By Midori Yamaguchi (Mori Hamada & Matsumoto)
Introduction
Japan has long relied on court-supervised restructuring proceedings. However, over the past two decades, Japan has developed several structured out-of-court workout frameworks. These mechanisms require adherence to specific rules, guidelines, or statutory provisions depending on the procedure, with independent specialists overseeing the restructuring process.
A defining characteristic of these workouts is the limitation of participating creditors—primarily financial institutions such as banks—whose involvement standardizes the process and facilitates negotiations between distressed debtors and their financial creditors. These workouts effectively serve as preinsolvency proceedings, allowing debtors to maintain cash liquidity by requesting standstills and debt restructuring exclusively from banks while continuing payments to trade creditors. Given the advantages, these regimes have become indispensable tools in Japan’s corporate restructuring landscape.
Each type of workout follows a structured framework: (1) multiple creditors’ meetings are convened to discuss the restructuring while debtors formulate a restructuring plan; and (2) unanimous creditor approval is sought to finalize the plan. These workouts harness the advantages of out-of-court proceedings while mitigating their typical drawbacks. Although debtors can independently negotiate debt-reschedulings with financial creditors outside of these structured workouts, achieving significant debt restructurings without recognized procedural frameworks is often impractical.
Rule-Based Out-of-Court Workouts
Advantages
Confidentiality and Preservation of Going-Concern Value: Out-of-court workouts primarily involve financial creditors such as banks, and exclude trade creditors. They are typically conducted privately unless the debtor is a publicly traded company that requires public disclosure. In contrast, judicial insolvency proceedings are public, revealing the debtor’s distressed situation, which triggers significant concerns among stakeholders. The announcement of in-court insolvency can precipitate harmful rumors and erode confidence among creditors and customers, potentially leading to the termination of contracts or the imposition of unfavorable terms. By virtue of the privacy afforded by out-of-court workouts, the debtor can maintain its going-concern value and preserve its assets, which ultimately benefits both the debtor and its financial creditors.
Simplicity and Flexibility: Workouts are inherently more streamlined and adaptable since they rely on unanimous creditor consent, eliminating the need for judicial intervention or the trustee appointment. In contrast, court-supervised insolvency proceedings necessitate adherence to procedural formalities, including claim investigations, documentation submissions and creditor notifications. These formalities serve to legitimize the restructuring process, thus ensuring due process and legal enforceability so that claims could be discharged based on a restructuring plan with a majority vote. However, they also add complexity compared to the more flexible nature of workouts.
Transparency and Predictability: The foundation of out-of-court workouts is the unanimity of all interested creditors, as opposed to judicial proceedings, which operate under statutory provisions. Since the court is not overseeing the workout, creditors question the fairness of the process and equal treatment among them, especially on repayment under a restructuring plan. To overcome these drawbacks, the guidelines and rules stipulate the steps to be taken during the out-of-court workout. They were formed by the government, the representatives of financial institutions, experts and academics. Although not legally binding, they should be respected and followed by parties engaging in the workout. Adherence to them fosters fairness and accountability of the process for the parties.
Fairness and Objectivity: The involvement of neutral experts in reviewing the whole proceeding and the restructuring plan enhances objectivity, mitigating concerns that may arise when workouts are solely managed by the debtor and its creditors. This impartial oversight ensures a fairer distribution of repayment and promotes creditor confidence in the process.
Expedited Resolution: Due to their less complex nature, out-of-court restructurings typically conclude within six to 10 months, whereas in-court proceedings may continue significantly longer before completion. The expedited resolution enables debtor firms to recover and resume operations more swiftly following the restructuring.
Tax Benefits for Creditors: When creditors waive claims pursuant to a restructuring plan that complies with rule-based workout requirements, they may include the associated costs as deductible expenses for tax purposes. This provision ensures parity between the tax treatment of in-court and out-of-court restructurings.
