[To Take Effect in 2026] The New Out-of-Court Restructuring Scheme under the Early Business Recovery Act (Part II) – Procedural Flow and Practical Considerations

Outline of the Procedure under the Early Business Recovery Act

The general flow of business rehabilitation procedures under the Early Business Recovery Act (the “Procedure”) is illustrated in the following chart:

Application and Acceptance

First, when a business operator facing the risk of financial distress seeks to adjust its obligations to financial creditors through a resolution at a creditors’ meeting, the operator must apply to a “Designated Confirmation and Review Organization,” which is a fair and independent third party designated by the Minister of Economy, Trade and Industry.
At the time of application, the debtor is required to submit a prescribed application form along with documents such as a summary of the proposed modification of the financial obligations (the “Debt Adjustment Summary”); and a list of the relevant financial obligations (the “List of Loan Claims, etc.”).

Confirmation by the Designated Third-Party Organization

Based on the submitted documents, the Designated Confirmation and Review Organization will examine:

• whether there is a risk that the debtor will be unable to repay debts falling due without impairing the continuation of its business,
• whether there is a reasonable prospect of obtaining approval for the proposed debt modification resolution,
• whether the proposed debt adjustment policy is expected to conform to the general interests of the financial creditors (i.e., the “liquidation value test”), and
• whether no insolvency proceedings are currently pending.

All of the statutory requirements set out in Article 3.I must be satisfied in order for the confirmation to be granted.
Once this confirmation has been made, the Designated Confirmation and Review Organization will notify each financial creditor individually (Article 3.VII). This confirmation marks the formal commencement of the Procedure and fixes the reference date for determining the scope and amount of the eligible creditors and claims (Articles 2.III and 2.IV).

Request for Suspension of Collection and Related Measures

Following the confirmation described above, the Designated Confirmation and Review Organization must promptly request all eligible creditors to refrain from exercising their rights as creditors with respect to the collection and enforcement of eligible debts (a “Suspension Request”), and must notify the debtor that such a request has been made (Article 6.I). From the time the debtor receives notice of the Suspension Request, repayment of eligible debts is subject to restrictions (Article 6.II).
Although the Suspension Request itself does not carry binding legal force, eligible creditors are under a duty of good faith to cooperate in facilitating the smooth implementation of the Procedure when such a request is made by the debtor or the Designated Confirmation and Review Organization (Article 6.III).
If an eligible creditor seeks to collect or otherwise enforce its claim in violation of a Suspension Request, the debtor or other eligible creditors may petition the court for an order to suspend compulsory execution (Article 7) or an order to suspend enforcement of security rights (Article 8). In addition, where some eligible creditors recover their claims in violation of a Suspension Request, the Early Business Recovery Plan (i.e., the Debt Adjustment Resolution) may provide for special measures concerning such creditors’ claims (Article 13, proviso), thereby ensuring equitable treatment among creditors.

Preparation and Submission of the Early Business Recovery Plan

After the confirmation by the Designated Confirmation and Review Organization, the debtor must, in principle within six months (subject to a possible extension of up to an additional six months in cases of unavoidable circumstances), prepare and submit to the Designated Confirmation and Review Organization both:

• a business recovery plan designed to facilitate early recovery (the “Early Business Recovery Plan”); and
• a proposal for the modification of eligible debts (the “Debt Adjustment Resolution”), based on the previously submitted Debt Adjustment Summary and List of Loan Claims, etc.

Required Contents of the Early Business Recovery Plan (Article 14.III)
The Early Business Recovery Plan must set out, among other matters:

1. The circumstances leading to the debtor’s need for a resolution on debt modification in order to pursue early business recovery.
2. The history and current status of the debtor’s business operations.
3. The history and current status of the debtor’s assets and liabilities, including the nature and causes of the eligible debts and the names of the financial creditors holding such debts.
4. Where eligible debts are secured by security interests, a statement to that effect, along with the details of such security interests and the assets subject thereto.
5. The debtor’s assets and liabilities, as well as projections of income and expenditures (including matters relating to any planned financing).
6. Matters concerning the business activities the debtor intends to undertake for the purpose of early business recovery, including those specified by ordinance of the Ministry of Economy, Trade and Industry regarding employee cooperation and measures to prevent the dissipation of the debtor’s technology and human resources.
7. Other matters as may be prescribed by ordinance of the Ministry of Economy, Trade and Industry.

The debtor is also required to attach to the application a property valuation report (the “Property Valuation Report”), which assesses the value of the debtor’s assets and liabilities in accordance with standards set by ministerial ordinance.

Required Contents of the Debt Adjustment Resolution (Article 12)
The Debt Adjustment Resolution must specify, at a minimum:

1. Provisions for the modification of all or part of the eligible creditors’ rights;
2. General criteria for modifications of creditors’ rights, including the reduction or waiver of obligations relating to eligible debts (excluding portions of eligible debts secured by security interests), extensions of repayment deadlines, and other adjustments; and
3. Where there are creditors whose claims include portions not yet determined as to the part that cannot be satisfied through the exercise of security rights, appropriate measures regarding the exercise of such creditors’ rights once the amount of the unsecured portion has been confirmed.

