of company shares are primarily governed by the Companies Act.
  • Other securities often fall under the Financial Instruments and Exchange Act or the Act on Book-Entry Transfer of Company Bonds, Shares, etc. (社債、株式等の振替に関する法律 - Shasai, Kabushiki tō no Furikae ni Kansuru Hōritsu).
  • Pledges of intellectual property rights are detailed in specific IP statutes like the Patent Act or Copyright Act.
  • Even unique rights like telephone subscription rights have, in the past, been subject to specific ad-hoc legislation permitting their pledge.

For the remainder of this discussion, the primary focus will be on the pledge of ordinary monetary claims as envisaged by the Civil Code.

Establishing a Pledge of Monetary Claims (債権質 - Saiken-jichi)

Creating an effective pledge over a monetary claim involves several key steps and considerations:

1. The Pledge Agreement

Like all consensual security interests, a pledge of a claim is established by a pledge agreement (質権設定契約 - shichiken settei keiyaku) between the pledgee (creditor) and the pledgor (the holder of the claim being pledged). This agreement will specify the claim being pledged and the debt it secures.

2. The Subject Matter: The Pledged Claim (目的債権 - Mokuteki Saiken)

  • Assignability as a Prerequisite: Generally, any monetary claim that is assignable can also be pledged (Civil Code Art. 466(1) affirms the general principle of assignability of claims). This flows from Article 343 of the Civil Code, which states that a thing which cannot be assigned cannot be the subject matter of a pledge.
  • Non-Pledgeable Claims: Consequently, claims that are legally or inherently non-assignable cannot be pledged. This includes:
    • Claims whose encumbrance is prohibited by law (e.g., certain types of public pension rights).
    • Claims that are purely personal in nature and thus non-transferable (e.g., a claim for a unique personal service like an artist painting a specific portrait).
    • Claims whose assignment is directly prohibited by statute (e.g., certain statutory support claims under Civil Code Art. 881).
    • Claims subject to a contractual non-assignment clause (譲渡禁止特約 - jōto kinshi tokuyaku) agreed between the original creditor (the pledgor) and the debtor of that claim (the third-party debtor). Under Article 466(2) of the Civil Code, such a non-assignment clause is generally effective. However, the proviso to Article 466(2) states that such a clause cannot be asserted against a third party in good faith (i.e., one who was unaware of the clause). Case law has extended this protection to pledgees, meaning a pledgee who took a pledge over a claim in good faith, without knowledge of a non-assignment agreement, could still acquire a valid pledge. (It's noteworthy that anticipated reforms to the Japanese Civil Code regarding claims aim to generally render non-assignment clauses ineffective in preventing the validity of an assignment itself, though the debtor of the claim might still be able to assert certain defenses or rights against an assignee who knew or was grossly negligent in not knowing about the clause. These reforms would likely impact pledges of claims as well.)
  • Future Claims (将来債権 - Shōrai Saiken): Claims that are expected to arise in the future can also be the subject of a pledge, provided they are sufficiently identifiable or ascertainable at the time of enforcement. Proposed revisions to the Civil Code (e.g., draft Article 364) explicitly confirm the validity of pledging future claims.
  • Claims Owed by the Pledgee Themselves: It is legally permissible for a pledge to be created over a claim that the pledgor (borrower) has against the pledgee (lender). A common example is a bank taking a pledge over a deposit account that the borrower maintains with that same bank. This is often used in conjunction with the bank's right of set-off.

3. "Delivery" and Perfection for Different Types of Claims:

Since a monetary claim is an intangible asset, physical "delivery" in the sense applicable to movables is not possible. The method of establishing the pledgee's control and perfecting the pledge against third parties depends on the nature of the claim:

  • Nominative Claims (指名債権 - Shimei Saiken) not evidenced by securities: For ordinary claims where the creditor is specifically named and the claim is not embodied in a negotiable instrument, there is no "delivery" of the claim itself. The key acts relate to notifying the debtor of the pledged claim.
  • Claims Evidenced by Securities (証券化された債権 - Shōkenka sareta Saiken): If a claim is incorporated into a security instrument (a physical document) and the transfer of the claim itself requires the delivery of that instrument, then Civil Code Article 363 mandates that the delivery of such security instrument is necessary to establish a pledge over that claim. This applies to:
    • Order Instruments (指図証券 - Sashizu Shōken) (e.g., promissory notes payable to order): The prevailing legal view holds that establishing a pledge over such an instrument requires not only the delivery of the instrument to the pledgee but also a pledge endorsement (質入裏書 - shichi-ire uragaki) on the instrument itself. (Anticipated Civil Code reforms are expected to codify this requirement more explicitly and potentially repeal Article 363 as a standalone provision, integrating its substance into broader rules for securities).
    • Bearer Instruments (無記名証券 - Mukimei Shōken): These are treated similarly to movables for pledge purposes (historically under Civil Code Art. 86(3), though this article is slated for removal in reforms, the principle of delivery for pledging bearer instruments will likely be maintained through new provisions governing securities). Thus, delivery of the bearer instrument to the pledgee is essential.
  • "Paperless" or Dematerialized Claims: For many modern financial assets, physical instruments are being replaced by electronic records:
    • Book-Entry Government Bonds (振替国債 - Furikae Kokusai) and Dematerialized Shares (振替株式 - Furikae Kabushiki): Pledges over these are typically effected by making appropriate entries in the pledgee's account within the relevant book-entry transfer systems managed by JASDEC (Japan Securities Depository Center) or other account management institutions, as per the Act on Book-Entry Transfer of Company Bonds, Shares, etc.
    • Electronically Recorded Monetary Claims (電子記録債権 - Denshi Kiroku Saiken): This is a newer form of claim whose creation and transfer are effected by recordings in a dedicated electronic claims recording register, governed by the Electronic Recorded Monetary Claims Act. A pledge over such a claim is established by having the pledge recorded in this official register (Article 36(1) of said Act). This act of recording itself creates the pledge and also provides a legal presumption that the person recorded as the pledgee rightfully holds the pledge.

Perfecting a Pledge of Nominative Claims Against Third Parties

For ordinary nominative claims (those not embodied in negotiable instruments requiring specific forms of transfer), Civil Code Article 364 dictates the requirements for the pledge to be effective (i.e., assertable or "perfected") against:

  1. The third-party debtor (第三債務者 - daisan saimusha) – the person who owes the money under the pledged claim.
  2. Other third parties – such as other creditors of the pledgor who might also try to claim the pledged asset, or a subsequent assignee of the same claim from the pledgor.

The perfection mechanism, as detailed in Article 364 (which applies the rules for assignment of claims found in Article 467), involves either:

  • Notice to the Third-Party Debtor: The pledgor (the original creditor of the pledged claim) must give notice of the pledge to the third-party debtor. Notice originating solely from the pledgee is generally considered insufficient for perfection against other third parties, as it lacks the same level of assurance regarding the pledge's authenticity.
  • Consent from the Third-Party Debtor: Alternatively, the third-party debtor must give their consent to the pledge.

The "Certified Date" (確定日付 - Kakutei Hizuke) Requirement:
For the notice or consent to be effective against third parties other than the third-party debtor (e.g., to establish priority over a subsequent assignee or an attaching creditor of the pledgor), Article 467(2) mandates that the instrument evidencing the notice or consent must bear a "certified date." This is typically obtained through procedures like sending the notice by content-certified mail (内容証明郵便 - naiyō shōmei yūbin) or having the consent document notarized. The purpose of the certified date is to prevent fraudulent backdating of the notice or consent, which could unfairly prejudice other parties who subsequently acquire interests.

Case law also suggests that for the notice or consent to be fully effective against other third parties, the pledgee must be clearly and specifically identified in the communication.

Alternative Perfection via Registration:
The Act on Special Provisions, etc. for Perfection of Assignment of Movables and Claims (動産及び債権の譲渡の対抗要件に関する民法の特例等に関する法律 - often referred to as the "Movables and Claims Assignment Perfection Act") provides an alternative method for perfecting pledges of claims against third parties (other than the third-party debtor). This involves registering the pledge in a dedicated Claim Assignment Registration File (債権譲渡登記ファイル - saiken jōto tōki fairu). This registration system is particularly useful for pledges of future claims or bulk assignments of multiple claims where individual notices to numerous third-party debtors would be impractical. To perfect the pledge against the third-party debtor themselves, the pledgee would still typically need to provide that debtor with a certificate of the registered matters.

