PLC - New option for out-of-court workouts for Japanese companies

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New option for out-of-court workouts for Japanese companies
Resource type: Legal update: archive
Jurisdiction: Japan

This article is part of the PLC Global Finance September e-mail update for Japan.
Atsumi & Partners

Speedread
In September 2009, the Enterprise Turnaround Initiative Corporation (ETIC) was launched, aiming
to manage more complex workouts for companies where a higher level of initiative and more
intensive use of professional expertise are required than cases filed with other out-of-court workoutbodies. This article summarises the range of out-of court workout options available, and explains
key features of the service ETIC will provide.

For potential sponsors interested in investing in Japanese companies through their turnaround(restructuring) processes, having a variety of out-of-court workout procedures available isdesirable. Since Septmeber 2009, the Enterprise Turnaround Initiative Corporation of Japan (ETIC)(Kigyo-saisei Shien Kiko) as added yet another method to options available for effecting such aninvestment.
Among the various types of out-of-court workout procedures the most popular in recent years havebeen:
Turnaround ADR (Jigyo-saisei ADR). This is an ADR procedure conducted by anorganisation that is both:certified by the Minister of Justice under the Act on Promotion of Use of Alternative
Dispute Resolution; andrecognised by the Minister of Economy, Trade and Industry under the Act on Special
Measures for Industrial Revitalisation and Industrial Innovation (formerly Act on Special
Measures for Industrial Revitalisation).
Currently, the Japanese Association of Turnaround Professionals (JATP) (an association ofturnaround practitioner lawyers, accountants, bankers and consultants) is the only organisation
certified and recognised to conduct turnaround ADR procedures. The JATP commenced
operations at the end of 2008 and six listed companies and one unlisted company havereportedly filed. These include, most recently, AIFUL Corporation (a major consumer loan firm)and WILLCOM Inc (a mobile telecommunications company).
Small and Medium Enterprise Turnaround Support Centres (Chusyo-kigyo Saisei ShienKyogikai). These are local turnaround consulting service providers usually established bylocal chambers of commerce in each prefecture of Japan. Since starting operations in 2003,
the Centres have provided consultation services to more than 18,000 companies and, by the

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PLC - New option for out-of-court workouts for Japanese companies

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end of June 2009, had reportedly assisted with the completion of turnaround plans for morethan 2,200 companies.

ETIC
The ETIC was established with the aim of managing more complex workouts for companies wherea higher level of initiative and more intensive use of professional expertise are required than cases
filed with a turnaround ADR or SME Turnaround Support Centres.
A company seeking support from ETIC must submit draft restructuring and revitalisation plans
which have been negotiated with its main lending banks in advance. The ETIC will then:
Conduct due diligence on the company.
Conduct negotiations among the lending banks on debt restructuring and businessrestructuring.
Conducts talks with, and deal with bids made by, potential sponsors.
Clarify the responsibilities of management and shareholders.
Screen whether the restructuring and revitalisation plan will work, while also satisfying thecriteria ETIC sets (once ETIC has decided to support buy out loans from the lending banks at
discounted prices (and in some cases inject capital)).
Monitor implementation of the plan.
ETIC will exit any positions they have taken in the company by selling loans (and shares) that they
have acquired or by other means.
The costs incurred by ETIC in supporting workouts (for example, the cost of buying loans frombanks and injecting capital into target companies) will be funded by other banks or investors andsupported by a government guarantee (the commitment for which being JPY1.6 trillion for the 2009
fiscal year).
These out-of-court workout procedures are characterised by transparency, neutrality of processand fairness (for example, proportionate discounts of purchase prices of loans). These are also
features of court-sanctioned workout proceedings (that is, Civil Rehabilitation Proceedings andCorporate Reorganisation Proceedings), but have the advantage of being flexible and expedient.
Further, the filings and the commencement of the above procedures carry less of stigma than thefiling and commencement of court-based proceedings. Also, unlike court-based proceedings, theyusually do not automatically lead to acceleration of debt obligations owed by the company becauseof the way insolvency events of default are usually drafted.
The disadvantage of such procedures is that they require voluntary consents from all affected
lenders for any debt restructurings, which may be difficult and costly to obtain.

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PLC - New option for out-of-court workouts for Japanese companies

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Products: PLC Cross-border, PLC Global Finance, PLC US Law Department

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