Investigation and Report by the Designated Confirmation and Review Organization

The Designated Confirmation and Review Organization conducts an investigation to determine whether the contents of the submitted Debt Adjustment Resolution, the Early Business Recovery Plan, and the Property Valuation Report meet the following requirements (Article 15.I). The debtor is obligated to cooperate with the investigation conducted by the Designated Confirmation and Review Organization (Article 15.III):

1. The contents of the Debt Adjustment Resolution do not violate statutory provisions.
2. It is not clear that the obligations subject to modification under the Debt Adjustment Resolution cannot be performed.
3. The contents of the Debt Adjustment Resolution are consistent with the general interests of the eligible creditors.
4. The provisions modifying all or part of the eligible creditors’ rights in the Debt Adjustment Resolution are established in light of the debtor’s assets and liabilities, future income and expenditure forecasts, and other relevant factors.
5. The contents of the Early Business Recovery Plan conform to the standards prescribed by ministerial ordinance.
6. The contents of the Property Valuation Report conform to the standards prescribed by ministerial ordinance.

The Designated Confirmation and Review Organization must report the results of its investigation to the debtor (Article 15.IV). The debtor, in turn, is obligated to deliver this investigation report to the eligible creditors as a reference document for the exercise of their voting rights at the subsequent creditors’ meeting (Article 17.I).

Creditors’ Meeting

Upon receiving the investigation report from the Designated Confirmation and Review Organization, the debtor must, without delay, convene a meeting of eligible creditors to deliberate and resolve on the Debt Adjustment Resolution (Articles 16.I, 16.II).
When convening the creditors’ meeting, the debtor must specify the date, the matters to be resolved, and, where creditors who do not attend are permitted to exercise their voting rights by electronic means, a statement to that effect, along with other matters prescribed by ministerial ordinance (Article 16.III). In addition, within the period specified by ministerial ordinance, the debtor must provide written notice of these matters to the eligible creditors and to the Designated Confirmation and Review Organization, together with the Debt Adjustment Resolution, the Early Business Recovery Plan, the investigation report of the Designated Confirmation and Review Organization, and the written voting forms required for creditors to exercise their voting rights (Articles 16.IV, 16.VI, 17.I).
At the creditors’ meeting, only the Debt Adjustment Resolution is subject to a vote; the Early Business Recovery Plan itself is not put to a resolution. For the Debt Adjustment Resolution to be approved, it must obtain the consent of creditors holding at least three-fourths of the total voting rights in respect of the eligible debts (Article 20.I, main text). However, if a single creditor holds three-fourths or more of the total eligible claims, approval also requires the consent of a majority in number of the creditors who exercised their voting rights (Article 20.I, proviso).
For the purposes of calculating voting rights, the amount of claims held by eligible creditors constitutes the voting rights (Article 19.I). The calculation is based on the portion of claims not secured by security interests (Article 19.III), and interest and damages accruing after confirmation by the Designated Confirmation and Review Organization are excluded (Article 19.II).

Court Confirmation

When a Debt Adjustment Resolution has been adopted at the creditors’ meeting (except in cases where unanimous consent of all eligible creditors has been obtained with respect to the Debt Adjustment Resolution), the debtor must, without delay, file a petition with the court for confirmation of the resolution. In doing so, the debtor is required to submit both the Early Business Recovery Plan and the investigation report prepared by the Designated Confirmation and Review Organization (Article 26.I). Notably, pursuant to the Supreme Court Rules, the petition may be filed by means of an electronic record (such as electronic submission of documents or the submission of an electronic storage medium) instead of in paper form (Article 26.II).
Upon receiving such a petition, the court will grant a decision confirming the Debt Adjustment Resolution, unless one of the following grounds applies (Articles 27.I, II):

1. The procedure of the creditors’ meeting or the content of the Debt Adjustment Resolution violates statutory provisions, and such defect cannot be remedied; provided, however, that if the violation of the meeting procedure is minor, this does not apply.
2. It is clear that the obligations subject to modification under the Debt Adjustment Resolution cannot be performed.
3. The Debt Adjustment Resolution was adopted through improper means.
4. The content of the Debt Adjustment Resolution is contrary to the general interests of the eligible creditors.

The Debt Adjustment Resolution becomes effective upon the court’s decision of confirmation (Article 28.I). Once effective, the resolution is binding upon the debtor and all eligible creditors, including those who opposed the resolution (Articles 28.I, 28.II, 28.IV). Importantly, the resolution does not affect creditors’ rights against guarantors of the debtor or against assets provided as collateral (Article 28.III).
If unanimous consent of all eligible creditors is obtained with respect to the Debt Adjustment Resolution, the resolution becomes effective immediately upon such consent, and no petition for court confirmation is required (Article 29).

