The Attraction and Development of Business Restructuring and Insolvency Proceedings
Lawyer, Nagashima Ohno & Tsunematsu
I passed the bar examination in 1981 and became a lawyer in 1983. I’m sincerely grateful to my alma mater, Chuo University and mentors at the Gyokuseikai, which is a study group for the bar examination, because I was able to pass the exam although I am an ordinary, lazy person. I have been thinking how I can show this appreciation since then. Thus, it was my honor to have an opportunity to lecture on Insolvency Proceedings Law 2 at the Chuo Law School from 2004 to 2014, and I am truly thankful. I spent a very meaningful time there as the students raised fresh questions, which offered me an opportunity to rethink important matters during the period.
My main work as a lawyer is in the area of corporate law, much of which is associated with business restructuring and insolvency proceedings. I have been widely involved in out-of-court restructuring matters and in-court proceedings for small and medium-size companies as well as large-size companies from various positions such as debtors, creditors and acquirers of the business. More than 400 lawyers work at Nagashima Ohno & Tsunematsu, which handles all aspects of corporate law, and I lead the business restructuring group there.
From my long experience of dealing with business restructuring and insolvency proceedings, I would like to talk about the attraction and development of these two fields. It will give me great pleasure if students become interested in these fields.
2. From bankruptcy to business restructuring
There has been an evolution in insolvency proceedings, from bankruptcy to corporate reconstruction to business restructuring.
The basic type of procedure in the case of a business failure is bankruptcy, whereby a corporation is dissolved and liquidated. The task in the procedure is to make fair distributions, in respect of claims for large sums, from limited resources according to the order of priority. The order of priority for each claim is determined by the legal nature of the claim from the perspective of substantive law and the necessity in accordance with procedural law, and the challenge for the lawyer lies in how to properly handle complicated legal issues and interests, which makes the job rewarding.
Corporate reconstruction is the process of reconstructing a corporation which has failed. This procedure should be considered before dissolution and liquidation because the business will be continued and the employment of employees will be maintained under this procedure. Corporate reconstruction requires cooperation with many people such as the management team, employees and other specialists, and all parties have to overcome many obstacles together, so a successful case gives me untold pleasure.
In business restructuring, it is believed that the business rather than the company has to be reconstructed and restructured. This procedure involves elements of Mergers and Acquisitions (M&A) because the concept includes the transfer of the business to a third party and restructuring of business by the successor, while securing business continuity.
3. Enrichment and development of the method of out-of-court restructuring
Previously, in-court proceedings were recommended since a transparent and fair process could be realized through the proceedings while out-of-court restructuring could result in non-transparent and unfair proceedings. However, in recent years, so-called regulated out-of-court restructuring proceedings for greater transparency and a fairer process have been enriched and more widely used － namely, the SME Business Rehabilitation Support Co-operative Scheme, Turnaround Alternative Dispute Resolution (ADR), and Regional Economy Vitalization Corporation of Japan (REVIC) (I consider the increase in such out-of-court restructuring cases to be one of the reasons for a decrease in in-court proceedings cases).
Out-of-court restructuring, however, requires the unanimous consent of concerned creditors as it takes the form of collective settlement. This is the difference from in-court proceedings, which enables a modification of rights by legal majority decision. For this reason, even though many concerned creditors agree to a modification of rights, when some creditors disagree, a transfer from out-of-court restructuring to in-court proceedings cannot be avoided; therefore, a key issue is to prepare measures to tackle such a situation. For that reason, as for Turnaround ADR, specialists are considering, in the process of revision of the Act on Strengthening Industrial Competitiveness, the establishment a method of handling a transfer to in-court proceedings.
4. Complication of corporate activities and influence of globalization
Transactions and contracts of Japanese companies have become more sophisticated and complicated these days rather than limiting themselves to traditional forms. For example, the financial sector has made broad use of project finance and structured finance. If a company that uses these methods fails, it will be required to properly handle contractual relationships, and we need to sufficiently understand such transactions and contracts.
Globalization is another important point, as many companies including small and medium-sized ones develop their business globally, which means the processes of business restructuring and insolvency proceedings are also globalized. Major topics of discussion have been, for example, how to secure a company’s overseas assets, how to solve problems such as a lawsuit instigated outside of Japan, and how to treat a subsidiary located overseas. Understanding insolvency law across the world and having a practical knowledge of business restructuring is important in order to deal with these globalized issues.
5. Sense of achievement and expectation for young legal profession and students
Finally, I would like to present a specific example of how working on business restructuring and insolvency proceedings gives me a sense of achievement, although I have already referred to it earlier. In 2008, I was appointed as a trustee of a company named Fukushima Transportation, which runs bus and train businesses. Despite the challenges to ensure profitability in their route bus business due to depopulation of the region, the business was successfully reorganized, with the cooperation of many concerned parties. The Great East Japan Earthquake devastated Fukushima Prefecture, but Fukushima Transportation contributed, with their buses, to helping the community residents, who were affected by the nuclear power plant accident. Watching their activities on television, I felt proud to have played a part in the reorganization of the company. This example convinced me that business restructuring is indeed rewarding.
In recent years, cases of business restructuring and insolvency have been reportedly decreasing. I also hear that fewer students study insolvency law today, possibly in reflection of the current trend. Cases involving in-court proceedings have decreased, but the content of work as a lawyer has deepened since cases of out-of-court restructuring have increased and business restructuring and insolvency have become more and more complicated and sophisticated. There is also an increase in the number of cases where the lawyer represents creditors and acquirers in M&A instead of debtors alone.
I hope more young lawyers will aim at working in the field of business restructuring and insolvency, which have deepened and broadened. Basic understanding is the key to tackling more complicated and developed legal issues, and that basic understanding means an understanding of insolvency law in addition to substantive law. I ardently hope that many students will study insolvency law and become interested in business restructuring.
Lawyer, Nagashima Ohno & Tsunematsu
Nobuaki Kobayashi was admitted to the bar in 1983 (35th graduating class of the Tokyo Bar Association). He works at Nagashima Ohno & Tsunematsu as a partner lawyer. He has engaged in large-scale global cases of business restructuring such as Elpida Memory and Takata, from the position of debtors as well as many other cases from different positions including sponsors for Skymark as an attorney. He has worked on many out-of-court settlement cases, which led to his appointment as Managing Director of the Japanese Association of Turnaround Professionals, which organizes Japan’s only Turnaround ADR procedures.
He has, inter alia, served as Chairman of the Committee for Insolvency Law, Japan Federation of Bar Associations; Representative Director of the Japanese Association of Turnaround Professionals (Co-representative: Prof. Junichi Matsushita, the University of Tokyo); Vice Chairman of Japan Lawyers’ Network for Insolvency Proceedings; Chairman of the Study Group on the Guidelines for Management’s Guarantees (Japanese Bankers Association, Japan Chamber of Commerce and Industry); Temporary Member of the Policy Board, the Small and Medium Enterprise Agency (Financial Working Group); Committee Member of the Business Restructuring Procedures Society (Ministry of Economy, Trade and Industry); and Director of the East Asian Association of Insolvency & Restructuring. Among his written works is Selected Business Restructuring Judicial Precedents for Practical Work (Co-author: Prof. Kazuhiko Yamamoto, Hitotsubashi University).