ATTORNEYS-AT-LAW
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E-mail:ushilaw@japan.email.ne.jp

Rehabilitation Proceedings under the Civil Rehabilitation
Law of JapanMay 19, 2020
I. Introduction
Under the impact of the new coronavirus (COVID-19), the number of failing
medium- and small-sized Japanese companies has rapidly increased.
Notwithstanding that there were only two such companies by February 2020
and 23 such companies by March 2020, the number surpassed 100 cases by
the end of April and is expected to further increase.
It is assumed that medium- and small-sized Japanese companies that fail due

Ushijima & Partners
Toshitake Higashiyama+81-3-5511-3223
toshitake.higashiyama@ushijima-law.gr.jp

to the new coronavirus will file either for commencement of bankruptcy
proceedings to settle the company or commencement of rehabilitation proceedings for businessrehabilitation.
By this newsletter, we explain a summary and schedule of rehabilitation proceedings for overseas creditorsof Japanese companies that have filed for commencement of rehabilitation proceedings.
II. Summary of Rehabilitation Proceedings (“RP”)
1. Commencement of RP(1) Petition for Commencement of RP When “cause for commencement of RP” (as mentioned in item (4)(a), below) exists, the debtor may filea petition for commencement of RP with the court (a debtor filing a petition for commencement of RP is
hereinafter referred to as the “Rehabilitation Debtor”).
 Usually, simultaneously with the filing of the petition for commencement of RP, the Rehabilitation Debtor
also files a petition for issuance of a temporary restraining order prohibiting the Rehabilitation Debtor
from providing security and paying debts until the issuance of the commencement order of RP.
(2) Appointment of a Supervisor and Issuance of Temporary Restraining Order After the petition for commencement of RP has been filed, the court will, usually on the same day thatthe petition is filed, (i) appoint a supervisor (“kantoku-iin”) and (ii) issue a temporary restraining orderprohibiting the Rehabilitation Debtor from providing security and paying debts.
(a) Appointment of a Supervisor
 The Rehabilitation Debtor, even after RP is commenced, may carry out its business and dispose of
its assets.
 However, in principle, the court appoints a supervisor in all cases when the petition forcommencement of RP by the Rehabilitation Debtor is filed. Thus, the Rehabilitation Debtor issupervised by the supervisor.
 Also, simultaneously with the appointment of a supervisor, the court orders the Rehabilitation
Debtor to obtain the consent of the supervisor in order to conduct the following:(i)transfer,

grant security, lease or any other disposition of rights regarding the assets owned or

occupied by the Rehabilitation Debtor (except for trading in the ordinary course of its
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business);(ii)

transfer, grant security or any other disposition of the Rehabilitation Debtor’s claim (except for(iii)

receive assets (except for purchase of goods or any other receipt of assets in the ordinary

recovery by the Rehabilitation Debtor);course of its business);
(iv)

loan;

(v)

borrow money (including bill discount) and guaranty;(vi)discharge debts, assume non-compensatory debt or waive rights; or(vii) redeem collateral for a right of separation (“betsujyo-ken”).
(b) Issuance of Temporary Restraining Order The court usually issues a temporary restraining order prohibiting the Rehabilitation Debtor fromproviding security, and paying debts accrued from a cause prior to the filing of the petition, except
for:
(i)

tax liabilities;(ii)

debts accrued from an employment relationship between the Rehabilitation Debtor and its
employees;(iii)

rent, cost of utilities, and communication costs for the Rehabilitation Debtor’s office;(iv)

lease payments for the Rehabilitation Debtor’s office supplies; and(v)

de minimis rehabilitation claims.

(3) Briefing Session for Rehabilitation Creditors held by the Rehabilitation Debtor
 Most Rehabilitation Debtors voluntarily hold a briefing session for rehabilitation creditors within one
week after the date of filing the petition for commencement of RP.
 In such session, the Rehabilitation Debtor usually explains to rehabilitation creditors about the statusconcerning the Rehabilitation Debtor's business and assets, and the progress of RP.
(4) Issuance of the Commencement Order of RP(a) Investigation by the Supervisor and Examination by the Court
 After a petition is filed, the court will examine both whether there are “facts constituting grounds forcommencement of RP,” and whether “grounds exist for dismissal of the petition for commencementof RP” based on the supervisor’s opinion.
“Fact constituting grounds for commencement of RP” means the following:(i) A risk constituting grounds for commencement of bankruptcy proceedings, such as the risk of“inability to pay” or “debts exceeding assets”; or(ii)

The debtor is unable to pay its debts that become due without causing significant hindrance tothe continuation of its business.

