Japanese Association of Turnaround Professionals

JATP REPORT
December 22, 2009

Alternative Dispute Resolution Procedures for Turnaround of Business
Gaku Suzuki, Nishimura & Asahi__________________________________________________________________________________I.

OVERVIEWThis memorandum outlines the basic features of the alternative dispute
resolution procedures for turnaround of business (“Turnaround ADR1”), which wasestablished in 2008 by an amendment to the Act on Special Measures for Industrial
Revitalization and Industrial Innovation in order to overcome some of thedisadvantages2 of out-of-court debt adjustments made pursuant to the Guideline
for Voluntary Debt Adjustment 3 and legal insolvency procedures under the
Corporate Reorganization Act (Act No.154 of 2002) and the Civil Rehabilitation Act(Act No. 225 of 1999).
Pursuant to Turnaround ADR, a private sector entity certified as a “businessresolution service provider” (nintei funsou jigyo-sha) by the Minister of Justice ofJapan and the Minister of Economy, Trade and Industry of Japan provides
mediation services. As of the date of this memorandum, the Japanese Associationof Turnaround Professionals (“JATP”) is the only certified business resolution
service provider for Turnaround ADR. The role of JATP is to provide a forum for
Turnaround ADR, but JATP will not itself provide solution services in individual
cases. Instead, a JATP committee selects candidates to serve as mediators(tetsuduki jisshi-sha, the “Mediators”) among turnaround professionals to mediate
between a debtor and its creditors, facilitate an agreement between a debtor and its
creditors with respect to a business rehabilitation plan, and prepare an expert
opinion on the reasonableness and viability of such business rehabilitation plan1

Basic concepts and rules of Turnaround ADR are set forth in the Act on Promotion of Use of
Alternative Dispute Resolution (Act No. 151 of 2004) and the Act on Special Measures for
Industrial Revitalization and Industrial Innovation (Act No. 131 of 1999).

2

Under bankruptcy procedures such as civil rehabilitation or corporate reorganization,
payments to business partners are suspended and all claims are typically reduced, andtherefore have an adverse effect on relationships with business partners. Further, it isdisadvantageous for financial institutions to make bridge loans because they are not treatedas preferred claims under the bankruptcy procedure if a company undergoes bankruptcy
proceedings transferred from the procedures provided in the Guideline for Voluntary Debt
Adjustment.

3

The Guideline for Voluntary Debt Adjustment was prepared by the Japanese Bankers
Association and the Japan Business Federation (Nippon Keidanren). It sets forth voluntary
procedures by which the debts of the debtor are reduced or waived according to a
restructuring plan to which all participating financial institutions consent.

from a fair and neutral standpoint.
The candidates selected by the JATP
committee must be approved by a unanimous vote at the first creditors’ meeting.
JATP, as a provider of Turnaround ADR, has issued specific rules for
Turnaround ADR, to be amended from time to time. Every party involved in a
Turnaround ADR case must proceed strictly in accordance with the rules, inaddition to the regulations provided in the relevant laws and ministerial ordinancesof the Minister of Economy, Trade and Industry of Japan.
II.

ELIGIBILITY

Before a debtor initiates a Turnaround ADR, the debtor must first consult
with JATP to determine whether or not it is eligible. Under the relevant laws andrules, there is no limitation on the size of an applicant, category of business of an
applicant, or type of legal entity4 of an applicant. However, JATP will not allow a
company to proceed with Turnaround ADR unless it concludes that there is areasonable chance of a successful restructuring, and that the debtor is of adequate
value to successfully participate in and complete the process. To successfully
persuade JATP and candidate Mediators to grant eligibility for a Turnaround ADR,
it is crucial for the debtor to complete intensive due diligence and form a wellorganized business turnaround plan beforehand.
III.

PROCEDURE OUTLINE

The procedure for Turnaround ADR is comprised of three stages: (1) the
preliminary stage, (2) post-formal application and (3) post-voting of the businessturnaround plan. See the “Chart of Turnaround ADR” attached hereto.
1.