Effect of Perfection on the Third-Party Debtor's Defenses:
The perfection of the pledge also impacts the defenses that the third-party debtor can raise against the pledgee. By analogy to the rules for assignment of claims (Civil Code Art. 468):

  • If the pledge is perfected by notice, the third-party debtor can generally assert against the pledgee any defenses they possessed against the pledgor (the original creditor) up to the time they received the notice.
  • If the pledge is perfected by the third-party debtor's consent given without reservation (異議をとどめない承諾 - igi o todomenai shōdaku), the third-party debtor generally cannot then assert against the pledgee personal defenses they might have had against the pledgor. This rule aims to protect the pledgee who relies on such unqualified consent. (However, if the pledgee knew or should have known of such defenses, the situation can be more complex. It's also important to note that planned reforms to the Civil Code are expected to abolish the "consent without reservation" doctrine as a distinct category, focusing instead on whether the debtor has effectively waived specific defenses).

Effects and Enforcement of a Pledge of Claims

Once validly established and perfected, a pledge of claims has several important effects:

  • Scope of the Pledged Right: The pledge naturally extends to any interest accrued on the principal amount of the pledged monetary claim. If the pledged claim is itself secured by an ancillary right, such as a guarantee or another security interest (e.g., a mortgage held by the pledgor securing the pledged claim), the pledge over the primary claim generally extends to these ancillary security rights as well, due to the principle of accessoriness.
  • Restrictions on Pledgor and Third-Party Debtor:
    • Pledgor: After perfection, the pledgor can no longer freely dispose of the pledged claim (e.g., assign it to someone else, waive it, or set it off against a debt they owe to the third-party debtor) in a way that would prejudice the pledgee's rights.
    • Third-Party Debtor: Once the third-party debtor has received a valid notice of the pledge or has given their consent, they cannot validly discharge their obligation under the pledged claim by making payment to the original creditor (the pledgor). To obtain a valid discharge, they must generally pay the pledgee or act in accordance with the pledgee's instructions when the pledge is enforced. If they mistakenly pay the pledgor after proper notice, they risk having to pay a second time to the pledgee. If the third-party debtor wishes to pay when the pledgee is not yet entitled to collect (e.g., the main secured debt is not due), they can discharge their obligation by making a deposit of the amount due with a legal affairs bureau (供託 - kyōtaku).
  • Pledgee's Right to Collect the Pledged Claim (取立権 - Toritateken) (Civil Code Art. 366): This is a key enforcement mechanism for a pledge of claims.
    • If the Pledged Claim Matures Before the Pledgee's Secured Debt: If the monetary claim that was pledged becomes due and payable before the primary debt (which the pledge secures) owed by the pledgor to the pledgee matures, the pledgee cannot yet collect for their own account. Instead, under Article 366(3), the pledgee can require the third-party debtor to deposit the due amount with a competent authority (e.g., a local Legal Affairs Bureau). The pledge then continues to exist over the pledgor's right to receive this deposited sum. This protects the pledgee's security while respecting the original maturity of their own claim against the pledgor.
    • If the Pledgee's Secured Debt Matures (or the Pledged Claim Matures Thereafter): Once the pledgee's own claim against the pledgor is due, Article 366(1) allows the pledgee to directly collect the pledged monetary claim from the third-party debtor. However, they can only collect up to the amount necessary to satisfy their own secured claim (including principal, interest, and costs). Any amount collected by the pledgee is then applied to the satisfaction of their secured claim against the pledgor (Article 366(2)). This provides a relatively straightforward, private method of enforcement without necessarily requiring a court auction of the pledged claim itself.
    • Pledged Claim is for Non-Monetary Performance: If the pledged claim is not for money but for some other performance (e.g., the delivery of specific goods), Article 366(4) allows the pledgee to receive that performance from the third-party debtor. The pledge then continues to subsist over the item or right received as performance.
  • Enforcement via Formal Civil Execution: In addition to direct collection, the pledgee also has the option to enforce the pledge of a claim through the formal court-administered civil execution procedures (Civil Execution Act Art. 193). This might be chosen if direct collection proves difficult, for example, if the pledged claim is conditional, disputed by the third-party debtor, or if multiple parties have competing interests.
  • Prohibition of Forfeiture Clauses: The general prohibition against forfeiture clauses in pledges (Civil Code Art. 349, applied via Art. 362(2)) also applies to pledges of rights. This means an agreement that the pledgee will simply acquire full ownership of the pledged claim (especially if its value exceeds the secured debt) upon the pledgor's default, without accounting for any surplus, is void.

