Japan: Japan to introduce long-awaited majority voting rule for out-of-court workout

In brief

In Japan, any out-of-court workout requires the unanimous consent of all creditors to a restructuring plan. On 4 October 2022, the Japanese government announced that it is considering introducing new out-of-court workout rules. Under the proposed new rules, a restructuring plan will be binding if a majority vote of creditors and confirmation of the court is obtained. Such a majority rule is a common feature amongst schemes of arrangement in many other countries.


In more detail

  • According to the Japanese government's announcement, it is planning to submit a bill for the new legislation in the coming Diet session next year.
  • Although the Japanese government has not provided any details of the proposed new law at this stage, it is expected that a majority voting rule for the out-of-court workout will be introduced for the first time in the history of Japanese restructuring law.
  • Nowadays, many countries with developed restructuring systems have majority voting rules for out-of-court workouts, such as the following:
    • the pre-packaged Chapter 11 plan of the US
    • the scheme of arrangement and restructuring plan of the UK
    • the accelerated safeguard of France
    • StaRUG in Germany
    • the Dutch scheme of arrangement under the WHOA
    • the pre-pack scheme of arrangement of Singapore
  • To date, such a rule has not been introduced in Japan despite a long-running debate among academics and practitioners. It is a view commonly shared by Japanese restructuring practitioners that the absence of such a majority decision-making process and the unanimity requirement have been preventing efficient and successful out-of-court restructurings.
  • In a recent case, a major Japanese auto-parts supplier first tried to turn itself around using an out-of-court workout procedure called Turnaround ADR (Turnaround Alternative Dispute Resolution), but was unsuccessful due to a failure to obtain consents from some of its financial creditors. Consequently, the debtor had to file for formal civil rehabilitation with the Tokyo District Court, which resulted in a few-months-long delay in the overall restructuring process.
  • The upcoming legislation will be, if successfully passed by the Diet, a ground-breaking reform of the Japanese corporate restructuring system and may make out-of-court workouts much easier, faster and more effective.
  • We must be cognizant of the hurdles to be overcome in the drafting of the new law before such legislation comes into effect. We should carefully assess, for instance, whether under the new rules the following are true:
    • the rules on protection of dissenting creditors is well-designed
    • the voting procedure is fairly and orderly structured
    • the demand for accelerated business restructuring and the fairness of the new procedure are well-balanced
  • We do not expect Japan to allow foreign debtors to have access to the workouts nor to allow parties to use the English language throughout the proceedings under the new regime. As such, it is unclear as of now whether the new workout process will be a useful tool for cross-border restructurings.

As the new rule is anticipated to have a huge impact on the Japanese corporate restructuring practice, we need to keep a cautious and close watch on the upcoming bill to be submitted to the Diet by the government.

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