Preliminary Stage

Initially, a debtor that wishes to use Turnaround ADR will submit a
preliminary application to be reviewed by the JATP committee. After receiving apreliminary application, the JATP committee selects two or three Mediatorcandidates from its list of eligible turnaround professionals to examine the eligibilityof the debtor and the feasibility of the proposed plan. During the period between
the preliminary application and the formal application, consultations among the
debtor, its advisors and candidate Mediators continue.
The length of theconsultation period varies depending on the nature of the case, but may typicallytake at least a few weeks.
Before or during the consultation period, the debtor is required, at its own
cost and expense, to conduct due diligence and a thorough assessment of its
assets, prepare a modified balance sheet and liquidation balance sheet, and form abusiness plan indicating its projected operating profits and losses and a repayment
plan, each of which is examined by the candidate Mediators. Further, theapplicant is required to prepare a proposed business turnaround plan (jigyou saisei
keikaku), which may be modified with the advice of the candidate Mediators.
Based on the examination report by the candidate Mediators, JATP decides whether
to accept or decline the official application.
If JATP decides to accept the
preliminary application, the debtor may submit a formal application to commence
the Turnaround ADR.
4

Turnaround ADR is not available to individuals or to sole proprietorships.

2

2.

Post-Formal Application

Upon acceptance of the formal application, the debtor and JATP jointly send
a “Notice of Temporary Suspension” (ichiji teishi tsuchi) to each of the creditors whowill participate in the procedure.5 The notice convenes a creditors’ meeting andmay request, among other things, that the creditors do not accelerate loans, receive
any payments or demand additional collateral from the applicant.6
Within two weeks of the date on which the notices of temporary suspension
are distributed to all target creditors, the first creditors’ meeting is held. At thefirst meeting, the candidate Mediators are officially appointed as the Mediators andthe effect of the notice of temporary suspension is approved by the creditors’ vote.
The schedule for the case is also determined at the first meeting. Each resolution
presented at a creditors’ meeting is validated only by a unanimous vote of thecreditors present at such meeting. Further, at the first creditors’ meeting, thedebtor will provide a summary of the proposed business turnaround plan to thecreditors.
At the second creditors’ meeting, the finalized business turnaround plan is
discussed among the parties. At such meeting, the Mediators present their expert
opinion on the reasonableness and viability of the proposed plan.
At the third creditors’ meeting, the creditors vote for or against the proposed
plan. Between each meeting, the Mediators coordinate among the interests of thecreditors, examine the proposed plan in detail, and give various advices to thedebtor concerning the proposed plan.
3.

Post-Voting on the Business Turnaround Plan

In the event that all the creditors participating in the Turnaround ADR
procedure consent to the proposed business turnaround plan at the third meeting,the business turnaround plan is validated, and the creditors’ rights are modified
pursuant to the terms and conditions of the plan.
In order to validate the proposed plan, a unanimous vote of the creditors
approving the plan is required. In the event that one or more creditors reject the
proposed plan, the Turnaround ADR is immediately terminated. In such case, thedebtor may go into another mediation process, known as Specified Conciliation
proceedings (Tokutei-Chotei tetsuduki), filing a petition therefore with a competentcourt under the Act Concerning Specified Conciliation for Promotion of Settlementof Specified Debts, Etc. (Act No. 158 of 1999), pursuant to which a judge isreasonably expected to follow in the footsteps of the Turnaround ADR proceedings.
If the debtor does not use the Specified Conciliation proceedings or the parties areunable to reach an amicable settlement pursuant to the Specified Conciliation
proceedings, the debtor may immediately undergo legal insolvency proceedings,
such as corporate reorganization under the Corporate Reorganization Act (Act5Turnaround ADR is designed primarily for creditors who are financial institutions, rather than
suppliers or customers of the applicant company.

6

This notice is merely a request, and does not legally prohibit the creditors from acceleratingloans or demanding that the applicant establish new collateral.

3No.154 of 2002), or civil rehabilitation under the Civil Rehabilitation Act (Act No.
225 of 1999).
IV.