Protection of Management as Guarantors for the Next Step: In Japan, the “Guidelines for Debt Workouts of Company Managers’ Guarantee Obligations” stipulate cases wheremanagement, such as directors, might be protected – such that they do not have to file for bankruptcy for the personal liability of guarantees against the corporate creditors, and can maintain their residences or other incentive assets if they comply with the requirements. This guideline can even be used even when a corporate debtor files for a court procedure, but these protections might be granted more readily in a workout process if the corporate restructuring plan is unanimously consented to. The framework encourages more prompt decision-making and restructuring while safeguarding management, especially if they share less of the blame for the company’s financial distress.
Grace Period for Delisting: A form of rule-based workout, turnaround alternative dispute resolution (ADR) is particularly suited for larger enterprises, such as listed companies. Unlike court-supervised restructuring, which may lead to delisting, turnaround ADR does not trigger delisting. A company is normally subject to delisting if it has been in a state of insolvency for two consecutive fiscal years, according to the Tokyo Stock Exchange Listing Regulations. However, if the insolvency is expected to be resolved through turnaround ADR, the grace period for delisting will be extended by one year.
Disadvantages
Requirement of Unanimous Creditor Approval: Unlike court-supervised restructurings, where a majority vote can authorize a restructuring plan, workouts necessitate unanimous creditor consent to bind said creditors to the restructuring plan. This stringent requirement increases the likelihood of dissenting creditors obstructing the process, potentially complicating the approval of viable restructuring plans.
Absence of Standstill Provisions for Trade Creditors: While workouts might facilitate a standstill agreement between a debtor and its financial creditors, trade creditors are typically excluded from the process. If a debtor faces immediate repayment obligations to commercial creditors, the lack of a legally enforceable standstill might precipitate financial collapse before the workout can be completed. In such cases, transitioning to court proceedings might become necessary.
Overview of Specific Rule-Based Out-of-Court Workout Procedures
Turnaround ADR
This procedure was established under the present Act on Strengthening Industrial Competitiveness.[1] The process is supervised by experts, usually two attorneys and one certified public accountant, who are appointed as “operators” by the Japanese Association of Turnaround Professionals (JATP), a private organization certified under the Act on Promotion of Use of Alternative Dispute Resolution. These operators preside over the process and review the proposed restructuring plan. Turnaround ADR mainly targets medium- to large-sized companies, including global enterprise groups with foreign subsidiaries, due to the higher procedure fees than the council scheme in the next section. This method has gained prominence in international restructuring cases due to its structured approach and professional oversight.
Small and Medium-Sized Enterprise Revitalization Council
The Small and Medium-Sized Enterprise Revitalization Council, a public institution, was established under the present Act on Strengthening Industrial Competitiveness. It supports the workout process and organizes a review team to examine the proposed restructuring plan from an objective standpoint. This framework[2] is used by small and medium-sized enterprises that have 300 or fewer employees and capital of JPY 300 million or less, with the actual size requirement depending on the debtor’s industry. The procedure is less expensive than others, as there is no fee for the council, and the due diligence might be partly subsidized by the government.
Rehabilitation-Type Out-of-court Workouts for Small and Medium-sized Enterprises
This type of workout was newly adopted in 2022 under the Guidelines for Restructuring of Small and Medium Enterprises.[3] Distressed debtors using this scheme would appoint third-party supporting experts, such as lawyers from the public list of accredited experts, with the consent of major creditors, to assess the fairness of the proposed restructuring plan. This scheme also focuses on small and medium-sized enterprises, but the difference between it and the council is that the debtors must choose third-party experts and that the legal fees for the attorneys representing the debtor might be partly subsidized by the government in addition to the cost of due diligence.
Regional Economy Vitalization Corporation of Japan
The Regional Economy Vitalization Corporation of Japan (REVIC) is an organization established under the Regional Economic Revitalization Corporation Act[4] that proactively takes the lead in restructuring small and medium-sized enterprises with 1,000 or fewer employees and capital of JPY 500 million or less, with some exceptions. The REVIC conducts the debtor’s due diligence, formulates its restructuring plans, and coordinates the interests of financial institutions and other stakeholders as a neutral and fair third-party organization, unlike the third parties in the three methods previously explained, which review the plan formulated by the debtor. Thus, the fee is generally the most expensive among the options. The REVIC is unique in the following comprehensive functions: investment, lending of capital, guarantee of financial obligations, turnaround staffing and debt purchasing.