 Also, “Grounds for dismissal of the petition for commencement of RP” means any of the following
cases:(i)

An applicant Rehabilitation Debtor fails to prepay the expenses of RP;(ii)

Bankruptcy proceedings or special liquidation proceedings of the Rehabilitation Debtor havealready been commenced and the continuation of such proceedings is appropriate for thecommon interest of the creditors;(iii) It is obvious that the proposed rehabilitation plan is unlikely to be prepared or approved, or the
rehabilitation plan is unlikely to be confirmed; or(iv) The petition for commencement of RP is filed for an unjustifiable purpose or it is not filed ingood faith.
 The supervisor will investigate the existence of the grounds for dismissal of the petition forcommencement of RP through a hearing with the main rehabilitation creditors at the briefing
session for rehabilitation creditors, etc.

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(b) Issuance of the Commencement Order of RP After the first discussion meeting between the court, the supervisor, the Rehabilitation Debtor andthe Rehabilitation Debtor’s counsel, the court issues a commencement order for RP if it determinesthat cause for the commencement of RP exists and cause for dismissal of RP does not exist.
 According to the standard schedule for RP of the Tokyo District Court (please refer to II below), thecommencement order for RP is issued one week after the date on which the petition is filed.
 Simultaneously with the issuance of the commencement order for RP, the court also decides thefollowing:(i)

The period for filing rehabilitation claims (“Period for Filing Claims”) by the rehabilitation(ii)

The period for investigating the rehabilitation claims (“Ordinary Period for Investigation”);

creditors;(iii) The due date for the Rehabilitation Debtor to submit a statement of approval or disapproval of
the rehabilitation claims filed during the Period for Filing Claims (“Statement of Approval or
Disapproval”);(iv) The due date for the Rehabilitation Debtor to submit a list of assets and a balance sheet, andthe report based on Article 125 of the Civil Rehabilitation Law; and(v) The due date for the Rehabilitation Debtor to submit the proposed rehabilitation plan.
2. Rehabilitation Claims(1) Claims within the Scope of Rehabilitation Claims
 A “rehabilitation claim” means a claim on assets arising against the Rehabilitation Debtor from a causethat has accrued before the commencement of RP (excluding common benefit claims or claims withgeneral priority).
(2) Rights and Obligations of Rehabilitation Creditors(a) Prohibition of Payment for Rehabilitation Claims
 After the commencement of RP, rehabilitation creditors, in principle, are prohibited from receiving
payment with regard to rehabilitation claims unless it is provided for in the rehabilitation plan.
(b) Right of Set-Off by Rehabilitation Creditor
 Where a rehabilitation creditor owes a debt to the Rehabilitation Debtor at the time ofcommencement of RP, the rehabilitation creditor may effect a set-off only within the Period for Filing
Claims, even if it is not provided for in the rehabilitation plan, provided that (i) its claim and debt are
the same kind of claim (e.g., both are monetary claims) and (ii) its claim will become due prior to the
expiration of the Period for Filing Claims.
 However, in principle, a rehabilitation creditor may not effect a set-off in the following cases:

(1)

(2)

The rehabilitationcreditor has
assumed a debt to
the Rehabilitation
Debtor after:
the commencement ofRP.
the Rehabilitation
Debtor became
unable to pay its
debts1,

With respect to (2), therehabilitation creditor has
assumed a debt to the
Rehabilitation Debtor by:And, with respect to(2) to (4), therehabilitationcreditor knew:(a) concluding a contract
with the Rehabilitation
Debtor for disposing of theRehabilitation Debtor's
assets with the intent to set
off any debt to be assumed

at the time of
conclusion of thecontract, that the
Rehabilitation Debtor
was unable to pay its
debts.