MEDIATORS

After receiving a preliminary application, the JATP committee selects two or
three candidates as Mediators. The number of Mediators varies depending on thenature of the case, however, at least three candidates are selected in the case of a
COD type plan (as defined in Section VIII hereof). JATP has created a candidate
list of Mediators, which will be amended from time to time, and the JATP committee
selects, on a case by case basis, appropriate candidates from the list. Only expert
professionals are included in the list, such as attorneys with considerable
experience as trustees in past prominent corporate reorganization proceedings,
certified public accountants experienced with the Guideline for Voluntary Debt
Adjustment, and other advisors experienced in turnaround business. Generally,
the selected Mediators for a given case consist of at least one attorney and one
certified public accountant. Each of the Mediators may retain assistant attorneys
or certified public accountants to support the Mediators’ mission.
During the course of the Turnaround ADR, the Mediators coordinate among
the interests of the creditors, examine the proposed plan in detail in order toprepare a written expert opinion to be presented at the second creditors’ meeting,and give various advices to the debtor concerning the proposed plan.
The
Mediators often recommend modifications to the proposed plan as they deem
necessary.
V.

CREDITORS’ MEETINGS

Turnaround ADR provides for three creditors’ meetings throughout theprocedure.
1.

Participants

Each of the debtor, Mediators and creditors participate in every meeting.
Which creditors should be included in a Turnaround ADR is a critical issue because
complete attendance and a unanimous vote are required for every meeting andevery resolution. Since Turnaround ADR strictly requires fair and equal treatment
among the creditors of financial institutions, the debtor ordinarily calls all bankcreditors having claims against the debtor to the first creditors’ meeting by sending
a notice of temporary suspension to each such bank creditor. However, it may
sometimes be a thorny issue as to whether the debtor should also include large
creditors other than banks into the Turnaround ADR process.7

7

While Turnaround ADR was designed mainly for “banks only,” the relevant laws andordinances and JATP’s rules do not have any restrictions on the eligibility of other creditors.
From the viewpoint of successful restructuring, the more support given by creditors, thehigher the likelihood that the plan will be successful. However, since creditors such as nonbank financial companies, servicers, and leasing companies have different priorities andbehavioral patterns from banks, debtors may be concerned about the possible negative impact(i.e. absence at the first meeting will trigger an immediate termination of the process) that may
result from including such creditors into the Turnaround ADR.

4

2.

First Creditors’ Meeting

Within two weeks from the date the notices of temporary suspension are
distributed to all target creditors, the debtor holds the first creditors’ meeting toprovide an outline of the proposed business turnaround plan to the creditors. The
creditors’ meeting is closed to the public and thus, only the target creditors who
receive a notice of temporary suspension are permitted to attend the meeting. The
absence of any one of the target creditors lacks a quorum. At the first creditors’
meeting, the following items are determined by unanimous consent of the creditors:
(1)
(2)
(3)
(4)
(5)
3.

Election of a chairman: ordinarily elected from among the candidate
Mediators;
Appointment of the Mediators;
Terms and conditions of the temporary suspension;
Dates and locations of the upcoming creditors’ meetings; and(If planned) Preferential treatment for the Pre-DIP Financing.8

Second Creditors’ Meeting

The second creditors’ meeting is held to discuss the proposed businessturnaround plan. By the date of the second meeting, the Mediators will prepare a
written expert opinion (chosa houkoku sho) regarding the reasonableness andviability of the proposed plan9 after diligent examination and review of the proposed
plan. At the second creditors’ meeting, a summary of the expert opinion will beorally presented to the creditors. The proposed plan should generally be finalized
at least several days before the second creditors’ meeting because the Mediators’
opinion will cover the plan on the assumption that it will not be amended.
Normally, the debtor and each creditor exchange comments regarding the proposedplan to reach agreed-upon terms and conditions thereof. Such negotiation stage isconcluded prior to the date of the second creditors’ meeting.
4.

Third Creditors’ Meeting

During the period between the second creditors’ meeting and the third
creditors’ meeting, each creditor will take the necessary steps to make an internal
decision on the proposed plan. At the third creditors’ meeting, the chairman will
put the proposed plan to a vote. As explained previously, a unanimous vote isrequired for the resolution.

8

Bridge loans, usually referred to as “Pre-DIP financing” in Japan, provided to the debtor within
the Turnaround ADR, may be treated preferentially to other ordinary claims in later civil
rehabilitation proceedings or corporate reorganization proceedings if the court concludes, atits discretion, that certain criteria are met. Further, such Pre-DIP financing may be secured
by a guaranty provided by the Organization for Small and Medium Enterprises and Regional
Innovation, Japan.

9

In many cases, the Mediators’ opinion is treated as material in the course of the bank’s
internal decision making process.

55.

