Given that at the time of writing JAL is commencing the largest corporate rehabilitation in Japan it looks like a good opportunity to look at the process for tax purposes.
The Japanese legal framework includes three different process for corporate rehabilitation that can be tax preferred these being minjisaisei – 民事再生, kaishyakousei – 会社更生 and rehabilitation under [RCC]. It it important to understand how the differences between these methods can impact M&A or other transactions, with the main difference between that creditors to whom kaisyakousei are corporate creditors whose objective is the maintenance and rehabilitation of the company concerned. In contrast the minjisaisei process has no such limitation and the objective is the preservation of the business or economic activity of the creditors concerned. The table below compares minjisaisei – 民事再生- and kaishyakousei – 会社更生.
Item minjisaisei kaishakousei
Application All companies and natural persons kabushiki kaisha
Persons able to petition process Persons bearing obligations of or rights against the person Persons with 10% or more of the rights to the capital of the company; out of all shareholders those having 10% or more of votes
Management rights; rights to manage assets In principle the debtor (e.g. the existing management). Actions that are not included in the normal business require approval The receiver or hozenkanrinin - 保全管理人 and administrator or kanzainin - 管財人. The original management group must retire but executive directors may become administrators
Typical time until plan approval or ninka - 認可 Around five months from application About one month from application to commencement of proceedings with presentation of rehabilitation plan within one year.
Rights that can be subject to extinguishment saiseisaiken - 再生債権 - rights subject to rehabilitation kouseisaiken or kouseitanpoken - 更生債権、更生担保権, rights or collateral subject to rehabilitation
Public debts, kousokouka 公租公課、(taxes and similar), secured rights Public debts for taxes and similar are treated as preferred. Other preferred creditors - e.g. mortgages and other securied debts are dealt with through their separete process not part of the minjisasei In principle public and secured debts are not settled but are included in the rehabilitation plan.
Position of shareholders Reduction of capital is voluntary In principle share holder capital is eliminated.
Valuation of assets In principle at the price they can be disposed of or otherwise dealt with but when necessary valued as a continuing business Valuation of assets and collateral is at market value at the start of the process
Creditor claims In principle if creditors do not submit claims in the allowed period they are lost In principle if claims are not submitted and there is no written confirmation of claims then they are lost
Creditor meetings Creditor meetings are held to vote on the saisei plan First meeting is held after the commencement of proceedings, second to vote on the reconstruction proposal
Method of voting and conditions for voting A majority of related persons (without division into groups) and a half or more of amounts with a right to vote. Shareholders have not rights Creditors group - 50% or more of the amount having rights; Secured group - (a) postponement 2/3rds or more; (b) reduction or exemption of debts 3/4qtrs or more; (c) liquidation - unanimous
(3) Shareholders - items where they have a right to vote, 50%+ majority
Upper time limit for settlement 10 years 15 years
Period for closing procedures On the determination of the trustee kantokuiin - 監督委員, when the reconstruction proposal is executed or after passing of three years from the approval - ninkaketteikakutei, 認可決定確定 2/3rds of the debt repayment determined under the rehabilitation plan is completed
Business transfer Whether or not according to the plan, allowed with permission of the court. In cases where there are net liabilities, there is no requirement for a special shareholders resolution Allowed with permission of the kanzaininn or court or may be allowed in the rehabilitation plan
Persons with rights for non recognition [of debts] 監督委員 - trustee - kantokuiin 管財人 - financial manager - kanzaininn