Extinction of a Pledge of Rights

A pledge of rights can be extinguished on similar grounds as other types of pledges:

  • Full satisfaction or other extinction (e.g., prescription, waiver) of the underlying debt secured by the pledge (due to accessoriness).
  • Extinction of the pledged claim itself (e.g., if the third-party debtor fully pays it, or if it prescribes).
  • Waiver of the pledge by the pledgee.
  • Merger (e.g., if the pledgee becomes the direct holder of the pledged claim in their own right, not merely as a pledgee).

If the pledgee directly collects the pledged claim under Article 366 and applies it to their secured debt, the pledge is extinguished to the extent that the collection leads to the satisfaction of that secured debt.

Pledges of Other Specific Rights: A Brief Glimpse

While pledges of monetary claims are common, other rights also frequently serve as collateral:

  • Intellectual Property Rights: Pledges can be created over patents, trademarks, copyrights, and other forms of intellectual property. Perfection of such pledges typically requires registration in the specific registers maintained for those IP rights (e.g., for patents, Article 98(1)(iii) of the Patent Act makes registration an effectuation requirement for the pledge). A notable feature for some IP pledges (e.g., patents under Patent Act Art. 95) is that the pledgee is generally restricted from working (exploiting) the intellectual property themselves. Their security is typically realized through rights over royalties or other proceeds generated by the IP, often via principles of real subrogation (e.g., Patent Act Art. 96). Rights that are merely "pending" (e.g., a "right to obtain a patent" for an application not yet granted) are often not directly pledgeable under these specific IP statutes but might be securitized using other methods like security by assignment.
  • Corporate Shares (株式 - Kabushiki):
    • Shares Represented by Certificates (株券発行会社の株式 - kabuken hakkō gaisha no kabushiki): A pledge is typically established by the delivery of the share certificate(s) to the pledgee (Companies Act Art. 146(2)). Continued possession of the certificate by the pledgee serves as the method of perfection against third parties (Art. 147(2)). While it's possible to have the pledgee recorded in the company's shareholder register (this is known as a "registered pledge" or 登録質 - tōroku-jichi), it is less common in practice than an "unregistered pledge" or "informal pledge" (略式質 - ryakushiki-jichi), which relies primarily on the pledgee's possession of the share certificates.
    • Shares of Companies Not Issuing Certificates (株券不発行会社の株式 - kabuken fuhakkō gaisha no kabushiki): For shares in companies that do not issue physical certificates, a pledge is created by the pledge agreement itself. However, for the pledge to be effective against the company and third parties, the pledge and the pledgee must be recorded in the company's shareholder register (Companies Act Art. 147(1)).
    • Book-Entry (Dematerialized) Shares (振替株式 - Furikae Kabushiki): For shares managed through the book-entry transfer system (under the Act on Book-Entry Transfer of Company Bonds, Shares, etc.), a pledge is created and perfected by an appropriate entry (recording the pledge) in the pledge column of the pledgee's account within the system (Arts. 140, 141 of said Act).

Conclusion: Leveraging Intangibles for Security

The pledge of rights (kenri-jichi) significantly enhances the versatility of the pledge as a security device in the Japanese legal framework. It allows a broad spectrum of intangible assets, with monetary claims being a prime example, to be effectively utilized as collateral. While the fundamental principles of pledge—requiring an agreement, some form of control or "delivery" appropriate to the nature of the right, and providing the pledgee with rights of retention and priority—are adapted to the intangible context, the specific rules governing creation, perfection (often involving notice to third-party obligors, delivery of instruments, or registration in specialized systems), and enforcement are carefully tailored to the particular type of right being pledged.

For businesses, financiers, and legal advisors operating in Japan, a clear understanding of how to properly establish, perfect, and enforce a pledge over various categories of rights is indispensable for structuring effective security arrangements in a wide range of commercial and financial transactions, from securing loans with accounts receivable to leveraging the value of securities or intellectual property.