Adjournment

The relevant ordinance and rules of Turnaround ADR provide for threecreditors’ meeting.
However, upon consent of the creditors, the number of
meetings may be extended.10
VI.

TEMPORARY SUSPENSION

1.

Contents of the temporary suspension

A notice of temporary suspension, issued jointly by the debtor and JATP, isdistributed to each target creditor upon or promptly after JATP’s acceptance of theformal application of the debtor.
The notice usually contains requests forvoluntary restraint of i) any collection of claims, including but not limited torequests for repayment, offsetting or repossession, ii) creation of security interestsand iii) involuntary petition for legal insolvency proceedings, such as bankruptcy,
civil rehabilitation or corporate reorganization. Other specific requests may bemade subject to the creditors’ consent at the first creditors’ meeting. Exceptions
for temporary suspension may be enumerated in the notice in case such exceptions
are deemed substantively fair.
2.

Implication of the temporary suspension

Unlike a court order to suspend repayments rendered in legal insolvency
proceedings, the requests for temporary suspension do not have a legally binding
effect on creditors during the gap period between the date of notice and the firstcreditors’ meeting. Once the creditors consent to the temporary suspension at thefirst creditors’ meeting, it is generally understood that a temporary standstillagreement has been formed among the debtor and the creditors. Presently, there
are no reports of any case where a creditor has ignored the temporary suspension
in a Turnaround ADR case, even during the gap period. While there is no
supporting court precedent, some leading experts suggest that the effect of thenotices of temporary suspension are, as a legal matter, considered more persuasive
than a mere entreaty from a private company due to the quasi-governmental natureof JATP, whose neutrality and expertise are legally guaranteed.
Since the Guideline for Voluntary Debt Adjustment was issued, it has been acontroversial issue whether i) a request for temporary suspension falls within thedefinition of “suspension of payment” (shiharai teishi) as defined by insolvency laws,
which is used as a cause for commencement of insolvency proceedings and as a
threshold enabling a bankruptcy trustee to exercise his avoidance power on the
debtor’s preferential action11. ii) a request for temporary suspension triggers anacceleration event on the basis that such request may be construed as an event ofcredit insecurity typically stipulated in the catch-all clause in standard loan
agreements.
10

In the case of Cosmos Initia Co., Ltd, five creditors’ meetings were held with the consent of thecreditors.

11

In Japanese insolvency laws, a certain category of preferential actions taken by a debtor before
the petition may be avoidable by the bankruptcy trustee if such action is taken after the
debtor’s status becomes insolvent. The status of insolvent shall be presumed in case thedebtor takes an action being construed as “suspension of payment,” (e.g. Paragraph 3 andParagraph 1, Article 162 of the Bankruptcy Law.)

6

VII.

DISCLOSURE

Since the Turnaround ADR process is not open to the public, no information
concerning the Turnaround ADR may be disclosed to the public, particularly when
the debtor is a non-public company. In the event the debtor is a public company,
timely disclosure in accordance with the rules of the relevant stock exchange may
be required.
However, the timing of public disclosure with respect to a
Turnaround ADR is not clear. For example, it may be argued that a preliminary
application does not trigger a disclosure requirement under the rules of the Tokyo
Stock Exchange (the “TSE”). Disclosure may be required if a formal application is
accepted by JATP or if notices of temporary suspension are sent to the creditors.
Further, if a business turnaround plan contains cancellation of debts, then suchplan contains “financial support.” In such a case, the approval of a businessturnaround plan with financial support at a creditors’ meeting would trigger thetimely disclosure requirement under the TSE rules. In actual cases, most publiccompany debtors12 released press releases at the time of JATP’s acceptance of its
formal application and subsequently released summary reports of each creditors’
meeting. The information contained in the press releases varies case by case.
VIII.

BUSINESS TURNAROUND PLAN

In a Turnaround ADR case, the debtor will, with assistance from its
professional advisors, prepare a business turnaround plan based on the results ofself-conducted due diligence and asset evaluation. The debtor will proceed with
the Turnaround ADR steps in order to have the business turnaround plan approvedby its creditors. While the terms and conditions of a business turnaround planvary from case to case, the relevant ordinances and rules classify businessturnaround plans into two types: i) the rescheduling of debt type (the “ROD type”)
and ii) the cancellation of debt type (the “COD type”). Turnaround ADR puts aheavier burden on a debtor which envisions a COD type plan than a debtor of a
ROD type plan.
1.