1 This “unable to pay its debts” means the condition in which the Rehabilitation Debtor, due to the lack of ability to pay, isgenerally and continuously unable to pay its debts as they become due.

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by the rehabilitation creditor
under the contract
exclusively against
rehabilitation claims; or(b) concluding a contract forassuming any debt owed byanother person to the
Rehabilitation Debtor,

(3)

(4)

the Rehabilitation
Debtor suspended
payments,

at the time ofassumption of thedebt, the fact that the
Rehabilitation Debtor
had suspended
payments2.
at the time ofassumption of thedebt, the fact that apetition forcommencement of RP
had been filed.

a petition forcommencement of RP
was filed,(3) Filing of Rehabilitation Claims by Rehabilitation Creditors
 Any rehabilitation creditor intending to participate in RP is required to file with the court the content andcause of each rehabilitation claim, the amount of voting rights, etc., within the Period for Filing Claims.
 If the rehabilitation creditor fails to file its rehabilitation claim within the Period for Filing Claims, such
rehabilitation creditor cannot exercise its voting rights at the creditors meeting in principle.
 Moreover, such rehabilitation creditor would lose its rehabilitation claim when the order of confirmationof the rehabilitation plan by the court becomes final and binding unless the Rehabilitation Debtor
acknowledges the existence of such claim and states it in the Statement of Approval or Disapproval.
(4) Investigation and Determination of Rehabilitation Claims(a) Preparation and Submission of the Statement of Approval or Disapproval The Rehabilitation Debtor must prepare the Statement of Approval or Disapproval stating, withregard to each rehabilitation claim filed during the Period for Filing Claims, its approval ordisapproval of the content of such claim and the voting rights.
 Also, the Rehabilitation Debtor, if it acknowledges the existence of a rehabilitation claim that has notbeen filed, must state the content of such claim, etc., in the Statement of Approval or Disapproval.
 The Rehabilitation Debtor must submit the Statement of Approval or Disapproval to the court by thetime limit designated by the court prior to the Ordinary Period for Investigation.
(b) Investigation during the Ordinary Period for Investigation
 A rehabilitation creditor who has filed its claim ("Creditor of a filed Rehabilitation Claim") may makean objection in writing to the court, within the Ordinary Period for Investigation, with regard to thecontent of a rehabilitation claim or the voting rights stated in the Statement of Approval or
Disapproval.
(c) Results of Investigation of Rehabilitation Claims
 The content of a rehabilitation claim and the number of voting rights (in the case a rehabilitation
claim stated in the Statement of Approval or Disapproval has not been filed by the rehabilitationcreditor, the content as stated therein) shall be determined if, in the investigation of rehabilitation
claims, (i) the Rehabilitation Debtor approves them, and (ii) no objection is made by any Creditor ofa filed Rehabilitation Claim during the period of investigation.

2 However, this shall not apply if the Rehabilitation Debtor was not unable to pay its debts at the time when the
Rehabilitation Debtor suspended payments.

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(d) Assessment Decision on Rehabilitation Claim If, in the investigation of rehabilitation claims, (i) the Rehabilitation Debtor disapproves the content
of a rehabilitation claim, or (ii) an objection has been made by any Creditor of a filed Rehabilitation
Claim with regard to such content, the rehabilitation creditor who holds such disapproved/objectedrehabilitation claim, in order to determine the content of the claim, may file a petition for assessmentwith the court within one month from the last day of the period of investigation.
 In its assessment decision, the court specifies the existence or nonexistence of the rehabilitation
claim in question and the content thereof.
(e) Action to Oppose Assessment Decision
 Further, if a person disagrees with the assessment decision, he or she may file an action to oppose
within one month after the day on which the person receives service of the assessment decision.
3. Investigation of the Status of the Rehabilitation Debtor's Assets
 After the commencement of RP, the Rehabilitation Debtor is required, without delay, to evaluate its
assets on the date of commencement of RP. After completion of such evaluation, the Rehabilitation
Debtor must then prepare a list of assets and a balance sheet on the date of commencement of RP and
submit them to the court.
 Also, the Rehabilitation Debtor is required, without delay, to submit a written report to the court stating
the following matters as set forth in Article 125 of the Civil Rehabilitation Law:(i)