Special Conciliation
Special conciliation is a proceeding governed by the Act on Special Conciliation for Expediting Arrangement of Specified Debts,[5] where debtors who are about to become insolvent may settle on the payment conditions of their financial debts with their creditors via court mediation. It involves a court mediator, but unlike in-court insolvency proceedings, special conciliation basically requires the individual and active consent of all creditors to the settlement. If the settlement is not agreed upon in the mediation, the court may issue an order; if there is no objection to the order within two weeks, it becomes effective. The court’s involvement enhances transparency and fairness among creditors in the process compared to the other rule-based workouts. Special conciliation is originally more common for a consumer insolvency process, and thus it is a rather less common method of corporate rescue.
Recent Legislative Developments – Introduction of a Pre-Insolvency Workout Framework in Japan
Out-of-court workouts in Japan currently require unanimous creditor approval for restructuring plans to become legally binding. In contrast, civil-rehabilitation and corporate-reorganization proceedings both allow for majority-vote approval.
In June 2025, the Japanese parliament enacted new legislation to establish a pre-insolvency workout framework. The law is expected to come into force by the end of 2026. Under this framework, a resolution concerning debt restructuring—such as debt reduction or rescheduling—becomes legally binding, in principle, if it is approved by creditors representing at least 75% of the total voting amount at a meeting of financial institution creditors, and is subsequently confirmed by the court. This legislation represents the culmination of prolonged discussions among academics and practitioners.
This hybrid workout mechanism is expected to resemble, to some extent, the Scheme of Arrangement in the UK and StaRUG in Germany.
The adoption of a majority-vote system typically raises concerns regarding creditor protections and procedural fairness. To address these issues, the legislation includes safeguards to ensure equitable voting structures and adequate due process protections for dissenting creditors. One such safeguard is the requirement of court confirmation, which helps to strike a balance between expeditious corporate restructuring and fairness to all stakeholders. The new legislation clearly reflects these considerations, marking a significant step forward in the evolution of Japan’s corporate restructuring framework.
(*) This article is reprinted with permission from the ABI Journal, Vol. XLIV, No. 4, April 2025.
[1] For the translated text of the Act on Strengthening Industrial Competitiveness (Act No. 98 of 2013), visit www.japaneselawtranslation.go.jp/ja/laws/view/4605. For an overview of the proceeding, visit meti.go.jp/policy/jigyou_saisei/kyousouryoku_kyouka/jigyousaiseiadr_gaiyo_R6_2.pdf (in Japanese). All links in this article were last accessed on 5 March 2025.
[2] For the procedure’s rules, visit www.chusho.meti.go.jp/keiei/saisei/2024/240329kaitei/003.pdf (in Japanese).
[3] “Further Business Rehabilitation Support through the ‘Guidelines for Business Revitalization, etc. of Small- and Medium-sized Enterprises,’” Financial Services Agency (March 8, 2022), www.fsa.go.jp/en/ordinary/coronavirus202001/20220509-2.html. For the full text of the guidelines, visit zenginkyo.or.jp/fileadmin/res/abstract/adr/sme/sme-gl/sme-guideline_202401.pdf (in Japanese).
[4] “Small and Medium Enterprises (SMEs) Revitalization and Regional Economy Vitalization,” Cabinet Office, www.cao.go.jp/en/pmf/pmf_18.pdf. For the full text of the Regional Economic Revitalization Corporation Act (Act No. 63 of 2009), visit laws.e-gov.go.jp/law/421AC0000000063 (in Japanese).
[5] For the translated text of the Act on Special Conciliation for Expediting Arrangement of Specified Debts (Act No. 158 of 1999), visit www.japaneselawtranslation.go.jp/ja/laws/view/2722.