Plan of the ROD typePursuant to the rules of Turnaround ADR, the following eight items are
required for a business turnaround plan: i) the reasons for the debtor’s financial
difficulties, ii) the measures for business restructuring, iii) the measures forstrengthening the capital base, iv) the projections of assets and liabilities, andprofits and losses as a result of the business turnaround, v) the plans for raisingfunds, vi) the repayment plan, vii) the modifications of the creditors’ claims andrights and viii) the projected amount of claims to be collected by the creditors
pursuant to the business turnaround.
2.

Plan of the COD typeFor debtors under a COD type plan, the rules require the following five
additional items to be included in the proposed business turnaround plan: i) a
modified balance sheet prepared based on the values of assets assessed in the self

12

See the websites of Cosmos Initia Co. Ltd., Japan Asia Investment Co., Ltd., Saikaya Co., Ltd,
Radia Holdings Inc., ES-CON Japan Ltd., Aiful Corporation, and Japan Airlines Corporation(as of December 2009).

7

assessment process, which must strictly comply with the rules of the ordinance ofthe Minister of Economy, Trade and Industry of Japan13, ii) the amount of cancelleddebts, calculated based on the values of the assets and liabilities stated in themodified balance sheet mentioned in item i) above of this paragraph and the
projected profits and losses stated in the business turnaround plan, iii) theextinction of all or part of the existing shareholders’ rights, iv) the resignation of theexisting board members (except for cases where the resignation of the board
members will significantly undermine the going-concern basis of the debtor), and v)
the cancellation of debts from two or more creditors of financial institutions OR one
or more government-affiliated financial institutions1415.
IX.

TIME FRAME

JATP anticipates that a Turnaround ADR will take approximately threemonths from the date of the notice of temporary suspension to the date of approvalof the proposed plan. Compared with other legal insolvency proceedings, such ascivil rehabilitation proceedings which normally take around 6 months from filing of
the petition to the approval of a civil rehabilitation plan, a Turnaround ADR is
expected to be a more expedient process, which is advantageous for the debtor.
Please note, however, that this time frame excludes the preparation period for the
Turnaround ADR. The length of time necessary for adequate preparation will varydepending on the complexity of each case.
X.

COSTS

According to JATP, the initial fee charged for a preliminary application is500,000 yen (excluding consumption tax). Additional fees are charged upon i)
JATP’s acceptance of the preliminary application, ii) the formal application and iii)
the resolution of the proposed plan. The amounts of such additional fees are
determined by JATP, taking into consideration the number of creditors, the amountof debt and the nature of the case. In addition, the debtor will incur the fees of its
professional advisors, such as legal counsel, accountants, and tax and financial
advisors retained for due diligence, asset evaluation and preparation of the
proposed business turnaround plan.
END
*

*

*

*

13

“Standard for the Asset Assessment to be Conducted pursuant to Paragraph 1, Article 14 of
the Ordinance concerning Certification of Business Resolution Service Provider in connection
with the Business Turnaround, etc.” effective as of November 20, 2008.

14

Creditors that waive or reduce their claims pursuant to the business turnaround plan are
eligible for certain tax advantages, such as being permitted to declare the waived or reduced
amount as tax losses.

15

There are certain tax advantages for the debtor, including, but not limited to, the debtor’s
option to declare as a tax loss the difference between the value of assets assessed in themodified balance sheet and the book values of the assets in order to avoid the COD income
tax.

8Attachment

Chart of Turnaround ADR

Preliminary Application

Preliminary
Stage

Review by the JATP Committee

Selection and examination of Mediator Candidates

Formal Application

Notice of Temporary Suspension (“TS”)

First Creditors’ Meeting (Explanation of Proposed
Plan of Turnaround ADR, Appointment of theMediators and Approval of the TS)

Post
FormalApplication

Second Creditors’ Meeting(Discussionof Proposed Plan)

Third Creditors’ Meeting(Creditors’ Vote on Proposed Plan)
Unanimous Voting from Creditors

No unanimous voting

Approval of Proposed Plan
Post
Creditors’ Vote

Rejection of Proposed Plan
Settlement

Change in Creditors’ Rights
Pursuant to the Approved Plan

Specified Conciliation

Transfer to Bankruptcy
Proceedings

9