The circumstances that have resulted in the commencement of RP;(ii) The progress and the present status with respect to the Rehabilitation Debtor’s business andassets;(iii) Whether or not there are circumstances that require a temporary restraining order or assessment
decision with respect to a claim for damages based on the liability of the Rehabilitation Debtor’s
director(s), auditor(s), etc.; and(iv) Other necessary matters concerning RP.
4. The Rehabilitation Plan
(1) Preparation of the Proposed Rehabilitation Plan by the Rehabilitation Debtor
 Taking into consideration the progress in evaluating the Rehabilitation Debtor’s assets and investigating
the rehabilitation claims, the Rehabilitation Debtor prepares a proposed rehabilitation plan and submits itto the court within a certain period designated by the court3.
 In the rehabilitation plan, a modification of the rehabilitation claims and/or capital reduction, etc., isspecified. The modification of the rehabilitation claims includes a reduction and exemption of theRehabilitation Debtor’s debts, and/or extension of the terms for debts, etc.
 The proposed rehabilitation plan is sent to all rehabilitation creditors prior to the creditors meeting.
(2) Preparation of the Written Opinion by the Supervisor
 For the rehabilitation creditors’ decision-making at the creditors meeting, the supervisor prepares awritten opinion, and submits it to the court about one week after the proposed rehabilitation plan issubmitted.
 Such written opinion states the following:(i) The grounds leading to the commencement of RP and a summary of changes in management;(ii) The assets on the day of commencement of RP;(iii) The accuracy of the accounting records;(iv) Whether or not illegal acts existed prior to the filing of the petition (including an act subject toavoidance);(v) Whether or not directors, auditors, etc., are liable for damages of the Rehabilitation Debtor
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A rehabilitation creditor also may prepare a proposed rehabilitation plan and provide it to the court.

5company;(vi) Whether or not illegal acts existed subsequent to the filing of the petition; and(vii) An examination of the proposed rehabilitation plan.
 This written opinion is sent to all rehabilitation creditors before the creditors meeting together with theproposed rehabilitation plan.
(3) Approval or Disapproval of the Proposed Rehabilitation Plan at the Creditors Meeting
 After the supervisor submits its written opinion, the court (i) makes an order to refer the proposed
rehabilitation plan to a resolution at the creditors meeting, except in the cases that the proposed
rehabilitation plan is unlikely to be executed, etc., and (ii) designates the date of the creditors meeting.
 In order to approve a proposed rehabilitation plan, both of the following consents are required:(i) consent of the majority of voting right holders attending the creditors meeting, and(ii) consent of persons who hold voting rights that account for not less than half of the total number ofvoting rights.
 Rehabilitation creditors have voting rights in proportion to the amounts of rehabilitation claims inaccordance with the classifications in the following chart.
Classification of Claims(A)

Claim with a fixed due date that
becomes due subsequent to thecommencement of RP and thatbears no interest.

(B)

Claim for periodic payments, theamount and duration of which are
fixed.

(C)(D)(a) Claim with an uncertain due
date, that becomes due
subsequent to commencement of
RP and that bears no interest.
(b) Claim for periodic payments,
the amount and duration of which
are not fixed.
(c) Claim not intended for
payment of money.
(d) Monetary claim the amount of
which is not fixed or the amountof which is fixed in a foreign
currency.
(e) Claim with condition.
(f) Claim that may arise in the
future and be enforced against
the Rehabilitation Debtor.
Claims other than thosedescribed in items (A) through (C)above.

Amount of Voting Rights
Amount after deducting, from the amountof the claim, the amount of legal interest(5% or 6%) accruing on the claim during
the period of the number of years (if such
period includes a fraction less than one
year, such fraction is ignored) from thedate of commencement of RP to the duedate.
The total amount calculated with respect
to the respective periodic payments inaccordance with item (A) above (in casewhere such total exceeds the amount ofprincipal, which would accrue interest
equivalent to the periodic payments whencalculating at a statutory interest rate, suchamount of principal).

The amount of the claim estimated as of
the time of commencement of RP.

The claim amount.

