The Japanese Civil Code (‘CC’) defines the Japanese partnership form, the Nin’I Kumiai. Not to be confused with the Tokumei Kumiai defined under the Japanese commercial code, the legal form of the Nin’I Kumiai is more similar to a conventional US or UK partnership.
For tax purposes a Nin’I Kumiai is treated as a pass through. One commonly used translation of Nin’I Kumiai is ‘voluntary partnership’, in Japanese 任意組合 and referred to below as an NK.
NK definition under Civil Code Article 667-1
An NK is defined in Article 667-1 of the Japanese Civil Code by reference to a partnership contract (below the ‘NK Contract’, in Japanese the 組合契約 or ‘kumiai keiyaku’). In unofficial translation the definition is “….a partnership contract is a contract under which the parties to the contract concerned agree to contribute capital and manage a business in co-operation and where, from such agreement, a partnership contract becomes valid…”. (In Japanese 「組合契約は、各当事者が出資をして共同の事業を営むことを約することによってその効力を生ずる」).
This definition identifies some ingredients familiar from the partnership law of other countries, such as:-
- the partnership being an agreement between two or more parties; and
- requiring the contribution of capital by the parties concerned; and
- requiring the co-operative carrying out of business activities
Contribution of capital and liability of partners
An NK recognizes not only the contribution of monetary assets but also the contribution of labor or services from the members of the NK (CC article 667).
Japanese Civil Law recognizes three main types of co-operative ownership (link in Japanese): Common Ownership (in Japanese ‘総有’ or souyuu), Mutual Ownership (in Japanese ’会有’or aiyuu and Co-operative Ownership (in Japanese or ’共有’ or kyouyuu). Assets contributed to an NK are held in Mutual Ownership which allows for the recognition of separate interests in the owned assets but where there are severe limitations (for example under the terms of the NK) in dividing up such interests on demand. This ownership concept is intermediate between Common Ownership (unanimity is required among all parties with an ownership interest before division would be possible) and Co-operative Ownership.
The liability of members of an NK is unlimited.
Execution of partnership business
The execution of the business of an NK is, by default, decided by a majority of its members (CC 670 I). However if the contract designates certain members (analogous to general partners) as responsible for executing the business of the partnership, then a majority of those designated members is sufficient (CC 670 II). Members of the partnership have defined rights to examine the assets and state of the business and, if certain specified conditions are met, require the removal of the partners with responsibility for executing the business.
Given that the NK does not have its own juridical character, legal relations with third parties are common to all members of the partnership.
Allocation of profits
CC article 674 I defines the default allocation of gain or loss to the members of the NK in the absence of agreement in the partnership contract. In these circumstances allocation is proportionate to the amount of capital each member has contributed. However, partners can agree freely between themselves in the partnership contract the basis of allocation of gains or losses.
Note however that if the NK contract only agrees on a distribution of either profit or loss (but not both) it is inferred that the distribution that is undetermined will also follow a similar allocation approach. Furthermore if, for example, a limitation is placed on the allocation of loss to a member up to the limit of his invested capital such a limitation is interpreted as being in-effective, as not in accordance with the basic NK definition of doing business in co-operation. In other words it is not possible to contractually create limited liability membership of an NK. (Later articles will deal with the Japanese limited liability partnership).
Relationship with the Financial Products and Transactions law
The Financial Products and Financial Transactions law (below ‘FPFTL’), which regulates transactions in financial products, investor protection and related matters, deems certain NK rights to be marketable securities and hence subject to the scope of the FPFTL. These include:
- Rights arising from an NK where all of the investors have a right to participate in the underlying business of the NK.
- Rights of an investor arising under an NK where the investor cannot receive as a distribution of profit or a return of partnership assets and amount in excess of their capital investment or contribution.
- Rights arising to an NK member under certain insurance related and co-operative investments including investments under the Real Estate Specified Joint Enterprise Law (不動産特定共同事業法).
The FPFTL also allows the designation of certain other rights arising under NK contracts as marketable securities if in the public interest or for the protection of investors.
Disclosure required by Nin I Kumiai
Disclosure requirements for an NK to its members or other third parties can be determined by the terms of the NK contract. However it is unusual to include disclosure requirements to third parties. However for practical convenience, for disclosure to members, it is common to borrow or cross reference the requirements of the corporate law relating to the content or methodology adopted in the preparation of financial statements.
NKs deemed to be marketable securities under the above FPFTL law are however required to prepare disclosures required for marketable securities if certain conditions are met.
- Where the main business underlying the NK contract is the business of investing in marketable securities.
- Where through solicitation of investors more than a specified number of persons (500 persons or more) are owners of interests in the NK contract.
Given the above investors protection rules proper advice should be obtained from legal advisers based on the facts concerned to determine the status of the NK contract.