Termination of the Procedure

The Procedure will terminate when the effect of the Debt Adjustment Resolution has become final and binding—namely, either when all eligible creditors entitled to vote have given their consent at the creditors’ meeting, or when the court’s confirmation decision regarding the Debt Adjustment Resolution has become final (Articles 26 and 27).
In addition, the Procedure will terminate in the following circumstances:

• where the Designated Confirmation and Review Organization rescinds its confirmation (Article 5);
• where the Debt Adjustment Resolution is rejected at the creditors’ meeting;
• where the Debt Adjustment Resolution is approved at the creditors’ meeting but the court subsequently issues a decision of non-confirmation, and such decision becomes final; or
• where the court’s confirmation decision is revoked upon immediate appeal or other procedure, and such revocation becomes final.

Cases Where the Procedure Should Be Utilized

The Procedure can serve as an effective tool in the following types of cases:

• Cases involving business operators with a substantial amount of debt owed to financial institutions
  Since the Procedure involves both the Designated Confirmation and Review Organization and the court, it is expected to entail greater costs and administrative burden compared with existing rule-based out-of-court restructuring procedures. As noted in Part I, the Procedure itself does not impose a minimum debt threshold as a condition for use. However, in cases where the total amount of debts owed to eligible creditors is relatively small (for example, JPY 1 billion or less), it is expected that, given the balance between the scale of debt and the costs of the Procedure, other procedures may be more appropriate.
• Cases involving only debts held by financial institutions
  As discussed in Part I, the scope of eligible debts under the Procedure is limited to “loan claims, etc.” held by financial institutions. Accordingly, the Procedure is particularly effective in cases where only debts to financial institutions need to be adjusted.
• Cases where opposition from a minority of financial institutions is anticipated
  Under existing rule-based out-of-court restructuring procedures, the opposition of even a single eligible creditor could prevent the adoption of a restructuring plan, thereby blocking the workout. By contrast, under the Procedure, if creditors holding at least three-fourths of the total voting rights consent and the court grants confirmation, the Debt Adjustment Resolution becomes binding even on dissenting creditors. For this reason, the Procedure is expected to be especially effective in cases where some financial institutions are reluctant to consent, or where there are a small number of creditors strongly opposed to a fundamental restructuring plan.

Cases Where the Procedure Should Not Be Utilized

In the following types of cases, it is highly likely that the Procedure will not serve as an effective tool, and the use of alternative procedures should be considered instead:

• Cases involving business operators with only a small amount of debt to eligible creditors
  As noted above in the discussion of cases where the Procedure may be effectively utilized, the Procedure is expected to involve a certain level of procedural costs due to the involvement of the Designated Confirmation and Review Organization and the court. Although the Procedure itself does not prescribe a minimum debt threshold for eligibility, where the total amount of debts owed to eligible creditors is relatively small (for example, JPY 1 billion or less), it is anticipated that other procedures may be more appropriate in view of the cost–benefit balance.
• Cases involving substantial debts held by non-financial creditors
  As explained in Part I, the scope of eligible debts under the Procedure is limited to “loan claims, etc.” held by financial institutions. Accordingly, if significant claims held by non-financial creditors also need to be restructured, the debtor will need to consider alternative procedures, since such claims cannot be modified under this framework.
• Cases where opposition from financial institutions holding one-quarter or more of the voting rights is expected
  As discussed in the section on cases suitable for utilizing the Procedure, this framework can be effective in situations where a minority of financial institutions are reluctant to consent. However, if creditors holding one-quarter or more of the total voting rights oppose, the Debt Adjustment Resolution will be rejected and debt modification under the Procedure will not be possible (Article 20.I, proviso). In such circumstances, resorting to formal insolvency proceedings is likely to be unavoidable.
• Cases primarily focused on the resolution of guarantee obligations
  As noted in Part I, the Procedure is not available for the resolution of personal guarantee obligations owed by company representatives or other individuals jointly liable with the debtor. Furthermore, as explained in the section on court confirmation, the Debt Adjustment Resolution does not affect creditors’ rights against guarantors or collateral. Therefore, even if the debtor’s financial debts are restructured under the Procedure, the guarantors’ obligations will, in principle, remain intact. In cases where the primary objective is to resolve such guarantee obligations, it will generally be more appropriate to consider other procedures, such as the Guidelines on Personal Guarantees by Business Owners.

Conclusion (Part II)

The Early Business Recovery Act represents a groundbreaking initiative to facilitate the early recovery of Japanese enterprises and is expected to have a significant impact on future practice in out-of-court restructuring. Going forward, it will be important to continue monitoring the development of subordinate regulations and practical implementation trends.

Consult a Specialist for Business Recovery Matters

At ZeLo, we have attorneys with extensive experience in the fields of business recovery and insolvency. The sooner a company begins its restructuring efforts, the greater the range of available options. We provide comprehensive advice and tailored services suited to the needs of each case, and we encourage you to contact us for further consultation.

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