 Please note that a creditor who has a security interest, i.e., (i) special statutory lien (“tokubetsu-nosakidori-tokken”), (ii) pledge (“shichi-ken”), (iii) mortgage (“teito-ken”) or (iv) a right of retention under theprovisions of the Commercial Code or the Companies Act (“shoji-ryuchi-ken”) may exercise its security
interest without limitation by RP.

In RP, secured creditors have voting rights only with respect to the6amount of their unsecured rehabilitation claims.
 If the proposed rehabilitation plan is disapproved at the creditors meeting, the court, by its own authority,
makes an order of (i) discontinuance of the RP and (ii) commencement of bankruptcy proceedings.
 As shown in item (C) of the above chart, foreign currency converts into Japanese Yen at an exchange
rate, calculated as of the time of commencement of RP for calculation of the voting rights based on theamount(s) of the claim(s).
(4) Order of Confirmation of the Rehabilitation Plan by the Court
 After the proposed rehabilitation plan is approved at the creditors meeting, the court, usually on thesame day as the creditors meeting, makes an order of confirmation of the rehabilitation plan except if
any of the following applies:(i)

RP or the rehabilitation plan contravenes a provision of law and such defect cannot be corrected;
provided, however, that this shall not apply where RP contravenes a provision of law but suchcontravention is a minor one;(ii) The rehabilitation plan is unlikely to be executed;(iii) The rehabilitation plan has been approved by unlawful means; or(iv) The approval of the rehabilitation plan is contrary to the common interest of the rehabilitationcreditors.
(5) Discharge of Rehabilitation Claims and Modification of Rehabilitation Claims
 The rehabilitation plan becomes effective when the order of confirmation becomes final and binding.
 If the order of confirmation of the rehabilitation plan becomes final and binding, the Rehabilitation Debtor
is discharged from its liabilities for all rehabilitation claims except for the liabilities pursuant to theprovisions of the rehabilitation plan or the provisions of the Civil Rehabilitation Act.
 Also, the rehabilitation claims provided in the rehabilitation plan are modified as provided for in the
rehabilitation plan.
5. Procedures after Confirmation of the Rehabilitation Plan
(1) Execution of the Rehabilitation Plan When the order of confirmation of the rehabilitation plan becomes final and binding, the Rehabilitation
Debtor should promptly execute the rehabilitation plan.
 Where a supervisor has been appointed, RP continues for three (3) years from the date on which theorder of confirmation of the rehabilitation plan becomes final and binding, unless rehabilitation is
executed within such period.
(2) Termination of RP Where a supervisor is appointed, the court makes an order of termination of RP when the rehabilitation
plan has been executed or three (3) years have elapsed since the order of confirmation of therehabilitation plan became final and binding.

7III. Standard Schedule for RP of the Tokyo District Court
 The following chart is the standard schedule for RP of the Tokyo District Court when a petition forcommencement of RP by the Rehabilitation Debtor is filed.
Proceeding
Filing of the petition and prepaying the expenses for RP.
Appointment of the supervisor and issuance of temporary
restraining order.
(Briefing session for rehabilitation creditors held by the
Rehabilitation Debtor.)
First discussion meeting.
Commencement order of RP.
Due date for rehabilitation creditors to file rehabilitation
claims.
Due date for the Rehabilitation Debtor to submit the list ofassets and balance sheet, and the report based on Article
125 of the Civil Rehabilitation Law.
Due date for the Rehabilitation Debtor to provide therehabilitation plan (draft).
Second discussion meeting.
Due date for the Rehabilitation Debtor to submit theStatement of Approval or Disapproval.
Ordinary Period for Investigation.
Due date for the Rehabilitation Debtor to submit therehabilitation plan.
Third discussion meeting.
Due date for submitting the written opinion of thesupervisor.
Decision to convene the creditors meeting.
Period for voting by written consent.
Creditors meeting/ Issuance of order of confirmation or
disconfirmation of rehabilitation plan.

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The number of days from thedate of filing the petition
0
0(0 to 6 days)
1 week
1 week1 month plus 1 week
2 months
2 months
2 months
2 months plus 1 week
10 to 11 weeks
3 months
3 months
3 months plus 1 week
3 months plus 1 week
8 days prior to the creditors
meeting
5 months