Advantages of a business transfer in minjisasei proceedings
In the law relating to minjisaisei proceedings there are regulations that allow easy and rapid procedures for business transfers. In contrast mergers, corporate splits, Japanese law share for share exchanges – kabushiki koukan, 株式交換 – have to be carried out under the reconstruction plan. A business transfer can be accomplished after the application to commence minjisaisei proceedings without the approval of a shareholder’s meeting but with the approval of the court.
In addition to helping prevent business operations from degrading and allow the business itself to be rebuilt with greater ease the business transfer has a number of other advantages. It may allow certain creditors to be repaid more quickly or even immediately, for example allowing a bank or other financial institution to remove the balance completely from its balance sheet. Also, if the creditors do not agree to a debt reconstruction plan and the company proceeds into bankruptcy, provided the business transfer was carried out under court approval there is little risk that the transaction will be denied by the receiver and hence the business can continue in the aquiring company.
There may also be advantages in a business transfer in minjisaisei proceedings for tax purposes. Under the proceedings certain assets of the company are revalued for tax purposes to market value and any loss (or gain) recognised. However tax losses are not recognised on all assets and also there is a risk that the amount of loss may be challenged by the tax authorities. A business transfer will ensure that all losses are realised as a net loss on disposal of the business and hence may make available a greater overall loss to offset taxable gain on exemption from indebtedness.
Other business transfer related procedures in minjisaisei proceedings
There are a number of reasons why business transfers are allowed more easily in minjisaisei proceedings.
- Under debtor in possession proceedings the court may not appoint a kanzainin but instead existing management may stay in place. The assumption is that existing management may find a buyer more easily, or may enter the proceedings with a prepackaged application with an identified buyer.
- Where a company is technically insolvent (i.e. liabilities exceed assets) the court may approve a business transfer instead of the shareholders meeting that would normally be required.
- The business transfer may allow security interests to be extinguished. Where an asset that is mortgaged or which has a similar security right attached to it is essential to the business and hence has to be included in the assets in the business transfer, with the permission of the court proceeds from the business transfer can be paid into the court and the security interest against the asset removed.